Tuesday, April 24, 2012

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."

31 Comments:

At 4/24/2012 12:15 PM, Blogger Benjamin said...

If we have cheap and abundant fossil fuels, why do we still have a federally mandated, rural-lard socialist, pink-o corn ethanol program?

Every gas tank in America has about 10 percent ethanol in it, forced upon us by Uncle Sam, your Big Mommie.

And why did President Bush jr. try to mandate an even larger cellulosic ethanol program?

 
At 4/24/2012 12:30 PM, Blogger Moe said...

Mr. Verleger uses the word "permanently" far too often IMHO - especially when the underlying commodity extraction always works on a Bell Curve. What am I missing?

 
At 4/24/2012 12:31 PM, Blogger james said...

Although The demand for energy keeps increasing here and worldwide. One must not lose sight of the impact on the environment from the extraction Of shale or any other raw materials. I do not get it when I here on TV by all the so called conservatives. Drill Baby Drill. We now have more rigs fracking for natural gas going on all over the USA than ever before. Yet these nuts on the far right keep on saying the government is not allowing any drilling to proceed thats certainly not the case with natural gas. The price of natural gas has collapsed over the last five years because of the exploding supply of natural gas on the market. Its completly the opposite yet you would never know it if you watched fox news for example. The problem with the news media today is that all the political biases cloud the real issues whether they be on the right or the left' when it comes to these sort of issues. You can not or it seems increasing more and more difficult to get a objective view on any of these matters.

 
At 4/24/2012 12:34 PM, Blogger Abir Mandal said...

@Moe: The time horizon. When the tail is too far away, it doesn't matter. Also, cheaper inputs right now puts us on a permanently higher income path.

 
At 4/24/2012 12:36 PM, Blogger Abir Mandal said...

James: Go to NK. They have no drilling there. Environment is exactly like Gaia made it.

 
At 4/24/2012 12:38 PM, Blogger Moe said...

Abir:

sorry - don't understand this statement:

cheaper inputs right now puts us on a permanently higher income path

 
At 4/24/2012 12:40 PM, Blogger The Grouch said...

The only thing standing in the way are..... surprise, surprise..... short-sighted politicians protecting old-school special interest groups such as the ethanol lobby.

 
At 4/24/2012 12:48 PM, Blogger Abir Mandal said...

Lower prices leads to higher GDP right now. Even at the same savings rate, we thus have a higher capital accumulation. Future income, which is considered to be a non decreasing function of capital, thus would be higher than if nothing changed.

 
At 4/24/2012 12:56 PM, Blogger Moe said...

and we all know nothing ever changes....

 
At 4/24/2012 1:22 PM, Blogger Abir Mandal said...

That is not the point. In any theory, you have a model. A model is essentially a simplistic view of the world. It is impossible to control for every possible change, thus, we predict ceteris paribus.

 
At 4/24/2012 1:37 PM, Blogger Moe said...

Yes, I am familiar enough with models having been in the finance industry since 1998 - enough to know the economy, the stock market, the weather – no amount of math is going to make them predictable.

 
At 4/24/2012 1:40 PM, Blogger Ken said...

Ben,

If we have cheap and abundant fossil fuels, why do we still have a federally mandated, rural-lard socialist, pink-o corn ethanol program?

Because farmers are as self-interested as anyone else. They are also a pretty powerful voting block. And people in general are ignorant of economic principles.

Every gas tank in America has about 10 percent ethanol in it, forced upon us by Uncle Sam, your Big Mommie.

And why did President Bush jr. try to mandate an even larger cellulosic ethanol program?


Because while Bush isn't as big a corporate tool as Obama, he was still a corporate tool. He believed in big government solutions the same as all statists.

 
At 4/24/2012 1:41 PM, Blogger juandos said...

pseudo benny whines idiotically as usual: "If we have cheap and abundant fossil fuels, why do we still have a federally mandated, rural-lard socialist, pink-o corn ethanol program?"...

You know why fool since you've been told on numerous occassions why...

Your boyfriend is respnsible...

 
At 4/24/2012 2:08 PM, Blogger Che is dead said...

"Because farmers are as self-interested as anyone else. They are also a pretty powerful voting block. And people in general are ignorant of economic principles." -- Ken

The real beneficiaries of ethanol subsidies are the shareholders of the large corporate interests involved in its production. This is true of almost all farm subsidies. Independent farmers receive almost nothing in the form of subsidies. What "Benji" likes to call the "rural-lard socialist, pink-o corn ethanol program?" is yet another form of welfare for his parasitic, city-dwelling, blue state friends.

"Between 1995-2009, taxpayers shelled out $246.7 billion dollars in agriculture subsidies. Sixty-two percent (62%) of American farmers received no subsidy at all. These no-subsidy farmers and ranchers are primarily small operators grossing under $250,000 a year on their farms. In other words, these are family farmers that fit the idea most Americans have of farmers. Nationally, ten percent (10%) of "farmers" received 74% of all subsidies, or $183.25 billion of the total $246.7 billion allotted. The bottom eighty percent (80%) of farmers who received a subsidy got on average, $572.00 dollars." -- Carroll News

"From 1995-2009," reports Environmental Working Group, "the largest and wealthiest top 10 percent of farm program recipients received 74 percent of all farm subsidies, with an average total payment over 15 years of $445,127 per recipient. Most farmers, in fact, manage with a minimum of federal help because they raise commodities that don't get subsidies. The great majority of government payments go to producers of just five crops: corn, wheat, soybean, rice, and cotton. Yet if you go to the grocery store, you will find racks filled with potatoes, strawberries, broccoli, tomatoes, lettuce, nuts, and carrots, grown without being heavily fertilized with tax dollars." -- Reason

Bush actually tried to end ALL farm subsidies:

"GLENEAGLES, Scotland — President George W. Bush said he was seeking agreement with the European Union on a plan to eliminate by 2010 the $112 billion a year that rich countries spend subsidizing their farmers. "We want to work with the EU to rid our respective countries of agricultural subsidies," Bush said at a news conference in Gleneagles, where he is attending a meeting of the Group of 8 leading industrialized nations. Bush said that aid should be eliminated as part of the so-called Doha Round of negotiations within the World Trade Organization. The president's call to end the subsidies seems to go beyond proposals now being considered within the WTO."> -- The New York Times

"Benji" is a moron, do not be drawn down his rabbit hole.

