America's Market-Driven Energy Revolution

While Washington squabbled over energy policy, the markets moved us toward cheap, plentiful energy.

Joel Kurtzman has an excellent editorial in today's WSJ about how market prices and technology, more than government policy, are driving the U.S. boom in oil and natural gas production.

"Those who doubt that market forces still have the power to transform the world aren't paying attention to America's revitalized energy sector. Four years ago, oil prices climbed to about $145 a barrel world-wide (see chart). The impact on the U.S. economy was devastating.

But eventually prices did what they're supposed to do in a market economy—they prompted the development of new sources of oil as well as oil substitutes. Some companies began drilling new oil wells using new technology including 3D seismic imaging and directional drilling. In 2002, when oil prices were in a trough, there were roughly 800 oil-drilling rigs operating in the U.S. Today, there are roughly 2,000. The last time we had that many rigs drilling for oil was 1985. In addition, energy companies went after and found more offshore oil, and far more "unconventional" oil from shale, tar sands and long-abandoned wells than most people thought possible.

Not surprisingly, companies also sought opportunities developing cheaper alternatives to oil. Chief among these fuels is natural gas, which is a cleaner fossil fuel than oil and coal. In 2008, estimates were that the U.S. had just 12 years of natural gas reserves left. Plans were being put in place to import liquefied natural gas from the Middle East, perhaps even Russia, to meet future demand.

But high energy prices prompted companies to develop new technologies. Hydraulic fracturing—drilling deep vertical wells then drilling horizontally to release natural gas from shale rock—was perfected. Because of that, natural gas reserves increased dramatically while prices fell. In 2008, natural gas sold for about $12-$14 per thousand cubic feet. Now it sells for about $2 per thousand cubic feet (see chart). Instead of supplies lasting only 12 years, there is now sufficient natural gas for at least 100 years.

Right now, natural gas is so abundant and cheap that some worry the U.S. and Canada, which has large reserves north of those in the U.S. Midwest, may soon run out of storage capacity. Some companies have even announced plans to curtail drilling due to falling prices and oversupply.

But here the price-mechanism is again at work. Trucking companies and fleet operators, wanting to take advantage of low natural-gas prices, are looking into converting trucks from diesel to natural gas, cutting their fuel bills by half. (See related Bloomberg article "Shale Glut Means $1-a-Gallon Savings at the Pump.")

High energy prices have transformed the American energy landscape. New oil and gas finds, combined with traditional sources of energy, including cheap-but-dirty coal, have transformed the U.S. from an energy has-been to a heavyweight.  Total U.S. energy reserves now exceed those of all other countries, including those in the Middle East. The U.S. is so energy rich there's little to prevent us from achieving energy independence."

Bottom Line: "Prices more than policy are driving these remarkable changes. While Washington squabbled over which energy direction to take, and which energy bill to kill, the markets moved us in exactly the direction the country should go—toward cheap, plentiful energy."