A Natural (Gas) Recovery

| August 2 2013
Greg Conterio

The economy is bad.  Let’s be honest—despite the spin, with the media trying to convince us all that less than 2% annual GDP growth is a good-thing, and 7% unemployment represents “light at the end of the tunnel,” the economy is still bad.  I hear from my clients across a variety of industries, and they agree—it’s bleak.  Everyone is hurting.  The talk is whether this really is the “new normal.”  For the first time in my adult life, I hear people talking of an actual recovery in terms of “if” not “when.”

natural_gasWell, I’m not ready to give up so easily.  This may be the longest, worst, most depressed economic period since the 1930’s (…which was the last time we had a Progressive in office, but I digress…) but I don’t think this is the new normal. Not by a long-shot.

Suppose I were to tell you we might be sitting on the cusp of an economic surge of unprecedented proportion.  A surge modestly projected to increase annual GDP by half a trillion dollars or more in the next seven years.  Do you think that might create a few jobs?  Bump-up our standard of living a little bit?  Perhaps even pay-down some of our astronomical national debt, provided we can get those clowns in Washington to work within a rational spending allowance?  Of course, much is dependent upon those same clowns, and our ability to convince them who they really work for, but I’ll get back to that.

McKinsey & Company released a report this month titled Game Changers: Five opportunities for U.S. Growth and renewal.  You can download the complete report; it is well worth reading if you are interested in the potential future of our economy.

While other writers have ably dealt with the complete McKinsey report, such as the Wall Street Journal, Business Insider, and Counsel on Foreign Relations, I would like to focus on the one sector from the report with the most potential impact, the one that I also see as something of a linchpin to unlocking the other sectors—that of course being the energy sector, with special focus on the emerging shale oil and natural gas opportunities.

Beginning in about 2005-2007, U.S. shale gas production began to climb dramatically as a result of technical advances in hydraulic fracturing and horizontal drilling.  Since 2007, annual gas production has grown by 50% per year, and with large new fields discovered recently in the Bakken, Marcellus, Utica and Morrison formations, the U.S. has more than 317 trillion (with a “T”) cubic feet of proved natural gas reserves.

While there have been equally encouraging discoveries in oil reserves, shale gas is particularly exciting and has huge economic potential to affect a number of different sectors.

Energy independence

The boom in natural gas production has forced prices down domestically, from $13/MMBtu (one million Btu, or British Thermal Units) to about $4/MMBtu, or about a 60% decrease.  This is already creating a drive to convert from oil to natural gas for industrial and residential and commercial transportation energy needs.  Moving from oil to natural gas cannot happen overnight, and with the current administration’s hostility to both oil and coal, prices and domestic development of those resources can be expected to remain deliberately inflated for the foreseeable future.  But as natural gas development gains momentum, the prospect of exporting LNG or liquid natural gas creates the possibility of neutralizing the cost of continued oil imports.

Cross-sector economic growth

Becoming an exporter of LNG means renovating part of our transport industry, specifically converting under-utilized oil import terminals into export terminals for LNG.  According to the McKinsey report, the U.S. Department of Energy has already approved two such conversions, and is reviewing applications for 20 more.  This of course represents a “stimulus” and job creation for several years’ worth of construction, engineering, and infrastructure projects, and represents just one of the ancillary effects of the boom in natural gas.  Dramatically increased energy costs over the past several years have been a significant contributor to rising costs of goods and services across the board, whether it be transportation, electricity, heating, or nearly anything you care to name.  The cost and relative abundance of energy is one of the keys to unlocking economic growth in all sectors, which is why McKinsey’s report shows the potential impact of energy, and particularly shale gas, as far outstripping the other game-changing sectors.  It is the one sector that impacts ALL others.  Put another way, it is the one game-changing sector that can significantly hamstring all the others if it were taken out of the picture.

A cynic may point out that the only reason natural gas is booming right now it that the current administration didn’t anticipate the industry’s sudden rise, and thus did not react quickly enough to dampen it with regulation the way it has done with coal and oil.  I would argue however that trying to do so now would cause such economic harm, as well as cost so many jobs, that even this administration could not withstand the resulting outcry.  The genie is already out of the bottle, so to speak.  But as the McKinsey report points out, it remains keenly in the best interest of the gas industry to continue to develop safe, clean, and responsible methods of recovery.  Certain political cohorts—and we all know who they are!—have already demonstrated their willingness to go to completely dishonest lengths to vilify techniques like hydraulic fracturing, so it’s easy to imagine what they would do if they didn’t have to make things up.  Still, without interference from the government, or hysterical propaganda from the environmental movement, natural gas is a good reason to believe in a brighter economic future.