Comeback: America’s new economic boom

By Charles R. Morris
May 9, 2013

A natural gas well is drilled onto the Marcellus shale in Bradford County, Pennsylvania January 8, 2012.  REUTERS/Les Stone

Artie White, a squarely built young man of about 30, is a driller with Helmerich & Payne, an international oil drilling specialist based in Tulsa. He works 12-hour shifts, seven days on, seven days off. It’s dirty, fast and occasionally dangerous work, but White’s pay is within shouting distance of $100,000 a year. All six men on the rig team are on a similarly lofty pay scale; none has a college degree.

This is the world of shale gas and oil — which has revolutionized the U.S. energy position. These particular wells are in Oklahoma and are owned by Devon Energy Inc., one of the country’s larger independent exploration and production companies. Drills go two miles straight down, then turn to go another mile through shale rock steeped with gas and gas liquids. The shale is “fractured” with a high-pressure burst of water, sand and chemicals to start the product flowing. Once the flow is stabilized, the rig is removed and the well is connected to a permanent gathering pipeline. It should produce hydrocabons for 15 to 20 years.

By 2020 or so, the United States is expected to surpass Saudi Arabia in oil output, and Russia in gas, according to the International Energy Association’s best estimate. By then all of North America should be self-sufficient in energy, which will do wonders for the U.S. trade deficit. Daniel Yergin, one of the world’s leading energy experts, estimates that the U.S. turnaround in energy has generated 1.7 million new jobs, including direct and “induced” employment, and that number should almost double by 2020. U.S. energy industry capital investment this year is expected to be $348 billion, or more than 2 percent of the gross domestic product.

The collateral job creation is even more important, and it’s just beginning. The big attraction is the low price of natural gas, the lowest-carbon fossil fuel, which can be produced profitably at about a third the cost per unit of energy as other hydrocarbons. That is particularly attractive to chemical companies. Natural gas is an ideal “cracking” fuel, generating the intense heat needed to break up and rearrange molecules to make usable chemicals. But it is also the raw material for plastics, Styrofoam, tires, sealants, adhesives, films, liquid-crystal screens, nylons, polyesters — almost everything around us. Dow Chemical just restarted a long-mothballed plastics plant and is building or rebuilding three others. Other big players, including Shell, Chevron, Bayer and Formosa Plastics, are expanding plants and starting band-new  plants.

But it goes far beyond chemicals. Consider Nucor, the world’s “smartest” and most profitable steel company. It began as a “mini-mill,” melting scrap to make high-quality steel; now it is the nation’s top structural steel vendor. But scrap steel is getting scarce and expensive, so Nucor has been locking up long-term supplies of natural gas so it can make its own iron using a highly efficient, but energy-intensive, “direct reduced iron” technology, which is not feasible without low-cost gas. Nucor is about to open a mammoth plant in Louisiana and is starting to build another. The company plans for all its facilities to be run on natural gas within a few years.

Dow Chemical has compiled a list of 108 new energy-intensive manufacturing projects (which includes plants by more than 80 companies) either under construction or in development, with a total planned investment of almost $100 billion. About a third are under way or due to start construction this year; 60 percent are scheduled to start construction by 2015. A census of energy-intensive industries, including chemicals, steel, fertilizer, paper and refining, among others, by economists at the American Chemical Council, using a model like Yergin’s for direct and induced employment, suggests that growth in just those industries will generate 1 million new permanent jobs by 2017 and some $342 billion in additional annual GDP (yet another 2 percent).

The energy bonanza comes on top of powerful trends already flowing in America’s favor. A ferocious Chinese trade assault in the first half of the 2000s decimated U.S. manufacturing employment. But China’s great success has been transforming its own economy. Chinese and U.S. labor costs, when adjusted for worker productivity, are rapidly converging, according to the Boston Consulting Group and others, even without the energy bonus. Chinese worker productivity is still growing at about 8 percent a year, an extraordinary rate — but worker compensation is growing more than twice as fast. From 2000 to 2010, wages in the Yangtze delta, a manufacturing hotbed, jumped from 72 cents an hour to $8.62. That brings U.S. and Chinese costs close enough to parity to highlight the aggravations, including long delivery lead times, that come with offshoring.

The U.S. cost advantage over Japan and Europe is even higher — Boston Consulting puts it in the 25 percent to 45 percent range, and the U.S. may also have the world’s best trade logistics capabilities. Just within the past year, Japanese and Korean automobile companies have been expanding their U.S. plants, or building new ones, to service the European market. Siemens has begun producing gas turbines in Virginia for export to Saudi Arabia. “Re-shoring” has become a mantra at U.S. business schools.

Official economic forecasters, however, like the Congressional Budget Office and the Organization for Economic Co-operation and Development, still foresee only a long twilit road to nowhere, with the United States limping painfully along at 2 percent to 2.5 percent growth to the farthest horizon. They point to a shrinking and aging labor force, and the drag of debt and deficits. But growth only at the U.S. average since 1950 — 3.3 percent a year — quickly puts debt and deficits on a downward path as a share of GDP.

