The Pro-Growth Energy Economy Begins to Emerge In less than 100 years, the United States rose from being a small former colony to being the worlds largest economy. As weve explained in prior issues of Trends, this involved a unique convergence of competitive advantages like:
- An entrepreneur-friendly culture
- Easily defensible borders and militarily weak neighbors
- Excellent harbors and rivers to support trade
- The worlds most productive farmland
- A sophisticated legal system
- An abundance of forests and minerals
Among those mineral resources, none was more important than an abundance of easily accessible coal, petroleum, and natural gas. In fact, our access to cheap domestic energy, whenever and wherever we needed it, was a major factor in the ascendancy of the United States. However, over the past half-century, the U.S. has lost its energy independence, and the associated cost advantage.
Today, one of the primary reasons that 5 percent average annual GDP growth seems so hard to attain is that the United States has unilaterally disarmed itself by taking one of its greatest economic advantages off the table.
The price has not merely been economic; foreign policy since 1973 has largely been dictated by our need to keep oil flowing to the United States and its allies. And, in spite of safeguards like the Strategic Petroleum Reserve, the United States remains highly vulnerable to a major disruption in the global oil supply.
Ironically, in the nearly 40 years since the first major price shock of the 70s, the United States has done little to reduce the threat of supply disruptions that could greatly undermine our economy. A well-placed terrorist attack on a major oil field in Saudi Arabia, or a coordinated cut in oil production by Iran and Venezuela, would lead quickly to an enormous spike in energy prices, which could easily send the global economy into a new recession or worse.
Such disruptions are quite possible, since the regions that supply most of the worlds energy are controlled or threatened by interests hostile to those of the United States, the EU, and Japan. Compounding the issue is the fact that state-owned enterprises hold 90 percent of the worlds oil reserves. Working in collusion, the OPEC nations can reduce production so that prices will rise, and subsequently increase production so that prices will fall, ensuring that petroleum alternatives arent pursued. Either way, we lose.
Fortunately, it doesnt have to be that way.
One solution is to adopt so-called "green solutions" that would make fossil fuels largely irrelevant. How would this be accomplished? First, the U.S. would need to force domestic energy prices higher, and provide subsidies to "green energy technologies" like wind, solar, and hydro. Theoretically, these subsidized technologies would advance over time to the point that they could become price-competitive. After such a transition, wed have stable energy supplies and prices.
It sounds fine, in theory. But, as an analysis published previously in Trends demonstrates, these green technologies cannot be realistically deployed on a national scale in the next 20 years. Moreover, the damage done to our standard of living by driving up prices to high levels, with supply restrictions and subsidies, far outweighs any benefits that would be gained. This solution ? championed by the current administration ? amounts to an anti-growth strategy.
Fortunately, there is a pro-growth alternative that can provide the United States with abundant energy at reasonable prices. That involves using North American supplies of petroleum, natural gas, coal, and even methane hydrate to eliminate our dependence on volatile petroleum supplies.
So, whats holding us back? Its certainly not a shortage of proven and potential energy reserves, or even available technologies. Its simply artificial restrictions that prevent us from reaping the benefits from these resources. Those restrictions are in place primarily because of outdated environmental concepts, coupled with a desire to profit from currently uncompetitive technologies. Consider some examples:
- The Green River Formation, which covers parts of Colorado, Utah, and Wyoming, contains the largest known oil shale deposits in the world, equivalent to between 1.5 trillion and 1.8 trillion barrels of crude.1 Thats five to six times the proven petroleum reserves under Saudi Arabia. However, current federal law keeps this resource from being tapped.
- Similarly, bureaucratic loopholes have prevented oil and gas production from 97.6 percent of the outer continental shelf.2
- Meanwhile, enormous quantities of oil and gas are currently "off limits to development" in relatively shallow waters just off our coast in the Gulf of Mexico, as well as in the Atlantic and Pacific.3 Those restrictions are largely based on the limitations of 1960s and 1970s technologies. New methods for preventing blowouts in anything but the deepest off-shore well, coupled with horizontal drilling, make the environmental risk minimal.
