America's Next Energy Revolution

Forget peak oil; forget the Middle East

By WALTER RUSSELL

The energy revolution of the 21st century isn’t about solar energy or wind power and the “scramble for oil” isn’t going to drive global politics. The energy abundance that helped propel the United States to global leadership in the 19th and 2oth centuries is back; if the energy revolution now taking shape lives up to its full potential, we are headed into a new century in which the location of the world’s energy resources and the structure of the world’s energy trade support American affluence at home and power abroad.

By some estimates, the United States has more oil than Saudi Arabia, Iraq and Iran combined, and Canada may have even more than the United States. A GAO report released last May (pdf link can be found here) estimates that up to the equivalent of 3 trillion barrels of shale oil may lie in just one of the major potential US energy production sites. If half of this oil is recoverable, US reserves in this one deposit are roughly equal to the known reserves of the rest of the world combined.

Edward Luce, an FT writer usually more given to tracing America’s decline than to promoting its prospects, cites estimates that as early as 2020 the US may be producing more oil than Saudi Arabia.

So dramatic are America’s finds, analysts talk of the US turning into the world’s new Saudi Arabia by 2020, with up to 15m barrels a day of liquid energy production (against the desert kingdom’s 11m b/d this year). Most of the credit goes to private sector innovators, who took their cue from the high oil prices in the last decade to devise ways of tapping previously uneconomic underground reserves of “tight oil” and shale gas. And some of it is down to plain luck. Far from reaching its final frontier, America has discovered new ones under the ground.

Additionally, our natural gas reserves are so large that the US is likely to become a major exporter, and US domestic supplies for hydrocarbon fuels of all types appear to be safe and secure for the foreseeable future. North America as a whole has the potential to be a major exporter of fossil fuels for decades and even generations to come.

Since the 1970s, pessimism about America’s energy future has been one of the cornerstones on which the decline theorists erected their castles of doom; we are now entering a time when energy abundance will be an argument for continued American dynamism.

The energy revolution isn’t a magic wand that can make all America’s wishes come true, but it is a powerful wind in the sails of both America’s domestic economy and of its international goals. The United States isn’t the only big winner of the energy revolution — Canada, Israel and China among others will also make gains — but the likely consequences of the energy revolution for America’s global agenda are so large, that the chief effect of the revolution is likely to be its role in shoring up the foundations of the American-led world order.

I will look at the global consequences for geopolitics and the environment in some upcoming posts, but first things come first and I’d like to look at the domestic consequences of the boom before moving on to its impact on the world.

Domestically, the energy bonanza changes the American outlook far more dramatically than most people yet realize. This is a Big One, a game changer, and it will likely be a major factor in propelling the United States to the next (and still unknown) stage of development — towards the next incarnation of the American Dream.

The energy revolution is first and foremost a revolution that affects jobs. We are in the very early stages, but since the financial crisis of 2008, fracking alone has created something like 600,000 new jobs in the United States, says the FT. Throw in more jobs in both extracting and refining the new energy wealth, and add the manufacturing and processing industries that will return to US shores to benefit from cheap, secure and abundant energy and feedstock, and it is clear that the energy revolution will be a jobs revolution.

These jobs pay well; for the first time in a generation we are looking at substantial growth of high-income jobs for skilled blue collar workers. Some of these jobs, especially with overtime, will pay in the six figures; most offer wages well above the national blue collar average.

The boom has the potential to change the debate over immigration. The best blue collar jobs in the new oil and gas patches will demand workers with good English language skills and some technical background — good junior colleges and strong vocational high schools will prepare workers for these new jobs. Low skilled, non-English speaking workers will have a hard time competing for these jobs but will work instead in less well paid jobs servicing the energy sector and its workers. They will build houses for the oil workers to live in and staff the restaurants where they eat. As more blue collar native-born Americans see their living standards rise, it is likely that (legal) immigration will lose some of its political salience.

Towards A New Geography of Power?

There’s another advantage: these jobs will mostly be located away from the coasts. The hollowing out of Middle America has been one of the tragedies of the last generation. Looking at the depopulation of the northern Great Plains, planners began to speculate about returning large chunks of whole states to the wild: the “Buffalo Commons” idea that would have taken up to 20 million acres out of private hands. The buffalo will have to move over now for the oil rigs and the people who work them; North Dakota will not be reverting to the wild anytime soon.

But there are large oil and/or gas reserves in other downtrodden areas. Western New York State and much of Pennsylvania and Ohio appear to have commercial quantities of fossil fuel. The revival of the Rustbelt may be getting under way. And Dixie will not lose out: the US share of the Gulf of Mexico is now believed to have the potential to produce 2 to 3 million more barrels per day than the 1.2 million that it currently pumps.

Overall, the new energy geography points toward a revival of the Mississippi-Ohio-Missouri river system as the axis of American growth. That’s likely among other things to be good for America’s political climate; the Midwest has traditionally been something of a swing region — less liberal than the coastal northeast and less aggressively conservative than Dixie. Middle Westerners have tended to be pragmatic optimists over time, and it would be interesting to see how a revival of this political tendency would work out in our politics today. In any case, we may be looking at a decline in the power of the northeast and (unless California embraces its inner tycoon and begins to exploit its own energy riches) the Pacific, while Dixie continues current rates of growth and the Middle West booms.

