SPECIAL REPORT—As the United States becomes an ever-greater energy producer, Russia, Saudi Arabia, Venezuela, and other relatively large energy producing countries will be negatively impacted. And with decreasing U.S. dependency on Middle Eastern oil, China, now the world’s largest consumer of energy, will become more influential there. But the biggest impact will be on the United States, which stands to significantly benefit in terms of economic growth, manufacturing output and corporate competitiveness.

In 2013, the United States was the third largest global producer of crude oil after Russia and Saudi Arabia, and the world’s biggest overall producer of oil. The U.S. also was the world’s top producer of dry natural gas, followed by Russia, Canada and China.(1) As U.S. energy production increases, the impact will continue to be felt inside as well as outside the United States.

Toward Energy Independence

Several years ago, it was assumed that the United States would be importing increasingly larger volumes of petroleum and liquefied natural gas to make up for shortfalls in domestic production. However, with significantly greater energy output over the last few years, combined with greater automotive fuel efficiency, net energy imports (imports minus exports), which peaked in 2005, continue to decline. In fact, the net import share of total U.S. consumption has been falling — from 30 percent in 2005 to 16 percent in 2012 — and is projected to decline further to 4 percent in 2040.(2)

In 2013, domestic energy production satisfied 84 percent of America’s energy needs and included natural gas, which represented 30 percent of U.S. energy output, followed by coal, at 24 percent, petroleum, at 24 percent, renewables, at 11 percent, and nuclear power, at 10 percent.(3) Moving forward, natural gas will become a greater and greater portion of domestically produced energy.

The combined use of horizontal drilling and hydraulic fracturing has enabled American companies to exploit untouched domestic unconventional energy resources, such as shale gas, shale oil and tight oil, once considered too difficult to extract. In turn, due to improved recovery rates, assessments of these obtainable reserves have skyrocketed, even in already tapped fields.

In fact, it is estimated that a Persian Gulf may lie beneath North Dakota and Montana.(4) And the Marcellus shale alone may hold 141 trillion cubic feet of natural gas reserves, an amount equal to estimated world consumption in the year 2024.(5)

Technical developments in horizontal drilling allow vertical drilling systems to turn 90 degrees to steer in various directions well below the Earth’s surface to reach areas not easily accessible. Hydraulic fracturing, also known as hydrofracking or fracking, is a process that injects mostly water, some sand and chemical additives into the ground to create fissures in shale or other rock. In turn, shale gas is released and captured, while shale oil and tight oil seep back through the cracks and are extracted.

Natural gas as a percentage of total U.S. energy production is projected to rise to 38 percent by 2040, followed by coal, oil, renewables, and nuclear.

In the short term, this process is unlikely to be replicated in other areas of the world. The United States has an edge over other countries for a variety of reasons. These include the huge resource base of shale/tight oil plays existing in the United States, the nature of private ownership of mineral rights, the presence of thousands of independent drilling companies, large numbers of drilling rigs, and strong capital markets that fund new ventures.

As a result of new U.S. production, domestic natural gas output is projected to rise by 56 percent from 2012 through 2040, with production increasing to 37.6 trillion cubic feet annually.(6) Therefore, natural gas as a percentage of total U.S. energy production is projected to rise to 38 percent by 2040, followed by coal, at 23 percent, oil at 20 percent, renewables at 12 percent, and nuclear at 8 percent.(7)

Obstacles Remain

A report card on the condition of America’s infrastructure is released every four years by the American Society of Civil Engineers. The 2013 report card gave America’s energy infrastructure a D+. An inadequate U.S. oil transportation system and refining infrastructure could slow progress.

According to the U.S. Chamber of Commerce’s Institute for Twenty-First Century Energy, “U.S. oil pipelines could circle the equator eight times, and U.S. natural gas pipelines carry natural gas over 1.8 million miles each year.”(8) Nevertheless, the Institute says “robust investments are needed to modernize, protect, and upgrade these critical assets, which are essential to America’s national security, economic security, and way of life.” How much investment is required?

To deliver new gas supplies to existing pipelines that flow to the expanding American consumer market, it is estimated that 10,000 miles of new pipeline will be required.(9) Reported in March 2014 by Jennifer Dlouhy if the publication Fuel Fix, ICF International, a leading provider of consulting services and technology solutions, estimated that “companies will need to invest $641 billion over the next two decades just in pipelines, pumps and other infrastructure to keep up with the gas, crude oil and natural gas liquids flowing from U.S. fields.” But that’s not all.

According to Daniel Yergin, Vice Chairman of IHS, a research consulting company, the new light crude being recovered by hydraulic fracturing and horizontal drilling is a poor match for the refineries in the Midwest and along the Gulf Coast. These refineries, he says, have spent more than $100 billion in recent decades reconfiguring their equipment to process heavy, lower-quality imported oil from Canada, Mexico and Venezuela.

This puts considerable pressure on the private sector, which owns and manages more than 80 percent of our country’s energy. But infrastructure shortfalls are only part of the problem.

Environmental doubts about the safety of hydraulic fracturing from shale also could put the American energy revolution on hold. There have been more than one million hydraulic fracturing operations in the United States since 1947 and very few accidents have occurred.(10) Analysts say this risk can be managed by implementing best practices along with the enforcement of rules and regulations.