 
At 4/24/2012 2:43 PM, Blogger Methinks said...

Uncle Sam, your Big Mommie.

Uncle Sam is a cross dresser?

 
At 4/24/2012 3:06 PM, Blogger Moe said...

Don't Ask, Don't Tell.

 
At 4/24/2012 3:15 PM, Blogger juandos said...

" I do not get it when I here on TV by all the so called conservatives. Drill Baby Drill. We now have more rigs fracking for natural gas going on all over the USA than ever before. Yet these nuts on the far right keep on saying the government is not allowing any drilling to proceed thats certainly not the case with natural gas"...

Gee james, did you read an especially informative issue of Mother Jones recently?

BTW james, where is the vast majority of this new drilling going on at, private or public lands?

BTW james, who's the biggest land owner in the US, private individuals and companies or the federal government?

 
At 4/24/2012 3:57 PM, Blogger AIG said...

Go to NK. They have no drilling there. Environment is exactly like Gaia made it.

Hmm, the environment isn't fairing very well in North Korea.

Anyway, this article is way too optimistic to be very realistic.

 
At 4/24/2012 5:29 PM, Blogger Methinks said...

AIG, I think that was sarcasm. I thought Abir was quite funny.

 
At 4/24/2012 5:53 PM, Blogger Abir Mandal said...

Moe: The purpose of an economic model is not to predict what will happen, at least not exactly. The model, however, will show the independent effect of change in a constituent variable on fundamental indicators.

 
At 4/24/2012 5:56 PM, Blogger Abir Mandal said...

AIG: Whatever Methinks said. The environazis want our economy to be like that of the norks. Consequently, we will also have a similar environment. But that takes time! So why not relocate those wastes of oxygen to the readymade "pristine" environment.

 
At 4/24/2012 6:45 PM, Blogger Benjamin said...

One thing puzzles me: Huge strikes of natural gas are being made globally. Much of it can be developed even with cheaper conventional drilling.

The whole world will soon be enjoying plentiful and thus cheap natural gas. They ship by LNG tankers.

How will USA have a competitive advantage in this condition?

 
At 4/24/2012 6:51 PM, Blogger Abir Mandal said...

@Ben: Why does the US need to have comparative advantage in it? It's more energy for the US to use in economic growth. If the gas is in the US, you can only produce it in the US right? Not in China or elsewhere.

 
At 4/24/2012 6:57 PM, Blogger Methinks said...

Not quite, Bunny.

Natural gas is a gas and gases are not easy to transport. This is why Arabia burns off its gas at the well (since there's not a whole lot of demand for NG in the desert).

If you find gas in a remote location, unless the reservoir is very very large, it's not worth the expense of liquifying it in order to transport it.

So, unlike oil, gas remains a continental commodity.

 
At 4/24/2012 8:20 PM, Blogger Benjamin said...

Dudes:

"An LNG carrier is a tank ship designed for transporting liquefied natural gas (LNG). As the LNG market grows rapidly, the fleet of LNG carriers continues to experience tremendous growth."

LNGs are being delivered at record rates. Obviously, natural gas is and will be a global commodity.

I am happy to drill in the USA. Perhaps our gas will be cheaper, even though drilled in shale, than gas drilled conventionally in huge strikes in Indonesia, Africa, and many other places.

For that matter, China is drilling shale, and Europe may start.

 
At 4/25/2012 6:05 AM, Blogger VangelV said...


I am happy to drill in the USA. Perhaps our gas will be cheaper, even though drilled in shale, than gas drilled conventionally in huge strikes in Indonesia, Africa, and many other places.


It isn't cheaper. I have no idea why everyone is so high on expensive shale gas when geologists know that the world should have massive amounts of conventional gas in areas that were ignored because there would be no market for stranded gas. Mexico should have plenty of gas around and the Middle East should be swimming in gas. The thing to do is to invest there, not in very expensive shale that does not yield a positive return on the energy invested.

 
At 4/25/2012 6:59 AM, Blogger Moe said...

Abir:

I respect your stance, but completely disagree. Mathmatics has been hijacked by economists. Models are made for a reason - prediciton and for an advantage - no matter in how you spin it.

I prefer my models on a runway.

 
At 4/25/2012 7:57 PM, Blogger Ron H. said...

Mwthinks,

"Uncle Sam is a cross dresser?"

Well, sort of.

 
At 4/28/2012 3:27 AM, Blogger Jet Beagle said...

Phil Verleger is a very smart man. Check out his blog where he thoroughly debunks the St Louis Fed's speculators assertion

 
At 5/29/2012 10:32 AM, Blogger Daniel Hink said...

I have found an article online that shows how the shale "boom" can impact the economy from internal use and exportation. If you would like to read it, I will provide the link below.

http://shalestuff.com/economy-2/shale-drilling-benefits-economy/

 
At 5/29/2012 10:33 AM, Blogger Daniel Hink said...

I have found an article online that continues some of the ideas in this article. Also, how we can expect to use the natural gas internally, as well as export it. If you would like to read it, I will provide the link below.

http://shalestuff.com/economy-2/shale-drilling-benefits-economy/

 

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