The United States Of Shale

  • Date: 23/04/14
  • Robert A. Hefner III, Foreign Affairs

Why the Shale Revolution Could Have Happened Only in America

Less than a decade ago, the future of American energy looked bleak. Domestic production of both oil and gas was dwindling, and big U.S. energy companies, believing their fortunes lay offshore, had long since turned away from the mainland. But then something remarkable occurred: a surge of innovation allowed companies to extract vast quantities of natural gas trapped in once-inaccessible deposits of shale. The resulting abundance drove down U.S. gas prices to about one-third of the global average.

Natural gas has been a godsend for the United States. Already, gas has spurred a manufacturing renaissance, with investors spending and planning hundreds of billions of dollars on new facilities such as chemical, steel, and aluminum plants. The shale boom has created hundreds of thousands of new high-paying, middle-class jobs, and now, more than one million Americans work in the oil and gas industry — an increase of roughly 40 percent between 2007 and 2012. Moreover, because natural gas currently supplies about 25 percent of the total energy consumed in the United States (a figure that is rapidly growing), the boom is saving U.S. consumers hundreds of billions of dollars a year. Combined with the other benefits, those savings have given the United States a long-term economic advantage over its competitors and helped the country recover from the Great Recession.

As much as other countries may envy this catalyst for domestic growth, they will not be able to replicate it, because only the United States possesses the unique ingredients necessary to fully develop shale resources. A legal system that enshrines the private ownership of land and the resources below it, along with open capital markets and a reasonable regulatory system, has led to the growth of thousands of independent oil and gas companies, all of which are in intense competition with one another. As a result, nearly four million oil and gas wells have been drilled in the United States, versus 1.5 million in the rest of the world. The bustle of drilling activity in the United States has also led to increases in innovation within the industry on an order of magnitude that other countries can only dream of.

Although other places, such as China and Europe, have substantial shale resources, they don’t have the entrepreneur-friendly system needed to develop those resources quickly and productively. So long as politicians don’t get in the way, then, the United States will profit handsomely from the shale revolution for decades to come.

BEHIND THE BOOM

The story of America’s shale revolution involves classic Yankee ingenuity — although not on the part of big oil. Beginning in the 1970s, production from onshore U.S. oil and gas fields declined as those fields became what the industry calls “mature.” So the major oil companies were forced to abandon the development of new resources on U.S. soil. In order to find giant new oil fields, they shifted their exploration efforts to remote foreign lands and deep offshore waters. Such investments were enormously expensive and often required decades to negotiate and develop. In order to build the capital resources and global reach necessary to deal with national governments and complete mammoth projects, the major oil companies began to acquire or merge with their peers. Oil, they recognized, was usually cheaper to buy on Wall Street than find in the ground.

Over the next few decades, however, these companies became excessively bureaucratic and developed tunnel vision. Focused principally on replacing their dwindling oil reserves, they invested their capital in giant foreign deposits, such as the Kashagan field, in Kazakhstan, which has an estimated 13 billion barrels of recoverable oil; its first phase of development alone cost $50 billion.

Meanwhile, smaller, independent companies — which earn the lion’s share of their revenue at the wellhead and little of it downstream (at the refining stage, for example) — were forced to innovate or die.

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