But a growing conflict between state and local governments and property owners (some governments have taken steps to prevent hydraulic fracturing and some property owners wish to sell their mineral rights) could result in law suits that could continue for years. Thus, during the summer of 2014, it was reported that five communities in Colorado voted to prohibit fracking, and more than 170 New York town and cities used zoning laws to restrict it. In turn, this could slow the energy revolution.

U.S. Energy Impact

The exploration and production of new American unconventional oil and natural gas, combined with related transportation, logistic and processing functions, is estimated to create nearly 2.9 million American jobs by 2015, 3.3 million by 2020, and approximately 3.9 million by 2025.(11) The value added contribution to gross domestic product on an annual basis is tremendous, and estimated at approximately $400 billion in 2015, $470 billion in 2020, and $533 billion in 2025.(12) But that’s not all. Due to the reduction in natural gas prices, disposable income of American households is projected to increase from $2,700 in 2020 to $3,500 in 2025.(13)

Abundant low-cost American energy not only will benefit workers, households and overall economic growth, it also will boost U.S. manufacturing output. A secure supply of low-cost natural gas will benefit many manufacturers, especially producers of iron and steel products, chemicals, plastics, resins, synthetic textiles and materials, and agricultural chemicals. And since gas-fired plants are an important source of electricity, lower electricity prices will benefit virtually every producer.

Plus, due to a more competitive environment, American manufacturing is projected to increase. And this is anticipated on top of the backshoring trend — the return of previously offshored American production to lower cost countries. In turn, U.S. exports are projected to rise.

It is estimated that the United States will capture $70 to $115 billion in annual exports from other nations by the end of the decade.

In fact, it is estimated that the United States will capture $70 to $115 billion in annual exports from other nations by the end of the decade. And surprising to many, approximately two-thirds of these export gains likely will come from the production shift to the U.S. from leading European nations and Japan.(14) Overall, by 2020, higher U.S. exports, combined with production that will likely be backshored from China, could generate 2.5 to 5 million American factory and service jobs associated with increased manufacturing.(15)

Impact on World Affairs

Due to domestic energy flooding the U.S. market, less American global demand will continue to impact world suppliers. And if the demand gap is not filled by China and other countries seeking greater energy imports, global energy prices may remain relatively low or not rise to levels projected in the past. Should this scenario play out, countries negatively impacted would include energy exporters like Russia, Colombia, Venezuela, Angola, Nigeria, Iran, Iraq, and Saudi Arabia.

Russia, for example, would have less global leverage since much of its economic strength is based on a high price of oil and gas. And if the United States should become a serious energy exporter (with minor exceptions, the United States banned exports of crude oil in the 1970s), more supplies worldwide would put Russia at a greater disadvantage.

Declining U.S. energy imports also translates into more money being spent in the United States on research and development, and wages and supplies, thereby benefiting local communities. This shift from imports to a more secure domestic supply also will, to some degree, shield the United States from future Middle East violence and volatility.

In The Spotlight

Since the 1970s, the United States Navy has and continues to be the lead provider of security in the sea lanes of the Persian Gulf, other Mideast waters and the Indian Ocean. But in recent years, China surpassed the United States as the largest importer of crude oil from the Persian Gulf — a region estimated to hold 55 percent of conventional oil reserves. As American energy imports from the Middle East decline, and with it a degree of influence, China is likely to become a more influential player there as it becomes a larger buyer.

China also may attempt to patrol regional waters to a greater extent in an effort to secure its supplies. Stated by Daniel Yergin, “some strategists in Beijing worry about China depending on a world oil market that they assert is unreliable, rigged against them, and in which the United States has, in their view, excessive influence. Some of them even argue that the United States has a strategy to interdict sea-borne Chinese oil imports — cut off China’s overseas ‘oil lifeline’ — in the event of a confrontation.”

On the other hand, Yergin says some Americans strategists “argue that China, driven by a voracious appetite for resources and control, has a grand strategy to project its dominance over Asia while also seeking to preempt substantial world oil supplies.” The bottom line: although the United States is becoming more energy secure, subsequent events could make the global environment more volatile.

This articles appeared in Global Impact, a Great American Insurance Group publication, September 2014.
Footnotes: (1) U.S. Energy Information Administration, http://www.eia.gov. (2) U.S. Energy Information Administration, “Annual Energy Outlook 2014,” Early release Overview, p12. (3) U.S. Energy Information Administration, http://www.eia.gov. (4) John F. Kennedy School of Government, Harvard University, “Oil: The Next Revolution,” June 2012, p13. (5) U.S. Energy Information Administration, http://www.eia.gov. (6) Ibid. (7) Ibid. (8) http://www.energyxxi.org/modernize-and-protect-us-energy-infrastructure. (9) IHS, “America’s New Energy Future: The Unconventional Oil and Gas Revolution and the U.S. Economy,” September 2013, p15. (10) John F. Kennedy School of Government, Harvard University, “Oil: The Next Revolution,” June 2012, p14. (11) IHS, “America’s New Energy Future: The Unconventional Oil and Gas Revolution and the U.S. Economy,” September 2013, p41. (12) Ibid p15. (13) Ibid p15. (14) Harold L. Sirkin, Michael Zinser and Justin Rose, “Behind the American Export Surge,” Boston Consulting, August 2013, p3. (15) Ibid p3.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, competitive strategies and the latest economic trends. He also is founder of the ManzellaReport.com and Chief Strategy Officer of Ignition Life Solutions. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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  • Guest (Bill Canis)

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    Excellent analysis of the changing energy picture, John.

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