The Pessimists’ Dead-End

Originally published in Flourishing January 2012

In 1957, Bennett Cerf, then CEO of Random House, took a chance on a wildly dystopian and philosophically radical novel.  You may have heard of it—more than seven million copies have been sold, and many of its author’s personal papers are now housed in the Smithsonian—Atlas Shrugged, by Ayn Rand.

I mention Atlas here, because its author is now widely perceived to have been incredibly prescient.  For example: One of the most interesting characters in the novel, Ellis Wyatt, had figured out how to get oil from shale, a crazy idea back in 1957.  Like today’s high tech oil and gas producers, Wyatt’s genius had the potential to lift the nation’s economy out of a deep recession. In the novel, government leaders conspired with their business cronies and political supporters to destroy a railroad needed to transport crude oil from Wyatt’sColorado oil fields to distant refineries.  Equivalently today (December 20, 2011), after three years of environmental studies, our President and Congress are still fighting over the construction of a similarly needed pipeline.

But pessimists and dystopians, please make a note:

In the real world—sooner or later—rational economic self-interest trumps political ideology, always. 

And, increased oil and natural gas production, along with an efficient transportation and pipeline system, are in the best interests of American businesses, American job-seekers, and American consumers.  So, let’s get right to the good news.

Shale gas production is not just increasing, it’s growing almost exponentially.  In 2010, shale gas production represented 29% of natural gas wells completed and 27% of total natural gas production in the U.S.  By 2020, it’s expected that shale gas production will more than double, and by 2035 shale gas will represent 60% of all American natural gas production. IHS Global1, a respected worldwide research firm, estimates that the value of the natural gas extracted from shale will grow from about $26 billion in 2010 to $72 billion in 2020, and more than $153 billion by 2035; and that estimate assumes that natural gas prices will increase at a rate less than the overall inflation rate.

In 2010, shale gas production contributed about $76 billion to domestic GDP, and more than $18.6 billion to federal, state, and local government tax and royalty revenues.  Those numbers are expected to triple to $231 billion and $57 billion by 2035.

At a time (2010) when jobs were—as they are now—seemingly in short supply, the shale gas industry supported more than 600,000 American jobs.  By 2035, that number is expected to grow to 1.6 million.

And, here is why I’m really excited about the potential expansion of the shale gas industry:  Increasing production of natural gas could mean lower energy costs, and lower energy costs could mean a new industrial renaissance forAmerica.  According to the IHS study, increasing production of shale gas could lower the cost of manufacturing in many critical American industries. 

Among the possible beneficiaries, the electric utility industry is likely to move away from coal and toward natural gas as a fuel for its generating plants.  Exports of PVC and related products manufactured in theU.S.have already tripled since 2007 as a percentage of total production.  Other chemical producers, including agricultural chemical manufacturers, and aluminum, steel, and cement producers could benefit, too.

This is all confirmed by another new study2 by Pricewaterhouse-Coopers,   which found that seventeen chemical, metal, and industrial manufacturers commented in their 2011 SEC filings that shale gas developments drove demand for their products, compared to no—zero—such statements just three years ago.

 The PwC study also says that it’s very likely that there will be a significant return of manufacturing from offshore in coming years—as many as one million new jobs by 2025—especially to areas of the country friendly to shale gas production and/or with easy pipeline access. 

Labor costs overseas and corporate tax rates at home could be negative factors, but don’t pooh-pooh these more positive conclusions too quickly, as tax and labor conditions could change suddenly, dramatically, and favorably, too.

Like the heroes in Atlas Shrugged, I have an implicit trust in the American entrepreneurial spirit. I first witnessed that spirit as a teenager among the roughnecks of Ellis County, which at the time was the highest oil producing county in Kansas.  That spirit still lives in America—especially in the shale gas and oil industry—and that’s why I’m so sure the pessimists are wrong. mh

 

  1. The Economic and Employment Contributions of Shale Gas in the United States, IHS Global Insight (USA) Inc., December 2011.
  2. Shale Gas: A renaissance in U.S. manufacturing? PricewaterhouseCoopers LLP, December 2011.