This article was first published in the November/December 2013 International edition of Accounting and Business magazine.
America’s oil explorers make for unlikely heroes. The cut-throat business tactics and extravagant lifestyles of many recent crude oil barons bring to mind JR Ewing – the villainous oil boss in the TV series Dallas. What’s more, as extractors of ecologically damaging fossil fuels, oil bigwigs are held in particular contempt by environmentalists.
Yet in recent years the captains of crude have produced a remarkable range of benefits to the public. New drilling techniques pioneered in the US have led to a surge in the nation’s oil and gas output, although these new methods are not without their environmental critics. The rewards are not merely economic. For the first time in a generation America can realistically aspire to liberate itself from dependence on Middle Eastern oil. American oilmen have even been claiming credit for lowering their nation’s greenhouse gas emissions.
‘Of course, America’s energy explorers were looking for personal enrichment,’ says Phil Weiss, an energy analyst at Argus Research. ‘They have become public benefactors only by accident.’
At the heart of this energy revolution has been a combination of hydraulic fracturing and horizontal drilling – popularly known as fracking. This technology allows the extraction of vast quantities of oil and gas trapped in rock that were previously considered beyond reach. The result has been a reverse in a multi-decade slump in output from America’s ageing oil wells. By the time of the financial crisis in 2008, US crude output had roughly halved since its peak of 10 million barrels a day in 1970. Many saw no end in sight to the declines. Yet in the past five years oil production has rebounded unexpectedly by 40% to its highest level in more than two decades.
A report by PwC, Shale oil: the next energy revolution, found that the potential emergence of shale oil could influence the dynamics of geopolitics as it increases energy independence for many countries and reduces the influence of OPEC.
Fracking has also unleashed giant supplies of natural gas. Output of this versatile fuel, which can be used to generate electricity, power trucks and produce plastics, has soared by 33% since 2005. Again, most energy experts had previously believed that America was running out of its own gas and would soon be reliant on imports.
The most obvious beneficiary of this fossil renaissance has been the American economy. ‘Think of the main problems that have been facing the US economy – weak economic demand, a huge trade deficit and weak tax revenues,’ says John Larson, a vice president of consultancy IHS. ‘The energy resurgence has been a huge help in easing all of these weaknesses.’
For a start, an abundance of natural gas has meant cheaper electricity. This saved consumers around US$107bn in 2012 alone on utility bills or US$926 per household, according to IHS. ‘This is equivalent to a pretty powerful fiscal stimulus in its own right,’ says Larson. ‘It is like shovelling money into consumers’ pockets.’
Even this understates the economic benefit. A surge in drilling activity has generated about 1.7 million jobs and could create another 1.3 million by the end of the decade. Added to the jobs created directly, cheap natural gas, a key component in many plastics and chemicals, has convinced the likes of Dow Chemicals to build new petrochemical plants in the US.
‘We are seeing a sort of industrial revival in the US, based on cheap energy,’ says Frank Verrastro, director of energy research at the Center for Strategic and International Studies in Washington. ‘That kind of massive job creation is far greater than most government infrastructure projects would achieve.’
The oil and gas boom has also been a huge blessing for America’s public finances. On a cumulative basis IHS believes that fracking will generate US$2.5 trillion in tax revenues between 2012 and 2035 for federal, state and local governments in the US. That is equivalent to about half total government revenue in 2012.
And there has been another bonus for America too. A large share of the bloated US trade deficit – often as much as half – has come from the nation’s need for imported oil. Since 2008 America’s net foreign purchases of crude have plunged by about five million barrels a day. With oil trading at around US$100 a barrel, that amounts to a saving of about US$185bn a year.
Citi believes this could be just the start. The bank estimates that booming oil and natural gas output will cut the US trade deficit by as much as 80% in the coming decade. ‘It’s not just the lower oil imports themselves,’ explains Edward Morse, head of global commodities research at Citi. ‘Bargain-price energy gives America a competitive edge as an exporter of other goods too.’
More precious still, for politicians at least, are the potential foreign policy rewards of being the world’s shale pioneer. Every US president since Richard Nixon back in the 1970s has pledged to control the country’s addiction to foreign oil. Yet by 2005 America relied on imports for 60% of the crude that its citizens were consuming.
‘This was a diplomatic as well as an economic liability,’ says Tom Biracree, a senior vice president at IHS. ‘This reliance shaped US foreign policy and gave huge leverage to oil producing states.’ The oil embargo of 1973, in which the Organization of Petroleum Exporting Countries reduced the flow of oil, caused its price to quadruple and forced America to ration petroleum. Ever since presidents have dreaded a repeat of this fiasco.
Shale promises to significantly reduce such threats. The US is on track to overtake Saudi Arabia and Russia as the world’s largest oil producer by 2017, according to the International Energy Agency. In fact a Wall Street Journal analysis in October shows the US on track to surpass Russia this year in the combined production of oil and gas. Canada is also experiencing a boom in production from its oil sands. North America could be self-sufficient in terms of net trade as soon as 2020, Citi now predicts.
That should end up giving the US more diplomatic flexibility. OPEC – which is dominated by Middle Eastern states – controls about 80% of the world’s crude. ‘The growth in oil and gas output has been coming from democracies – the US, Canada and Australia,’ says Charles Ebinger, director of energy research at the Brookings Institution in Washington. ‘That is a threat to the influence of these oil states.’
The impact of this trend may deepen if the new drilling techniques spread globally. US energy companies have been seeking to extract shale gas in parts of Europe, including Germany. Royal Dutch Shell, meanwhile, recently signed a contract with the Ukrainian government to exploit its gas reserves. Similarly, other nations are thought to be sitting on impressive reserves of shale oil, including Argentina.
In 2008 Wall Street bankers were being vilified for shaking the foundations of American capitalism. This was at the very point when US oil entrepreneurs were perfecting technologies that are now giving a powerful boost to the US economy and its global clout.
Of course, fracking has downsides too. In potentially bringing vast new reserves of gas and oil on stream, fracking has made life harder for investors in cleaner solar and wind energy. And that may one day prove to be a major ecological setback.
Christopher Alkan, journalist based in New York