The New Prometheus
The domestic energy industry is booming—and driving a U.S. economic revival
By DANIEL YERGIN
When the 'shale gale'—the surge in the production of natural gas trapped in very dense shale rock—first came into public view in 2008, the focus was primarily on the energy and environmental implications. But the past couple of years have brought recognition of shale gas's economic consequences, beginning with major job creation in a time of stubbornly high unemployment. President Barack Obama has repeatedly cited the jobs impact of shale, including in his State of the Union address last year and even in one of his debates with Mitt Romney. At the same time, abundant low-cost energy is stimulating a revival of manufacturing in the U.S. as well as increased American economic competitiveness—as angst-ridden European CEOs will tell you. And the change has come quickly. Shale gas, only 2% of total U.S. natural gas production a decade ago, is now nearly 40%.
Comeback
By Charles R. Morris
PublicAffairs, 179 pages, $12.99
The economic portent of America's unconventional oil-and-gas revolution is at the heart of Charles Morris's "Comeback: America's New Economic Boom." Mr. Morris is the author of a number of books on the U.S. economy and economic history. His most recent, the commendable "The Dawn of Innovation," described the explosive growth that resulted from America's first industrial revolution during the early decades of the 19th century. But it was in 1990, at another time of economic gloom, that Mr. Morris published "The Coming Global Boom," correctly predicting an era of strong economic growth.
Now he is back with a similar argument, namely that "the United States is on the threshold of a long-term economic boom, one that could rival the 1950s-'60s era of industrial dominance." The country, as he sees it, is at a turning point that most people, mired in chronic pessimism, are missing. The source of the boom this time, Mr. Morris says, will be "rising American productivity" and industrial "restructuring" that "has made the United States one of the most desirable manufacturing sites in the world, especially in states like Virginia, Tennessee, Georgia, the Carolinas, and Alabama."
The "manufacturing renaissance" in the U.S. is also fueled by what is happening elsewhere. With industrial wages increasing 15% to 20% per year, China is losing what had been the indubitable edge that transformed it into the workshop of the world. There is also the logistical advantage of manufacturing close to North American markets, especially when transportation costs are added in. All this is giving the U.S. renewed impetus as a manufacturing platform for global exports: Japanese auto makers now build cars in the U.S. for export to Europe; the German engineering conglomerate Siemens SIE.XE -1.38% does the same for gas turbines sold to Saudi Arabia.
But—and this is central to Mr. Morris's argument—what really turbo-charges this American advantage is what he calls "the new X-factor, the American energy advantage," the arrival of low-cost shale gas. Here is the big new chance for American industry. As Mr. Morris puts it, shale gas can be the central pillar of America's coming economic rebound. "Unless something goes horribly wrong," he says, "energy is a game changer." The U.S. and Canada have this ace up their sleeves while, at least at this point, no one else does.
There are other reasons to be optimistic, according to Mr. Morris: The comeback he foresees is bolstered not only by the new availability of inexpensive, abundant energy and the resurgence of manufacturing but also by an uptick in public infrastructure investment and the continuing growth of the health-care sector.
His main focus, however, is the positive economic impact of shale gas. He spends some time on the employment effects. He cites research findings from IHS, a research firm of which I am vice chairman, showing that 1.7 million jobs are currently supported by this unconventional revolution in oil and gas. (That doesn't include the additional jobs resulting from the expansion of manufacturing.) Most of these shale jobs have been created since 2008 and the beginning of the recession. The economic impact of shale, including especially the job numbers, helps explain why public policy has been supportive of shale gas and why state governors focused on economic development are among shale's biggest backers. And the job creation will continue to explode: Mr. Morris argues that this unconventional revolution could support more than four million jobs by the end of this decade.
Mr. Morris adroitly explains the workings of what he calls—no doubt to the alarm of some—"the splendid technology that makes [shale] possible." That is hydraulic fracturing, better known by the now-famous shorthand "fracking." This is the process of injecting water and sand mixed with a small amount of chemicals, under high pressure, to create fractures in rock deep underground that allow gas to flow into the drill hole.
But the author's discussion becomes confusing when he takes on the environmental questions around shale gas. Despite the oft-expressed concerns in the fracking debate about the amount of water used in the process, Mr. Morris points out, such drilling even in gas-rich Texas uses only 1% of the total water consumed in the state. He rightly underlines the importance of properly dealing with the waste water produced from drilling a well, one of the central tasks of proper environmental stewardship. All good, but then he also declares that the most dire portrayal of the environmental risks by anti-fracking critics is "mostly right." Yet then he switches course yet again and concludes that the environmental issues can be managed—although he never really demonstrates that they aren't being managed well in the first place.
Mr. Morris is particularly exercised about "fugitive emissions" of methane from gas production. This is a subject of major debate because methane is 25 times more potent a greenhouse gas than carbon dioxide. Mr. Morris wholeheartedly embraces the view that this is a very big problem, dismissing analysis that indicates that the risks have been greatly overstated. But in April, the Environmental Protection Agency—which had previously expressed much concern on this subject—significantly lowered its estimate of methane emissions owing to an improved understanding of well operations. Further reductions in the estimates will likely result from the prevalence of "green completions" in new wells, which trap methane instead of allowing it to be flared or vented into the atmosphere.
What really bothers Mr. Morris, however, is the possibility that the U.S. might join the ranks of liquefied natural gas (LNG) exporters. This, he says, would not only hijack the low-cost energy opportunity but would also turn the U.S. into "a raw material colony of an Asian industrial juggernaut"—that is to say, relegate the U.S. to the subservient role of provider of cheap energy for rising China.