Energy frontiers tend to be individualistic places. Canada, where the oil boom is a few years ahead of the US, has shifted to the right as power and money flow from blue Ontario and Quebec to Alberta. Prosperous blue collar workers and aspiring oil tycoons are not generally the strongest supporters of expensive welfare states, and American greens are already feeling the political consequences of a newly energized hydrocarbon sector. They are also not very interested in subsidizing the fiscal problems of other states; should California’s woes worsen and the state come to Washington for more help, the energy rich states and their representatives are likely to take a hard, skeptical look at its requests.

Even so, the Middle West’s traditional moderation is going to soften the rough edges a bit; much of the oil is coming to places where people historically have valued community ties and concerned themselves about the well being of the less fortunate. This won’t be the second coming of Ayn Rand.

Heartland Economics

There are significant economic benefits in having all this prosperity in the heartland. North Dakota and Wyoming are states where shipping costs from China and Japan are high — but Chicago and St. Louis are much better placed to serve them. Put cheap and secure energy in the Middle West, and build large new cities and centers of economic demand in the neighborhood, and the energy revival in a few states will support general economic growth in many more.

The long term outlook for the dollar and even for the federal government’s accounts will also improve. Even quite recently people assessing the long term health of the United States pointed toward inexorably rising energy imports as an important drain on the balance of trade and on the health of the dollar. But oil imports are going to decline, and exports — especially of natural gas — will help offset them. The federal government is also going to be collecting taxes on the new energy production — and on all the incomes of the individuals and companies involved, directly or indirectly, in the new energy boom.

The United States will be a more attractive place for foreign investment. Building the infrastructure required to get the new energy industry up and running and to transport its products to the market offers some very profitable and secure investment opportunities. And with the US much less dependent on foreign oil (and with the foreign oil it does need coming largely from Canada), the US economy will be much less exposed to the risks associated with turmoil in the Middle East. That is the kind of thing investors look for: high growth in safe places.

Few places are going to look more secure in the 21st century than America between the Rockies and the Appalachians, between the Gulf of Mexico and the Canadian frontier. Some of the world’s largest energy reserves will be sited next to the world’s most fertile crop land. Geopolitically, few places on earth are as secure from war; politically few can match its record of stable governance; legally, few offer as much protection for property rights and few have as long a record of offering foreign investors the equal protection of the law.

Avoiding the Pitfalls

Every silver lining has a cloud, and the energy bonanza isn’t all good. We will have to watch out, for example, that the hydrocarbon boost to the dollar doesn’t price American manufacturing goods out of world markets. Here we will need to look at Europe, and see how some countries — like Germany — responded in a more disciplined way through the years when the euro was high to reduce costs and improve quality so that German goods remained internationally competitive.

We will also have to work to keep the political classes from distributing the oil wealth to the rent-seekers. We don’t want to be either the Nigeria or the Russia of the new century, in which corrupt rent-seeking elites hijacked the political process and appropriated the lions’ share of the hydrocarbon wealth to themselves. Cheap, attractive subsidies for the masses, while the real wealth goes into the Swiss bank accounts of the well connected and the unscrupulous: that could very well happen here and there are plenty of people in leading positions in American life — in both parties — who stand willing and ready to sequester the loot.

But the first great wave of oil discoveries did not turn America into a corrupt petrostate when the oil discoveries of the late 19th and early 20th centuries made the US the world’s greatest producer of fossil fuels. One important reason that still holds true today is that the US economy was so diversified and so high tech (by the standards of the day) that the oil tsunami was only one part of a much larger story of innovation and development.

Innovation remains a big part of the American energy picture. The United States has very large reserves of these new fuels, but we are not alone on the planet in having this wealth. But America is getting to the energy revolution early because our oil companies and drillers were ahead of other people in developing the technologies that can bring the new resources on line. We don’t just happen — like the Saudis and others — to be sitting on incredibly large pools of oil which the skills of other people discover and pump out of the ground. We haven’t exactly made our own luck, but we’ve made the discoveries that enabled us to take advantage of it.

That spirit of innovation and the culture that supports it are the true sources of American wealth. That is how we found oil in the first place and built our first energy economy; it is what enables us to benefit from these additional reserves — and it is what will get us on to the next thing when the new energy sources begin to run dry.

Thankfully, the United States is not a Russia or a Nigeria. Our economy and our political system are strong enough and diverse enough to benefit from an energy boom without being overwhelmed by it. The energy boom will stimulate the development of new technologies and new products in the non-energy sectors and will likely to usher in an era of broad prosperity and social advance across many industries and regions rather than just in a few.

Nature — or perhaps Nature’s God — seems to love mocking pundits. Just when the entire punditocracy, it sometimes seemed, had bought into the “American decline” meme, Europe collapsed and huge energy reserves were discovered underneath the United States. The “special providence” that observers have from time to time discerned in America’s progress through history doesn’t seem to be quite finished with us yet.

Getting the new oil and gas raises complicated technical and environmental issues, and it may take some time before the dust settles and we understand exactly what we are looking at here. And drilling is a notoriously uncertain business. The energy revolution may fall short of the full hopes it stirs up. Yet the rapid progress of extraction technology is making these unconventional reserves look more real and more ‘gettable’ all the time. Rather than coping gracefully with the consequences of inevitable decline, America’s job in the 21st century looks like handling its new set of opportunities wisely and well.