All of Them

Originally published in Flourishing November/December 2012

As recently as 2005, the annual average price of natural gas in the U.S. was $8.81 per thousand cubic feet (mcf)1; and gas ended that year at the astronomical price of $13.05 per mcf.  In September 2012, the cash price for natural gas was $3.52 per mcf.2  For American job-seekers, this trend could be a game-changer.

And, not that long ago, the bullies in Russia and Iran imagined they were going to corner the world market for natural gas.  Even now, there is an omnipresent threat of politically motivated supply shortages throughout Europe.  That situation may be about to change, too.

The short explanation for these possibilities is that investment in oil and gas exploration and development has exceeded $1.5 trillion in just the last three years3.  Much of that capital outlay has gone into various shale formations throughout the U.S., including the Mississippian Lime that underlies Cowley County.   

The somewhat longer explanation is that with persistent research and field experimentation in the 1980’s and 1990’s, George Phydias Mitchell, the son of an immigrant Greek sheep herder, developed technologies for drilling into shale formations horizontally, and then fracturing the rock so that oil and natural gas could flow into a concrete-sealed, steel-lined well-bore, and rise safely to the surface.4 It was largely as a result of Mitchell’s work that so much capital was attracted to shale development and hydraulic fracturing.  Mitchell sold his company to Devon Energy in Oklahoma City for $3.5 billion in 2002.

In 2011, the U.S. became a net exporter of oil for the first time since 1949.5  Within a few years, we may become the world’s biggest natural gas exporter; but that depends on the approval and completion of liquefied natural gas (LNG) export terminals. 

You might ask yourself, “What about European oil companies?  Can’t they do the same thing?”  Maybe they will, someday, but what makes North American shale formations viable as new sources of energy isn’t just geological or technological.  It’s also philosophical.  American entrepreneurial energy, which in this case is a by-product of private ownership of the means of production, including land, equipment, and mineral rights, is a critically important factor.  Julio Friedman, chief energy technologist at the Lawrence Livermore National Laboratory in California, sums it up nicely, “The mineral rights, the availability of small players to enter the market, the availability of geological data, these things are all part of an entrepreneurial model that is unique to the United States.”6

(Incidentally, the first commercial use of hydraulic fracturing occurred near Hugoton, Kansas in 1947.  The best illustration of the fracturing process that I’ve seen is at http://www.devonenergy.com.)

Incentivized by George Mitchell’s success, American oil companies have recently discovered (or rediscovered) and begun to develop more than twenty different shale formations in North America, each with more than 20 billion barrels of recoverable oil7; and, according to the U.S. Energy Information Agency (EIA), nearly one quadrillion cubic feet of natural gas. Thanks to these discoveries, North America could increase its production of oil and natural gas liquids from 15 million barrels per day (b/d) in 2010 to as much as 27 million b/d by 2022.   That would be an increase of 80% in just twelve years.  The U.S. may become the world’s largest oil exporter as early as 2017.8 

Why is this important?  It’s not because it makes us “energy independent”.  It doesn’t.  But, follow me closely, because the potential is much bigger than that:

In the fantasy world of Keynesian9 economics, it is believed that if the government will create sufficiently large budget deficits (stimulus packages), and if the Federal Reserve will print enough money to buy the government’s bonds to keep interest rates low; then jobs will be created, the economy will grow, and everyone will be fat and happy. 

But, we’ve repeatedly seen what those policies really produce: Corruption and carelessness in banking and on Wall Street; rampant mal-investment and cronyism in government programs; credit crises; and inflation. 

So, what does stimulate job creation and real economic progress?  The answer was provided by French economist Jean-Baptiste Say more than two hundred years ago:

“It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of creation of one product immediately opens a vent for other products.” 10

In economic science that’s called Say’s Law.  It’s often misrepresented and derided by those who think that deficit spending and the Federal Reserve printing press can create wealth.  But you, and I, and the Little Red Hen11 know—as Say’s Law suggests—that if one wants to reap a bountiful harvest, one must actually plant and nurture a fertile seed.  And, that is precisely what America’s oil industry entrepreneurs have done—in spades.  Thanks to their tireless efforts and their colossal investments, we’re seeing lower energy prices, a rebound in manufacturing, a cleaner environment, and thousands of good new jobs.   

