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Manhattan Institute for Policy Research, March 2015 EF EF I M I I MANHATTAN INSTITUTE FOR POLICY RESEARCH R R B B SSUE SSUE I I No. 35 July 2015 STEP ON THE GAS! How to Extend America’s Energy Advantage Oren Cass EXECUTIVE SUMMARY Senior Fellow ow may seem an odd time to emphasize the impor- tance of increasing U.S. oil and gas production. Domestic output has reached an all-time high,1 prices have plummeted,2 and drilling activity is Nslowing in response.3 Job cuts in the industry are approaching 100,000.4 Headlines announce that the boom has already gone bust.5 Observers concerned about output typically worry that it is too high: that drilling will damage local environments; that cheap, abundant fossil fuels will frustrate progress on limiting carbon emissions; and that prospects for electric cars and wind turbines, which had enough difficulty becoming economically viable before fuel costs fell by half, will further dim. Yet failing to press America’s current energy advantage would be an enormous mistake. Demand forecasts indicate that any oil and gas glut is temporary.6 Further, U.S. energy policy, still based on an assumption of resource scarcity, is ill equipped to manage the new abundance. Indeed, America’s private sector has driven an oil and gas revolution in the face of, at best, am- bivalent federal policy. This paper suggests 11 reforms to help craft a smarter U.S. energy policy, one that will amplify the current boom and extend it far into the future: Published by the Manhattan Institute 1. Amplify the Boom (Reforms 1–5). Enact regu- From Scarcity to Abundance latory reforms to increase the efficiency and ef- During 2005–14, net U.S. imports of crude oil and fectiveness of U.S. energy markets. petroleum products fell from 60 percent to 26 per- cent of consumption, and natural-gas imports from 2. Extend the Boom (Reforms 6–11). Open fed- 16 percent to 4 percent, according to the U.S. En- eral land and waters to energy development to ergy Information Administration (EIA).9 This revo- replicate the extraordinary growth of tight oil. lution is not, however, a story of successful govern- ment intervention. I. INTRODUCTION: AMERICA’S ENERGY ADVANTAGE After 40 years of national energy policy dedicated to curbing demand for oil and gas, U.S. demand for Current U.S. energy policy was forged in the 1970s, the former remains steady and for the latter has in- at a time of crisis and under an assumption of crip- creased.10 But new drilling technologies that release pling scarcity. “The oil and natural gas we rely on for massive reserves from shale have increased produc- 75 percent of our energy are running out,”7 warned tion during 2005–14 by 69 percent (oil) and 42 President Carter in 1977. As recently as 2008, percent (gas).11 The U.S. is now the world’s largest then-candidate Barack Obama declared that “if we producer of both resources (Figure 1).12 opened up and drilled on every single square inch of our land and our shores, we would still find only New U.S. oil production has come primarily from “tight three percent of the world’s oil reserves,” adding that oil” unlocked in the Bakken (North Dakota), Eagle “we must end the age of oil in our time.”8 Ford (Texas), and Permian (Texas) shale formations. Figure 1. If Recent Growth in U.S. Output Were a Country 5 10 4.7 4.6 4.4 4 8 7.7 3.5 3 3.4 6 5.7 5.6 5.1 2 4 4.0 1 2 2013 Natural Gas Production (tcf) 2013 Natural Gas Production 2014 Oil Production (million bbl/d) 2014 Oil Production 0 0 U.S. China Canada U.A.E. Iran U.S. Iran Qatar Canada China Increase Increase (2005–14) (2005–14) Source: EIA Issue Brief No. 35 July 2015 2 Figure 2. The Changing Picture, 2010 vs. 2015 15 EIA Forecast in 2015 Actual 10 EIA Forecast in 2010 5 Forecast and Actual Forecast U.S. Oil Production (million bbl/d), U.S. Oil Production 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: EIA In 2008, the Bakken produced 180,000 barrels per energy and petrochemical feedstock are enabling a day (bbl/d), on average; in April 2015, it produced resurgence of domestic manufacturing.17 Continued more than 1.3 million bbl/d. During the same period, shale development could add an incremental $380 the Eagle Ford’s output soared from 55,000 bbl/d billion–$690 billion to annual GDP by 2020 and to 1.7 million bbl/d, as did the Permian’s, doubling create 1.7 million permanent jobs, according to the to 2 million bbl/d.13 New gas production has come McKinsey Global Institute—larger than any other primarily from the Marcellus shale formation, which