Actually, he is a little late on that. The "train" (to use the industry word for LNG export facilities) has already left the station. The first new export facility to be permitted by the U.S. Department of Energy will begin exporting around 2016, and two weeks ago a second was approved.
Being a mere raw-material colony would clearly be a bad thing in anybody's book. But Mr. Morris's assertions are a little overheated. Markets themselves will dictate that only a handful of new LNG export facilities will be built in the U.S. There will be a great deal of competition, from present and future suppliers in other countries. As many as five new LNG export facilities are planned just on the west coast of Canada, a country that doesn't have a hang-up about energy exports. The huge new resources of natural gas that have been discovered off the shore of East Africa will also enter the market, and perhaps even the big discoveries off Israel. The U.S. won't be the lowest-cost supplier. The discipline dictated, moreover, by the cost of new projects—ranging from $7 billion to $60 billion—will also limit what gets built.
Mr. Morris's worry about exports reflects his fear that there may not be enough natural gas to go around. But today's natural-gas market is constrained by demand, not supply. Just a few weeks ago, the Potential Gas Committee, a nonprofit affiliated with the Colorado School of Mines and the authoritative source on the nation's gas resources, raised its projection for technically recoverable natural gas supplies in the U.S. by 26%.
When he gets to his third pillar—stepped-up spending on roads, bridges, railways and the like—Mr. Morris makes a compelling case that the U.S. is significantly under-investing in the infrastructure needed to support economic growth. "We now spend," he writes, "half as much on public infrastructure relative to the size of the economy as we did fifty years ago." He points, for example, to the deterioration of the inland waterways that tie the Midwest and its industries together and on which the manufacturing revival will depend. It was too late for his book, but the collapse a week ago of I-5 over the Skagit River in Washington state underscores his warnings about the risks from aging infrastructure, including tens of thousands of "structurally deficient" and "functionally obsolete" bridges around the country. Remedying the widespread infrastructure deficiency through public spending, Mr. Morris predicts, will add fuel to a once-again roaring industrial engine. "Infrastructure financed by borrowing has a long and honorable history in the United States," he writes.
But it is not only lack of such government finance that, in Mr. Morris's view, is holding things up. There is another big constraint: inordinate delay. To make that point, he calls on his own experience: He worked in New York City government 45 years ago trying to get a third water tunnel built for the city. It was supposed to take a decade, but "current expectations are that it will be completed around 2020." That may be an extreme, but it does point to what seems the ever-lengthening time it takes to "get to yes" on major infrastructure projects.
When it comes to health care—another pillar of the comeback—Mr. Morris asks an interesting question: Does it make sense that the purchases of refrigerators, cars and computers are considered positives for economic growth but not any expansion of medical services? He provides his own answer: Health care is a "vibrant industry" that contributes to growth.
In a previous book, "The Surgeons: Life and Death in a Top Heart Center" (2007), Mr. Morris investigated health care by "shadowing an elite cardiac unit" at Columbia-Presbyterian hospital in New York City for most of a year. But how health care fits into his argument in "Comeback" isn't so clear. He wants to build upon the "new Obamacare machinery" to extend "federal bargaining power in setting vendor payments." And he has no doubt as to who are the villains in his health-care narrative. "Doctors," he writes, "increasingly ply their trade within various forms of corporate organizations devoted to exploiting the hallowed fee-for-service payment paradigm by ping-ponging patients between as many diagnostic tests and minor procedures as they can." This seems to be a rather broad brush with which to paint doctors, many of whom are even more confused than the public about how health reform will work and what it will mean for their ability to practice.
Mr. Morris's other big villain is the drug industry. His proof is the hefty dollars in legal settlements between the federal government and drug companies. Yet the size of settlements between the federal government and companies, intent on avoiding litigation and reputation damage, is not necessarily proof of wrongdoing. What all this really has to do with shale gas and manufacturing revivals isn't obvious, and Mr. Morris doesn't persuasively connect these developments.
Overall, "Comeback" captures the major changes set in motion by the unconventional oil and gas revolution. The result, Mr. Morris says, will be higher economic growth and a quickly disappearing federal budget deficit. "Trade and budget deficits will shrink in real terms and cease to dominate the political discourse," he writes. This will in turn change politics: "A vigorously growing economy going into the 2016 election should lock in a liberal ascendancy for a considerable period." To help speed the decline of the deficit, Mr. Morris, who describes himself as an "old-fashioned liberal," calls for moving tax rates up "a good notch," though without addressing the setback that such a "good notch" might mean for the comeback.
There are misfires on facts in the book. Natural-gas prices did not plummet last year due to lack of pipelines. It was primarily because production exceeded demand. In other words, there was a surplus. Here Mr. Morris is confusing natural gas with oil, where the once-famed WTI crude—the West Texas Intermediate—stripped of its place as global benchmark, sells at a discount owing to inadequate pipeline capacity. It is true, as Mr. Morris says, that North Dakota is now the second largest oil-producing state in the country, but it follows not Alaska, as he writes, but Texas. In fact, Alaska, worrying about declining production, is now in fourth place, behind California. Speaking of North Dakota, Mr. Morris glides rather quickly over the significance of the rapid growth in "tight oil" that uses the same technology as shale gas. Yet, with U.S. oil production up 43% since 2008, the impact is no less striking. And more impact is to come.
The contribution of "Comeback" is to cogently lay out the bright economic consequences of the unconventional oil and gas revolution and the revival of manufacturing. Shale gas and tight oil are proving, in ways not expected even a couple of years ago, the fuels of America's comeback. Without them, the economy, instead of gearing up for a comeback, would have been held back even more than it has these past few years.
