Thursday, March 29, 2012

A Nation Built to Last on Affordable Energy


Over the past few months I've become incredibly optimistic about our country's prospects. I believe President Obama has a good chance of being re-elected with a Republican controlled House and possibly Republican controlled Senate. If Obama isn't re-elected then someone who is a very close version of him will be. In either case President and Congress will be hostile to each other and gridlock will ensue. I think the mobile Internet is just starting and will cause as much growth as the wireline Internet did. Maybe most important, we are undergoing a fracking revolution. I don't think this can be underestimated.

Just consider three things then we'll let our imaginations run a bit.

This Wall Street Journal article points out the dramatic reduction in natural gas prices due to hydraulic fracking in the US. The Journal writes,

"That is good news for consumers. More than half of American households use gas to heat their homes, and they can expect an 18% drop in the cost of staying warm this winter, according to federal forecasts. A home in the Northeast that uses natural gas can expect to spend $1,023 this year, less than half the cost of heating with oil.

Inexpensive natural gas also is a boon for manufacturers and petrochemical producers. For the first time in nearly a decade, steel companies and plastics makers are building facilities in the U.S., taking advantage of the inexpensive fuel to compete globally."

As if on cue, The Wall Street Journal (again) has a story on Shell opening a "$2 billion petrochemical plant expected to generate thousands of permanent jobs and draw from the region's massive deposits of natural gas," Shell is building an ethane cracker, the first new one in the US since 2000, and is considering additional units.

Of course, the Wall Street Journal reports US Steel, steel of all things, is benefiting from the natural gas boom by producing tubular goods for drilling but maybe more important its costs are declining.

"Industrywide, a ton of steel costs around $600 to produce. Using natural gas instead of coal to run the furnaces cuts the costs by $8 to $10 per ton. Based on those figures, U.S. Steel could save $133 million this year alone, according to a recent report by UBS AG, which also said the Pittsburgh-based company could save another $80 million in 2012 energy costs for nonblast furnace operations."

And the low cost of natural gas is attracting others to the US.

"In January, Methanex Corp. MEOH -0.80% of Vancouver said it would relocate a plant to manufacture methanol, used in making plastics and other materials, to Louisiana from Chile. At the time, Bruce Aitken, the company's chief executive, cited "the outlook for low North American natural-gas prices" as key reason for the move.
And low natural-gas costs were a factor in the decision by Brazil's Santana Textiles LLC to build a $180 million denim plant now under construction in Edinburg, Texas, rather than Mexico."

Lower steel prices, lower plastic prices, lower heating prices means lower prices for a LOT of goods, means US manufacturing becomes much more competitive relative to the rest of the world. And our natural gas prices aren't just a little bit lower. From the most recently cited Journal article:

This is a jaw-dropping competitive advantage we have right now. It won't last forever, but it will last long enough. But wait, there's more.

The US is a big exporter of oil field technology. Texas and Oklahoma are the laboratories of the oil field service industry. If you can make it there, you can make it anywhere, as the song goes. The fracking technology will be, is already in the process of, being exported to China and other countries which means the world will enjoy lower prices for natural gas and the benefits to consumers and workers will be tremendous. 

But wait, there's more.

So far fracking has been used mostly for gas deposits. But it will be used for oil as well. And when that happens OPEC will become irrelevant. The United States and Canada, combined, is the largest producer of oil in the world. Period. Full stop. Bigger than Russia. Bigger than Saudi Arabia. When fracking is applied to oil reserves, and it will be applied to oil reserves, oil prices will fall, supplies in the US will increase, which will attract manufacturing jobs of all sorts. Prices for all the goods using oil will decline. And, wait for it, the technology will be exported overseas creating a tremendous downward pressure on oil prices worldwide.

Jobs will be plentiful and the good times will roll. Amen.


1 comment:

  1. It seems like it might also be likely that the savings would lead to greater accumulation of wealth by the owners of the manufacturing companies, with little effect on the general public--similar to what's going on with Apple. It's only if the savings lead to expansion, as you predicted, that the advantage will "trickle down" to everyone else. I kind of think that the current recession should have taught us not to trust an expansion-based economic model, if nothing else.

    Additionally, the optimistic view of fracking that you presented is only true from a short-term corporate economic standpoint. But what about the people who live in the "fracked" areas? Do they know what common resources they're losing because of the fracking, and do they have adequate say in whether or not they give those up? Are they being adequately compensated for it?

    What about four, five, six, or seven generations from now? Is there any reason to think they might mind how much water needs to be used right now in order to execute the fracking? How about the fact that we're making fractures in the bedrock of the ground they'll be living on? There are already reports of clusters of micro-earthquakes in Alabama that appear to be related to fracking. That's an immediate effect--what might the long-term effects be?