U.S. growth opportunity identified by McKinsey.18 stretches across New York, Pennsylvania, Ohio, and West Virginia. Output there leaped from 500 billion Benefits of the Energy Boom cubic feet (bcf) in 2008 to more than 5,600 bcf in the America’s new status as an energy superpower con- 12 months ending April 2015.14 fers considerable geopolitical benefits. U.S. drillers are now the swing producers in global markets.19 Ex- America’s shale boom took energy markets by tensive spare capacity—such as the 300,000 bbl/d surprise. The EIA’s current projections for 2015 of tapped but not yet produced U.S. reserves20— U.S. oil and gas output are 66 percent and 37 dampens price volatility and reduces the threat of percent higher, respectively, than its 2015 output supply shocks.21 Declining oil prices are squeezing projections made in 2010 (Figure 2).15 Soaring the finances of Iran, Russia, Venezuela, and other re- production helped lift America’s economy out of pressive, energy-rich regimes, too.22 the Great Recession—boosting annual GDP by hundreds of billions of dollars and creating hundreds The $1,500 that the average U.S. household now of thousands of shale-related jobs.16 Lower-cost saves annually from plunging energy prices—$1,000 Step on the Gas! 3 at the pump electricity, heating, and finished goods that use natural gas as an input increase in median household income during 1986–2013 gas, rather than coal, to generate electricity reduces air pollution emissions by more than 200 million metric tons 23 annually (much larger than the reduction delivered and $500 from lower costs for by renewables) during 2005–13, cut emissions by more than any other country. Given such benefits, maximizing the value of today’s(Figure 3). boom and maintaining its momentum should be top priorities for policymakers. 26 and has lowered carbon dioxide Doubling Down 24 Notwithstanding the temporary energy glut, numer- —is larger than the total ous long-term projections suggest that global demand for oil and gas will rise faster than U.S. output. BP es- 25 timates that oil consumption will remain flat in devel- The spread of natural oped countries to 2035 but will jump by 19 million bbl/d (nearly 50 percent) in non-OECD countries, as 27 helping the U.S. a billion new cars are added to the roads. Global gas demand will grow by 53 percent. trends, EIA forecasts America’s global share of pro- 60 duction to fall for oil (15 percent to 11 percent) ,000 natural gas (21 percent to 19 percent); to rise significantly. opportunity for U.S. producers. Issue Brief No. 35 July 2015 28 Regardless of the extent to which such forecasts 50 are accurate, there is little downside to laying the ,000 Figure 3. Energy Savings for U.S. Households groundwork for expanded production. The U.S. government need not place industry bets but simply U.S. Median Household Income (2013 USD) create an environment conducive to private invest- ment—the private sector, best incentivized to make Value of reduction in energy costs Source: U.S. Census Bureau; EIA; Boston Consulting Group judgments about returns on investment, will com- 4 40 mit the capital and accept the risk if given the op- 32 ,000 portunity to do so. Such conditions offer enormous Thanks to its large domestic market, the U.S. econo- 29 my faces little risk of overdependence on energy pro- Indeed, on current 1980 duction. Whereas energy-producing nations often 1981 grow dependent on high energy prices, the relative 1982 1983 1984 31 1985 and prices 1986 30 1987 and 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 balance between U.S. production and consumption Thus, the time to invest more is now, at the very mo- leaves its economy evenly exposed to both sides of ment that more investment seems superfluous. Oppo- the market. Likewise, the threat of “Dutch disease,” nents of further exploration and development tend to whereby resource-dependent economies lose manu- cite long lead times as an argument against pursuing facturing competitiveness as their currencies appre- such a course; in this instance, however, lead times are ciate,33 poses little risk to the United States: produc- a feature, not a bug. Further, the commercialization tion helps reduce the country’s large trade deficit and of new gas and oil technologies and the installation its manufacturers’ energy costs. of new infrastructure take years to complete. Smart policy today can ensure that the necessary pieces are Some environmental groups argue that any increase in place to sustain U.S.
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