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The Misfortune Of Having Shale Gas

 February 29, 2012 11:33 AM

The buzz surrounding potential supplies of shale gas and depleted oil in the United States is a case in point.

Shale gas refers to natural gas that is trapped within shale formations. Over the past decade, new techniques in drilling have allowed access to large volumes of shale gas that were previously uneconomical to produce. The production of natural gas from shale formations has rejuvenated the natural gas industry in the United States.

Almost 90 percent of the natural gas consumption in the United States in 2010 was produced domestically, according to Energy Information Administration (EIA). Thus, the supply of natural gas is not as dependent on foreign producers as is the supply of crude oil, and the distribution system is less subject to interruption.

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Working gas in storage was 2,595 Bcf as of February 17, 2012, according to EIA estimates. This represents a net decline of 166 Bcf from the previous week.

Natural gas prices for April gas contract on the New York Mercantile Exchange were up 1.19 percent to $2.55 per million British thermal units.

The availability of large quantities of shale gas should enable the United States to consume a predominantly domestic supply of gas for many years and produce more natural gas than it consumes.

On the positive side, the nation's gross domestic product should increase, driven by higher domestic oil and gas production. In addition, the balance of payments position would improve as the U.S. would become less dependent on imported energy.

On the flip side, higher oil and gas reserves would lead to currency appreciation, hurting companies in the other sector like automakers. U.S focused non-energy companies will find it harder to compete in the international market place – as their products will be more expensive from currency perspective and are less likely to be suited to the international trade through comparative energy inefficiency.

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"The persistent nature of the currency appreciation risks making the non-oil sector of the economy uncompetitive," UBS economist Paul Donovan wrote in a note to clients.

Meanwhile, the US is lagging behind Europe in efficient oil consumption especially when Western Europe has more manufacturing compared to the U.S.

"This is all the more surprising when we consider that Western Europe has a higher proportion of manufacturing in its economy than does the United States, and also includes less developed economies (for instance, Turkey) which will also tend to have a higher oil : GDP ratio," Donovan added.

The U.S. saw a surge of energy efficiency during the recession of the early 1980s, as energy inefficient industries closed down. The move to a less manufacturing based, more service sector based economy also helped reduce the consumption of oil per unit of GDP.

On the other hand, European economies responded to the OPEC oil shocks of the 1970s with a policy of taxation aimed at reducing oil consumption. This created an economic incentive for companies in the European economies to become more fuel efficient.

"In the United States, there was a focus on legislation to improve fuel efficiency, but the economic imperative was never as strong as it was in Western Europe or Asia," the economist noted.

As a result, though shale gas reserves will give the US economy a cyclical advantage compared to its current position, the economic incentives for US firms to pursue energy efficiency are likely to be less than they are in those countries with fewer energy resources.

Meanwhile, the revenues accrued from domestic energy resources could allow an easier transition to energy efficiency, if the political will to tackle environmental considerations is sufficiently strong.

"If politicians squander the opportunity to transit to a more efficient economy, the near term growth benefits of America's new found energy will be unsustainable," Donovan said.



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