America's Energy Renaissance: How a Surprising Combination of Entrepreneurship and Market Forces, Not Government Intervention or Big Oil, Are Saving the Day
West, J. Robinson, The International Economy
The last decade has seen a remarkable change in the energy narrative in the United States. As we entered the millennium in 2000, U.S. oil production seemed in terminal decline, having fallen by a third from its 1970s peak. The United States needed imports to feed 60 percent of its 20 million barrel per day (and growing) oil habit. In the lower forty eight states (excluding Alaska and Hawaii), onshore resources had reached advanced maturity, with cumulative depletion of 75 percent. The industry's last best hopes seemed to be to drill increasingly in the deep waters in the Gulf of Mexico and seek access to environmentally sensitive federal lands in Alaska, spurring acrimonious political debate. Yet this story is not one of government intervention or big oil saving the day. It is one of market forces, entrepreneurship, and hard work coming together to create a profound change in U.S. energy in particular and the economy as a whole.
While dire predictions of peak oil in the United States continued, higher prices (by historical standards) and the expectation of sustained higher prices in the long term spurred the development of better technologies and investment in their application. The story begins in the 1990s, when George E Mitchell, one of many stubborn wildcatters who have written the history of the oil and gas industry, worked doggedly on what many viewed as a quixotic scheme to produce large resources of shale gas (natural gas trapped within fine-grained sedimentary rocks) that had long been known to exist, but always seemed beyond the horizon of commercial viability. It was Mitchell and other smaller companies (not the government or the large oil companies) that, by trial and error and a concentrated focus at first in the Barnett Shale near Fort Worth, Texas, were able to combine horizontal drilling (originally pioneered offshore and perfected in the nearby Austin Chalk play), hydraulic fracturing, and other techniques to force gas from shale and other tight formations. By 2001, Mitchell Energy and Development Company had drilled four hundred wells and built over two trillion cubic feet of reserves, and was considered to have the best growth and inventory story among independent exploration and production companies. Larger oil and gas players began to recognize the potential. Devon purchased the company that year in a $3.5 billion deal that included a 32 percent premium over the stock's market price.
The shale gas revolution has since left the United States both independent and secure in terms of natural gas. Due to its very nature as a gas, the fuel is harder to transport, thus limiting the potential for a globally connected market. Although U.S. gas producers look to make the switch to producing higher-priced oil, gas production remains at record highs, reaching sixty-five billion cubic feet a day in 2012 from around an average fifty-two billion cubic feet a day as recently as 2007--25 percent growth.
The big winners from rising production and lower natural gas prices are consumers. Residential and commercial users have seen tremendously low prices for gas in heating and electricity and domestic industrial users have been granted a new competitive advantage--Germany's BASF, for example, has cited low energy prices in the United States as a reason for expanding operations here. As global oil prices rise, the United States is enjoying the upside of domestic production and witnessing increased domestic economic activity rather than exporting capital, which should have the side effect of strengthening the dollar. This is the first time since the 1960s that the rising price of crude has provided a benefit to the United States--an important break with past experiences.
The new techniques developed for natural gas have been employed in oil and natural gas liquids production as well, creating new energy frontiers in states--the Dakotas, Louisiana, Pennsylvania, Ohio--that had, a decade ago, no hope of developing oil and gas. …