Meanwhile, restrictions such as these are exacting an enormous cost by restricting the growth of the American economy. A recent study performed by SAC Corp. determined that over the next two decades, $2.3 trillion will be lost in "opportunity costs" due to restrictions on accessing domestic oil and gas resources.4
According to David Holt, President of the Consumer Energy Alliance, "Expanded access to and increased production of North Americas ample energy resources would largely offset the need for imports."5
One of these sources is the Marcellus Shale deposit that extends below millions of acres of land in New York, Pennsylvania, Ohio, West Virginia, Maryland, and Kentucky.6 With estimates of 500 trillion cubic feet of natural gas, it could provide enough fuel to power the United States and meet all of its energy needs for decades. Already, with only a limited number of wells on-line, it has turned Pennsylvania from an importer of natural gas into an exporter.
As a result of developing the Marcellus Shale, it is estimated that in 2011, the state will have more than 156,000 jobs that would not otherwise exist and generate $12.8 billion in additional economic activity.7 By 2020, those numbers are expected to rise to 256,000 jobs and the infusion of $20 billion annually into the Pennsylvania economy. In addition to these jobs and revenues, the resulting drop in natural gas prices caused by the Marcellus development has already saved Pennsylvania consumers nearly $633 million on their utility bills in 2010.
The success of developing the Marcellus Shale deposits is encouraging because similar shale deposits, loaded with natural gas, have been discovered in Texas, Louisiana, Montana, and North Dakota.
Another promising energy source for North America is extracting petroleum from the oil sands of Alberta, Canada. These deposits hold 1.7 trillion barrels of oil and account for 66 percent of the worlds total proven oil reserves. Since Saudi Arabia has just 300 billion barrels of oil reserves, the estimated Canadian oil sands reserves outstrip the Saudi Arabian reserves.
This type of "sand" consists of clay, sand, water, and bitumen, a form of hydrocarbon that can be processed into petroleum. The sands are mined, not drilled. But, until recently, it has been economically impractical to do it.
In 2009, the Alberta sands were yielding 1.5 million barrels a day, with that output expected to grow to 3.2 million barrels a day by 2019.8 The longer term potential is even greater.
Currently, plans are under way to expand the Keystone XL Pipeline so that it can export 700,000 barrels of Canadian oil-sands petroleum per day to the United States. The plan would also improve the transportation of domestic crude from a storage hub at Cushing, Oklahoma to the large refineries on the Gulf Coast.
Clearly, Canada is a far more secure source of petroleum than the Middle East. Unfortunately, regulations could once again stand in the way of an abundant and secure energy source, as developers wait for permission from the U.S. EPA and the State Department to expand the pipeline.
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As of mid-2011, the Obama Administration appears to be doing some foot-dragging for political reasons; its looking to appease environmentalists who oppose the expansion of the pipeline. Such opposition is shortsighted. If we dont commit to buy the Canadian oil, they will sell it to China, and we will instead buy it from other foreign sources. For the environmentalists, the tanker traffic under both of these scenarios should be seen as a riskier proposition than a Midwestern pipeline.
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An additional energy source that is beginning to get attention is methane hydrate, a crystalline lattice of ice with hydrocarbon caged inside of it. Because its methane ? natural gas ? it is preferable to coal or petroleum because it burns much more cleanly.
Methane hydrates were discovered in the 1960s in oil-rich regions of Siberia and Canada under the permafrost. More recently, they have also been found on the sea floor near methane seeps. Scientists and engineers have been pleased to discover that methane can be extracted from the hydrate using long-established drilling and pumping methods for gas fields.
This is all good news, since its been estimated that just exploiting the most accessible and easily recoverable methane in hydrates could yield around 10,000 trillion cubic feet. To get an idea of how much energy this represents, consider this: The MIT Energy Initiatives 2010 The Future of Natural Gas9 report tells us that all of the worlds remaining conventional sources of natural gas, combined, add up to only about 16,200 trillion cubic feet.
