Well shale gas is helping to give the US cheap natural gas. And the expanded production efforts do have large knock on effects for other areas of the economy as well: lodging, entertainment, cars and truck sales, etc. And it's not just small market players who have their finger in the shale pie. Exxon and other large players are in on the game too.
America's most profitable company now produces about as much natural gas as it does oil. CEO Rex Tillerson thinks the fracking party has just begun. Two years ago [Exxon] engineered a $35 billion acquisition of natural-gas producer XTO Energy in large part to buy the company's hydraulic-fracturing expertise. It is easily the largest deal the energy giant has done since the $88 billion mega-merger with Mobil.
Over the past several years fracking has unlocked a vast new source of energy supply in the U.S. Advanced forms of the process that Tillerson used in the 1970s. This shale gas boom has turned assumptions about the future of the U.S. and global energy picture upside down. Less than a decade ago the consensus was that America was beginning to run out of economically recoverable natural gas and that the country would need to import vast quantities of it from overseas. Now we're awash in natural gas. U.S. production has increased 28% since 2005. In 2011 about a third of that production was from shale gas, up from just 11% in 2008. By 2035, according to a study by the research firm IHS Global Insight, shale gas will account for 60% of U.S. production.
The shale gas industry employed more than 600,000 workers in the U.S. in 2010, according to IHS, and by 2015 it will contribute some $118 billion to the U.S. economy.
The biggest single theme in the research, which Exxon uses to guide its strategic planning, was the growing demand for electricity. Exxon estimates that worldwide electricity demand will increase 80% by 2040 as hundreds of millions in the developing world achieve a middle-class lifestyle. An increasing amount of that electricity will be generated by natural gas, which will pass coal as the world's second-largest fuel source, behind crude oil, by 2025. Exxon has been preparing to meet the emerging demand for natural gas for some time. Over the next five years Exxon plans to invest $185 billion in its business, most of it to explore for and develop new sources of oil and gas. The cost of the "next barrel" is on the rise, says Tillerson, as easy-to-access reservoirs are depleted.
Exxon's big bet on shale gasDeep-sea drilling and fracking are helping to unearth abundant supplies of oil and gas. The coming energy renaissance could be just the elixir the U.S. economy needs.
Many of the pickup-driving diners at the Texas Roadhouse are oil-patch contractors currently employed at one of two massive expansions going on just outside Port Arthur: the $3 billion addition to Valero's (VLO) Port Arthur refinery and, literally across the road, the $7 billion project to double the size of the refinery owned by Motiva Enterprises, a joint venture between Royal Dutch Shell and Saudi Aramco. Along the coast it's easy to spot the effects of America's oil and gas renaissance in new hotels built in the past five years (many of them now populated by itinerant oilfield workers), in the multiplying numbers of overnight "shale-ionaires," in rising home values, expanding car and truck dealerships, and effectively full employment.
What really excites experts is that these signs of prosperity in the gulf point to a larger trend. "We call it the great revival of the North American oil industry, This is a turnaround not just for North America's oil supply, but one with global impact. It's certainly the biggest development in the world oil market of this century." That means the oil and gas boom could make America a major player again in the world energy market and help spur the entire U.S. economy.
Cheap domestic energy is also good news for the manufacturing sector. "The discovery and development of North America's shale resources has the potential to be the most remarkable source of economic growth and prosperity that any of us are likely to encounter in our lifetimes," U.S. Steel CEO John Surma told the Congressional Steel Caucus in a late March hearing. It's a virtuous cycle: More drilling requires more steel, and lower energy costs give U.S. steel producers a cost edge. This at a time when the Department of Energy reports that the energy intensity of U.S. steel companies is now among the lowest in the world. In St. James Parish near Baton Rouge, ground was broken last year for a $3.4 billion steel plant being built by Nucor Steel (NUE), the first major facility built in the U.S. in decades. U.S. Steel is investing in a new facility in Lorain, Ohio, and V&M Star Steel (the North American subsidiary of the French pipemaker Vallourec) plans to spend $650 million on a small-diameter rolling mill in Youngstown, Ohio.
It's not just Big Steel that will benefit. Feedstock made from cheap natural gas is a boon for the petrochemical industry. Citing "the improved outlook for U.S. natural-gas supply from shale," Dow Chemical (DOW) says it will build an ethylene plant for startup in 2017. (Ethylene is used to make things like plastic bottles and toys.) Dow will also restart its ethylene plant near Hahnville, La.
It is ironic that only a few years ago the conventional wisdom was that America was running out of natural gas. Now becoming "the Saudi Arabia of natural gas," as some industry promoters like to say, means that America will start exporting lots of the stuff. "We're going from being a very large sinkhole for all hydrocarbon products," says Charif Souki, CEO of Cheniere Energy (LNG), a natural-gas supplier, "to becoming the low-cost energy producer in the world."
While the U.S. remains the world's largest importer of crude oil (the nation still imports 45% of its oil) liquefied natural gas (LNG) may soon become a big export item, adding jobs and helping offset America's trade deficit.
For all the ebullience in the industry these days, the boom times could change, and quickly. As the regulars at the Texas Roadhouse can tell you, that's the thing about booms. They eventually always turn to busts. In the meantime, let the good times roll.
America's energy job machine is heating up
The oil barrel is half-full.