Consider, for example, that companies as diverse as GE and Cummins are now partnering with smaller companies to develop products for the emerging natural gas transportation market.  And, why wouldn’t they?  Natural gas is now $1.50 to 2.00 per gallon cheaper than gasoline or diesel.  Natural gas refueling stations are springing up all across the country, and as many as one thousand commercial truck fleets are already sporting natural gas engines.12  (Paul Abram of Abram Ready Mix in Beloit, my friend and former employer, just sent me an article from Heavy Duty Trucking magazine, which shows Ferrara Brothers Ready Mix of New York City, using trucks powered by Cummins’ compressed natural gas (CNG) engines to deliver concrete to the World Trade Center.)

Then, there is the matter of electricity generation.  In previous issues of this newsletter, I’ve touched on the  lousy economics of solar and wind power, but natural gas is also making changes in the electric utility industry by driving down the demand for coal.  In 2004, natural gas provided for less than 18% of all electricity generation in the United States, while coal accounted for nearly 50%.  In 2012, natural gas will provide for more than 30%, and coal will provide for less than 38%.13   I wouldn’t write coal off completely, though. It’s still a plentiful, inexpensive, and with the latest technology, clean source of energy. 

Natural gas is not just a fuel, it’s also a key ingredient in many chemical manufacturing operations.  Chevron Phillips Chemical Company (a joint venture of Chevron and Phillips Petroleum) is planning to spend $5 billion to build a new, state of the art ethylene plant in Baytown, Texas, along with two polyethylene plants and related infrastructure.  According to the company’s executive vice-president Mark Lasher, the chemical industry is likely to spend up to $30 billion on such plants in the next few years.14  Confirming this, Dow Chemical has announced that it will build a new ethylene plant in Freeport, Texas, spending more than $4 billion and creating 2,000 new jobs.15.  Most of the remaining $20 billion or so will likely come from Sasol Limited, Formosa Plastics Corporation, and Royal Dutch Shell. I expect many more such announcements.

According to a report by the global research combine IHS-CERA, posted on the Exxon/Mobil website16, there were 37,000 new jobs created directly by the oil and gas industry in 2011.  That activity drove the creation of another 111,000 new jobs in industries that serve the energy producers.   But that only  begins to tell the story.  The technological transformation of the energy industry, led by the horizontal drilling and hydraulic fracturing innovators, couldn’t have been predicted, or even believed, as recently as ten years ago.  Yet today, the “unconventional” gas and oil industry employs, directly and indirectly, more than 1,300,000 Americans.  The average starting salary for petroleum engineers, for whom demand is rising, is now $79,000 per year.

As a further demonstration of Say’s Law, it might be interesting to discover how many jobs are ultimately made possible by the production of oil and natural gas.  With a moment’s reflection, you’ll probably realize that you don’t need a calculator or a degree in labor economics.  The answer is: All of them.  That is the reality of today; and it’s our assurance—if we will let it be—of a prosperous tomorrow.  mh

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Notes:

1.  U.S. Energy Information Agency (EIA).

2.  Ibid., EIA

3.  Citi/GPS, Energy 2020: North America, the New Middle East? 2012, p 3.

4.  http://newsok.com (Mitchell, who was born in 1919 in Galveston, graduated first in his class from TexasA&M.University.  He served in the U.S. Army during WWII, attaining the rank of Captain.)

5.  Oil: The Next Revolution, Leonardo Maguerri, Belfer Center, Harvard Kennedy School, 2012, p 20.

6.  CTIT/GPS, Energy 2020.

7.  Ibid., Maguerri

8.  Ibid., Citi/GPS

9.  Refers to Lord John Maynard Keynes, whose 1936 book, The General Theory of Employment, Interest, and Money,  has corrupted the science of economics for three generations.

10.  J. B. Say, A Treatise on Political Economy, 1803; available in PDF at http://www.econlib.org/

11.  The Little Red Hen is a children’s story, popularized in the 1940’s and 1950’s, emphasizing personal initiative and a work ethic. Truly a classic.

12.  http://www.marketwire.com

13.  http://www.bloomberg.com

14.  http://www.downstream.com

15.  Ibid.

16.  http://www.exxonperspectives.com

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