Thats just one-and-a-half times the most accessible methane hydrate gas. Significantly, Japan, one of the worlds most energy-poor nations, has some of the largest methane hydrate deposits just off its coasts.
Although it could be up to 10 years before methane hydrates make any significant contribution to commercial natural gas supplies, they could represent the key to the worlds energy future, and to some countries energy independence.
As we can see with the development of the Marcellus Shale in the rust-belt state of Pennsylvania, unleashing a flood of cheap energy can have a dramatic positive effect on employment and economic growth. The same will be true on a national scale, once we move beyond the era of artificial shortages.
Given the trend toward a pro-growth energy policy, we offer the following four forecasts:
First, exploiting methane hydrates will reduce our economic vulnerability to the geopolitical turmoil.
Like oil sands, oil shale, and ultra-deep off-shore oil drilling, methane hydrate is an energy resource controlled by the worlds industrialized nations. Increasingly, national security interests will force the United States, Japan, and China to exploit these resources.
Second, over the coming decade, natural gas will play a dramatically larger role as an American energy source.
Simply because it is abundant, domestic, price-competitive, and clean, natural gas cannot be ignored. Successes such as the Marcellus Shale deposit will drive support for it to become a greater portion of our energy mix. Pressure to begin incorporating it into our energy strategies will mount as oil prices and world tensions rise. It will take at least some government incentives to accelerate us down this path. But, when it becomes clear that oil prices are not coming back down to below $40 a barrel and may temporarily spike toward $200 per barrel, the resolve to leverage natural gas will finally take root.
Third, oil sands will be just the first of a whole series of alternative energy sources that will transform the outlook for energy between now and 2050.
Oil sands are a temporary measure, no matter how much energy can be extracted from this resource. While it is being productively mined, alternative energy resources will mature; nuclear energy will experience a safer, more efficient comeback; and sub-sea methane hydrate will appear as a new source of almost inexhaustible magnitude. Combined with solar energy, fuel cells, hydrogen technology, and increasingly efficient engines, energy security will be guaranteed as far into the future as we can see.
Fourth, restrictions on cultivating domestic fossil fuel reserves will remain a second-tier political issue during the 2012 election.
Although this should already be a hot topic, for the next year it will be overshadowed by discussions of repealing the healthcare bill, the growth in the national debt, the threat of tax increases, and other ongoing attempts of government to reach into our pockets. However, it will become central to any serious attempt to accelerate our economic growth.
References List :
1. Investor’s Business Daily, July 29, 2011, “Grow Our Way Out.” ⓒ Copyright 2011 by Investor’s Business Daily, Inc. All rights reserved. http://www.investors.com 2. Townhall.com, July 21, 2011, “Oil’s Role in Solving the Debt Solution,” by David Holt. ⓒ Copyright 2011 by Townhall.com. All rights reserved. http://townhall.com 3. Ibid. 4. Investor’s Business Daily, July 29, 2011, “Grow Our Way Out.” ⓒ Copyright 2011 by Investor’s Business Daily, Inc. All rights reserved. http://www.investors.com 5. Townhall.com, July 21, 2011, “Oil’s Role in Solving the Debt Solution,” by David Holt. ⓒ Copyright 2011 by Townhall.com. All rights reserved. http://townhall.com 6. MIT Technology Review, November/December 2009, “Natural Gas Changes the Energy Map,” by David Rotman. ⓒ Copyright 2009 by Technology Review. All rights reserved. http://faculty.haas.berkeley.edu 7. To access the report, “The Pennsylvania Marcellus Natural Gas Industry: Status, Economic Impacts and Future Potential,” visit the Marcellus Coalition website at: http://marcelluscoalition.org 8. For information about Alberta oil sands production, visit the Energy Resources Conservation Board website at: http://www.ercb.ca 9. To access the MIT Energy Initiative’s 2010 study, “The Future of Natural Gas,” visit their website at: http://web.mit.edu