Labor force shrinkage has also been exaggerated by the sharp drop in male labor force participation, particularly among men without a college education. Consider, half all manufacturing jobs lost since 1979, the peak year of U.S. manufacturing employment, were lost from 2001 to 2007. Still-fresh shocks like that drive workers to the sidelines. As jobs open up again, however, participation rates can be expected to rise.

How can we screw this one up? One way is for the shale companies to keep doing a poor job of site management. The big headline issues are not the real problem. Shale energy production, for example, happens to be the least water-intensive of the fossil-fuel-recovery technologies. Coal and conventional oil drilling use far more water per unit of energy produced, while “renewable” ethanol production uses up to 1,000 times more. Shale energy’s share of national water consumption is less than 1 percent. Agriculture, on the other hand, accounts for more than 80 percent of all American water consumption — about half of it wasteful.

There is only one documented case of fracking chemicals contaminating drinking water supply. But there have been a great number of surface spills and many cases of methane contamination resulting from leaky, usually badly encased, wells.

The problems that drive people crazy are mostly eminently solvable with concentrated, detailed attention to process management. Like truckers dumping contaminated water in open fields rather than waiting in line at treatment plants. Like hundreds of giant water tanker trucks hogging rural roads or lining up early in the morning to fill up at small-town fire hydrants. Like open holding pits for noxious fluids that overflow in rainstorms. Like unnecessary open venting of methane, a potent greenhouse gas. Like careless cementing of well pipes that allow gas leaks.

The shale industry was jump-started by small, highly entrepreneurial companies, and the wildcatter ethos is still strong. Process management, however, requires intensive large-scale, General Electric -type inspection, measuring, documentation, quality policing and follow-through. Compared to opening a new gas field, it is dull work — and shale companies are not good at dull.

The industry is transforming rapidly, however. The most successful one- or two-dozen shale companies are becoming formidable enterprises, with multibillion-dollar annual revenues, and they can afford more orderly development processes. They’ve also seen the nuclear industry get stopped in its tracks. So most seem acutely aware of the need to raise their game and have started reaching out to environmental organizations.

The two most critical steps will be achieving greater control over methane leakage and improving water management with up-front planning, on-location treatment and recycling, and replacing truck transport with pre-positioned pipelines. Time will tell.

The biggest longer-term threat, however, is the lobbying drive for permits to export massive amounts of natural gas. Deep in its corporate heart, the industry fervently believes that all energy should be priced at the highest cost of its next nearest substitute ‑ which is usually a barrel of crude. The current cheapness of American gas therefore looks like an offense against free-market economics, which would be corrected if it were sold freely on global markets.

Ignore for the moment that the cheapness of American gas is a major factor in America’s attractiveness as a manufacturing venue. Ignore, too, the fact that crude prices are currently set more by Saudi budget requirements than by free markets.

In fact, it is difficult to export gas overseas. It must first be liquefied at a super-low temperature (minus-162C) that turns it into the viscous liquid known as liquefied natural gas (LNG), which has roughly the same energy density as crude. Facilities to accomplish that cost tens of billions of dollars. Special plants are required at both the export and import ends to liquefy and then “re-gasify” the fuel. It must be shipped in specially adapted tankers. But it could be worth the investment if the gas were sold at current East Asian prices, which, in the wake of Japan’s Fukushima nuclear plant disaster, are as much as five times higher than in the United States.

The crucial question is whether U.S. gas prices would become “oil-linked.” That would depend on how large the foreign sales were. The industry is now trumpeting a study by an economics consulting firm that claims there will be no price linkage because the volume of potential exports would be very low. (See a refutation here.) But the industry clearly doesn’t believe the study, for the current pipeline of export permit requests would consume almost 45 percent of current U.S. production.

Accommodating this volume, or anything approaching it, is not possible in the near term. In fact, it would push total output higher than the Energy Department now projects for 2040. If even most of those plants are approved, the bidding wars for gas will spike prices and end hopes of a manufacturing recovery. Inevitably as well, the rush to expand production will degrade industry environmental practices. In the worst case, the United States could slip into the role of raw material supplier for an East Asian manufacturing juggernaut.

In that sad event, the only winners would be the global oil majors, which view no country as their home.

Charles R. Morris’s new book, Comeback: America’s New Economic Boom, is due hout this week as an e-book and as a paperback in June. 

 

PHOTO (Insert A): A Chesapeake Energy Corp. worker stands beside a Chesapeake oil drilling rig on the Eagle Ford shale near Crystal City, Texas, June 6, 2011. REUTERS/Anna Driver

PHOTO (Insert B):An oil derrick at a fracking site for extracting oil outside of Williston, North Dakota, March 11, 2013. REUTERS/Shannon Stapleton

PHOTO (Insert C): A natural gas well is drilled in a rural field near Canton in Bradford County, Pennsylvania, January 7, 2012. REUTERS/Les Stone

PHOTO (Insert D): A Chesapeake Energy Corp. worker walks past stacks of drill pipe needed to tap oil and gas trapped deeply in rock at the Eagle Ford shale site near Crystal City, Texas, June 6, 2011. REUTERS/Anna Driver

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