The shale revolution helped make America’s economy great But will the country’s oil riches discourage a similar revolution in renewables?
Here is a silly headline and even sillier premise. Until renewables reach the profitability of natural gas, they will remain second class energy citizens.
Special report | Energy
The shale revolution helped make America’s economy great
But will the country’s oil riches discourage a similar revolution in renewables?
Oct 14th 2024
SaveShare
Give
In the dense hilly forests of northern Pennsylvania, Trapper Wyman steers his pick-up truck down a gravel path until he reaches a small clearing at the end. It is a modest industrial site, with a lattice of pipes and valves, a few engine-like units no bigger than suvs and one worker who is monitoring it all. The operation runs in almost total silence. Unseen are the wells that plunge some 10,000 feet below the ground, then turn a corner to run another 10,000 feet horizontally, or the gas that flows back up and into a pipeline that traverses the country. This is the Marcellus shale, a family of rocks rich in fossil fuels. For Mr Wyman, owner of a local crane company, it is a site of deep reverence. “You only ever see bits and pieces of the Marcellus above ground, but it is like a giant factory producing energy for America and the world,” he says.
The Marcellus is just one of several such rock formations around America, from the oil-rich Bakken shale in Montana and North Dakota to the Permian basin, endowed with both oil and gas, in Texas and New Mexico. The revolution in tapping their hard-to-reach hydrocarbons got under way in the latter half of the 20th century as companies and government researchers worked to combine hydraulic fracturing, or fracking (the injection of specialised liquids to open cracks in rocks), and horizontal drilling. As they honed these techniques in the early 2000s, production surged. Now, America produces some 13m barrels per day of crude oil and 3bn cubic metres per day of natural gas, making it the world’s biggest producer of both.
The economic effects have been far-reaching. Most obviously it has changed America’s trading relationship with the world. Long a major importer of oil, America’s need for foreign crude started to decline in 2008—just when its oil-shale fields really took off. By 2019 it was, for the first time in more than half a century, exporting more energy than it imported (although it produces more than it consumes domestically, it still imports vast quantities of oil because it needs some varieties only produced overseas). Last year America recorded a net energy surplus of about $65bn.
Where the boom has occurred, the impact has been profound
Shale has boosted American growth in several ways. Narrowly, the decline in imports and increase in exports has improved America’s balance of trade: in most other sectors America buys more from the world than it sells to it. Plentiful shale gas, which is harder to export, reduced domestic energy prices, freeing up cash for more consumption and investment. Although many lost money on shale investments last decade because they took on excessive risk at high costs, the survivors have become more disciplined and efficient, with drilling rigs declining but production increasing. In a paper for the Federal Reserve’s Dallas branch, Mine Yücel and Michael D. Plante estimated that the energy boom added about 1% to American gdp from 2010 to 2015, or about a tenth of the economy’s growth during that period—a boost that may be continuing.
Where the boom has occurred, the impact has been even more profound. The timing was also remarkable. In much of America, as in much of the world, the 2007-09 period is remembered for the global financial crisis and a steep rise in unemployment. In places like Williamsport, a town in northern Pennsylvania that serves as a hub for drilling in the Marcellus shale, it is remembered as the beginning of the boom. “There were new companies coming to town, and they were coming in at a time when everything else was really slowing down,” says Jason Fink of Williamsport’s chamber of commerce. Nationally employment in oil and gas extraction increased by 60% to 200,000 between 2005 and 2015. It subsequently declined as production techniques improved. Yet the knock-on consequences have been more significant still, from growth in support services for fracking to a small recovery in manufacturing, fuelled in part by cheaper energy.
A well-insulated house
But the biggest economic effect of all is that shale has helped to shield the American economy from the volatility of the global oil market. In the past, oil shocks were a source of economic instability in America, just as in other countries: price surges drove up inflation and depressed growth, a combination experienced most brutally in the stagflation of the 1970s. In recent years, the drags have been far milder. Higher prices have led to ramp-ups in domestic oil and gas production, thereby supporting economic activity in the energy sector even as higher prices hurt downstream users. In 2022, soon after Russia invaded Ukraine, natural-gas prices in Europe soared as Russia cut off its westbound pipeline shipments. In America, awash in gas as never before, prices climbed a little, but never much above a quarter of the European level.
Shale also highlights some of the roots of America’s economic strength. There is the country’s sheer size and particular geology, which bestowed it with extraordinary energy deposits, both more plentiful and more amenable to drilling than shale formations in other countries. The drive of American capitalism is also on display in its oil and gas wells. Unlike many other countries America allows private individuals to own the minerals under their land. That encouraged hundreds of companies, big and small, to get into the shale business, and as they drilled more wells, they developed a better picture of where the richest reserves lay. This was an important differentiator between America and countries where big, lumbering national oil companies moved more tepidly. “The more you drilled, the more likely you were to hit the sweet spots,” says Xizhou Zhou of Wood Mackenzie, an energy consultancy. Now, with extensive geological surveys already on the books, energy producers know where to turn for their next wells.
Fracking has a bad name due to its environmental downsides: leaks of methane, a highly potent greenhouse gas, from wells and pipes; the creation of waste fluid; and, especially where that waste is reinjected in the ground, a risk of earthquakes. But the critiques undersell the upsides. It actually requires little energy to generate oil through fracking in America, meaning that direct emissions from extraction are relatively low. And the gas produced is much cleaner than the coal that had previously been one of the country’s major energy sources. Much of the reduction in carbon emissions in American power generation over the past two decades has come from shifting to gas.
That raises the question of whether America’s shale riches may turn into a liability, landing the country in a “fossil-fuel trap” by discouraging both innovation and investment in clean energy. As evidence that this may already be happening, Daron Acemoglu of mitand colleagues have pointed to a decline in renewable-energy patents in America, from 1.9% of total patents in 2009 to 0.8% in 2016. “Gas has been good for addressing the problem to date, but at some point, if you want to get to zero emissions, it’s not good enough,” says Samantha Gross of Brookings, a think-tank.
In economic terms, a fossil-fuel trap would pose two risks for America. The first is that its existing energy investments go stale. However much crude American producers extract, Gulf producers can always get more at lower costs. As the world weans itself off oil, shale fields will probably generate diminishing returns. The second risk is that America fails to make the right kind of new investments. It is a distant second behind China in producing electric vehicles, solar panels, wind turbines and batteries—the essential parts of clean-energy systems. Many of these are already cheaper sources of power over their lifespans than fossil fuels are, and their cost advantage will only grow.
The Innovation Production Act
The Biden administration has thrown money at the problem. Its signature piece of legislation, the misleadingly titled “Inflation Reduction Act”, lavishes tax credits and subsidies on both the companies that make renewable technologies and the consumers who buy them. Goldman Sachs, a bank, calculates that this may catalyse nearly $300bn per year in investment in renewables in America through 2032, resulting in double the energy produced from shale. James Stock, a Harvard economist and an energy adviser in President Barack Obama’s White House, says that the clean-energy revolution should, in theory, play to the innovative strengths of American firms, since so much advanced technology underpins it, from battery storage to hydrogen power. But for now renewables in America remain in the shadow of shale. ■