The success of unconventional oil and gas production from shale formation is reshaping the US energy industry and may yet prove to be a major factor pulling US GDP growth up off the floor. Comparing the relative performance of the conventional and unconventional oil and gas sectors of the industry is a study in contrasts.
The conventional oil and gas sector was setback by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Now two years later, Federal permitting of new drilling is returning to average pre-spill approval rates of six new permits per month. There are new regulations in place to prevent a repeat of the accident and new safety regulations to protect crews, but reports from the New Orleans Economic Development Agency confirm the US Government’s newly organized Bureau of Safety and Environment Enforcement status reporting on permitting is returning to pre-spill average permit approval levels.
The reasons for this return to normal include the global demand for energy and worries over the potential for supply disruptions in the Middle East. High oil prices also stimulate drilling and E&P activities. And reality is setting in here at home too as the combination of the looming 2012 election pressure to get things moving again to create jobs and progress in spill cleanup and settlement of litigation by BP. But progress in the Gulf of Mexico was offset by disputes over approval of the Keystone XL pipeline and the relentless opposition to expanding use of fossil fuels by the environmental constituencies that make up the President’s Democratic base.
Compare the return to normal in the conventional sector to the boom taking place in the unconventional oil and gas sector. CERA Chairman Dan Yergin recently told the Canadian Globe and Mail that “U.S. oil production is up 20 percent since 2008. If we hadn’t added 1 million barrels per day of supply in the U.S., we’d be looking at much higher oil prices,” he said. “You have a spare capacity of between 1 (million) and 2-million barrels per day in the world market. You take away 1 million (barrels), you don’t have much spare capacity at all.”
Think about that for a minute. The growth in unconventional oil production in the US alone from horizontal drilling and hydraulic fracturing is increasing the global spare capacity as profoundly as the Saudi capacity to pump more oil.
Spare capacity is the single biggest factor in setting global oil prices. So increasing US domestic energy production of oil is the fastest way to bring down high gasoline prices in an election year. The fastest way to reduce imports of foreign oil thus improving US trade balances. And expanding global oil production is the fastest way to create jobs. Now you understand why the President is in favor of the Keystone XL pipeline segments from Cushing to the Gulf of Mexico even while he opposes the northern segment crossing the Canadian border bringing oil sands to market.
But it is not clear sailing for domestic energy production. The US EPA is working feverishly to preempt the states by issuing new environmental regulations controlling fracking practices. This is setting off alarm bells among the states that see mischief in the EPA’s methods. The growth of domestic energy production from shale oil and gas has happened because the states were willing and able to be more flexible than the EPA balancing environmental and economic development interests. The fear is the light touch of EPA’s initial regulation of fracking will lead to “more flexibility” to crack down on the practice after the president is safely re-elected.
It is also not clear sailing for our economy either. Slowdown in economic indicators suggest the risk of recession is real. Europe has already slid back into recession according to economists and fears of “Greek contagion” still loom over Spain, Italy and other EU countries. America’s persistently high unemployment rates remain the key problem. Uncertainty about the economy, global competition, regulation and health care costs, the tax spikes schedules for January 2013 all conspire to keep business sitting on the sidelines with cash not invested.
Perhaps the 2012 election will bring more certainty no matter who wins—or not. Perhaps the EU will get its fiscal and debt act together but the results of elections in France and Greece suggest austerity is not selling well with voters who want growth and a return to prosperity not more political posturing. Even China is struggling with rising costs, slowing exports and thus growth, a real estate bubble of its own and the uncertainties of its ritual rotation of leaders. Volatility is here to stay in our global and domestic economy.
One thing we do know. Domestic energy production is real. It is producing economic growth and energy security. It produces jobs, increases tax revenue and raises public confidence. Domestic oil production is raising global spare productive capacity and more oil productive growth can, in fact, bring down global oil prices. And then there is this, American technology in horizontal drilling and hydraulic fracturing is the envy of the world. It will likely dominate the world’s energy production spotlight and is already transforming the energy future. The question is whether the US EPA will be permitted to extend its war on fossil fuels to limit the use of horizontal drilling and fracking in the US so that the only market for this innovative American technology is for export—along with US coal.