The Coming U.S. Shale-Based Economic Boom

Philip Verleger, visiting fellow at the Peterson Institute for International Economics, writing in today's Financial Times: 

"Today, few realize that the U.S. stands on the cusp of significant economic gains stimulated by low energy costs. Ten years from today, [we will] celebrate a decade of unexpected strong growth, and the credit will go to countrywide gains from the very low energy prices found only in the U.S.. Low-cost energy will have spawned an export surge in all sorts of goods, from chemicals to tires. Fracking and the other technologies that gave us low natural gas prices will have added more than 1 percent a year to U.S. growth. 

Four conditions will contribute permanently to a big improvement in the competitive position of the U.S. 

1. The U.S. has perfected a means of “manufacturing” natural gas from shale, in effect breaking the monopolistic control on hydrocarbon supply once enjoyed by the majors. 

2. This advantage gives manufacturing plants in the U.S. up to an 80 percent cost advantage over those operating in China, Japan, South Korea or European countries. 

3. U.S. financial markets (principally futures markets) enable producers and consumers to lock in profits for years ahead. Low cash prices now do not deter producers that sold today’s production a year ago at much higher and profitable prices. 

4. Competitive and open pipeline systems prevent any single large participant from denying these economic benefits to any producer or consumer. 

No country other than Canada enjoys U.S. competitive conditions. Nor will any other country probably enjoy them in the future. Recognizing this, groups such as Michelin and Shell intend to build plants in the U.S. to take advantage of the country’s permanently lower-cost energy supplies. Steel mills are also being planned. 

In short, low-cost energy provided primarily by shale gas production advances will almost certainly contribute to an investment boom across the U.S. economy. As a result of these circumstances, the benefits of low-cost energy supplies will spread throughout the U.S. economy, stimulating exports of goods and services and creating millions of jobs."