Shale continues to dominate the headlines.
Seemingly everywhere I look there is a new cover story or feature article on the “energy renaissance” or “shale revolution” that is transforming global oil and gas markets and handing the United States a sizable geopolitical advantage. Back-to-back issues of the journal Foreign Affairs have covered the subject, and it’s also been featured recently in a special section of Petroleum Economist.
For those of us in and around the oil and gas industry there isn’t a lot of new information in these articles. And while I gain new perspectives as I read these noted experts in foreign affairs and economics, they don’t represent the full picture.
Robert Blackhill of the Council on Foreign Relations and Meghan O’Sullivan of Harvard University’s Kennedy School of Government write expansively in the March/April edition of Foreign Affairs of the “geopolitical consequences of the shale revolution.”
Their thesis is that new U.S. crude supplies flowing into global markets may well lower prices, thereby limiting the influence (and coffers) of major producers, shifting the balance of energy power and conferring the benefits of those lower prices to consumer nations.
“Ever since 1971, when U.S. oil production peaked, energy has been construed as a strategic liability for the country, with its ever-growing thirst for reasonably priced fossil fuels sometimes necessitating incongruous alliances and complex obligations abroad,” they write. “But that logic has been upended, and the newly unlocked energy is set to boost the U.S. economy and grant Washington newfound leverage around the world.”
Well, maybe.
The cover of the May/June Foreign Affairs features a dark fractured rock surface with orange flames shooting out of the fissures and the title, “Big Fracking Deal: Shale and the Future of Energy.”
In this issue the head of Citi’s global commodities research, Edward Morse, extols the virtues of shale both for the United States and the globe, seeing production increasing, production costs decreasing and overall prices declining to deliver a boon to energy consumers.
Outside the United States, he says, “there is no longer any doubt about the sheer abundance of this new accessible resource base …”
One reason I believe the policy and economics community is talking about this now is because the trends are observable: U.S. natural gas production, for example, has steadily risen – up 25 percent since 2010, observes Morse. Permits to authorize U.S. LNG exports are dribbling out – slowly, but they are being issued.
These trends are frequently presented as both inevitable and persistent. And innovation and technological advancements are said to easily sweep away any obstacles in our path to realizing the potential of this energy renaissance.
I’m reminded of Adam Smith’s “Invisible Hand” guiding and directing the markets. And that makes me uneasy, because it does not reflect the daily concerns I hear about as I talk to our members: the challenges of escalating costs, hydraulic fracturing programs that don’t perform as expected and the continual pressure to replace reserves.
And that is what makes the essay in the same issue of Foreign Affairs by AAPG member Robert A. Hefner III so welcome.
A decade ago U.S. oil and gas production was a shadow of what it is today; certainly no one was talking about a renaissance or revolution. And as Hefner explains, the story of shale is a story of the triumph of the little guy – the small independent oil and gas operator who had the fortune to be operating in the United States.
He correctly observes that the success of shale production in the United States is the result of several factors, including:
- Favorable geology.
- Innovative thinking and ideas.
- Demand for the product.
- An entrepreneurial culture among independent operators.
- Property rights that give both producers and mineral rights owners incentive to find and produce these resources.
Pursuing shale resources in the United States was not the result of a policy decision. It was the result of having a system in place that rewards initiative and encourages individuals to put capital at risk in the pursuit of economic gains.
In fact, Hefner warns politicians against tinkering with a system that is already working.
The folks in capitals across this globe listen to and rely on experts, such as those writing in Foreign Affairs and similar publications. They’re smart and have important perspectives to share. But they need our help to understand the realities beneath the trends that they are measuring and reporting.
Shale is transforming the energy sector, bringing new oil and natural gas to consumers worldwide.
But it wasn’t an invisible hand that found those resources and produced them. It was a hand swinging a rock hammer, a hand connected to a brain interpreting a well log or seismic section, and a hand gripping a pipe wrench operating in a system that rewarded that activity.