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01 Oct 2013

US revolution, global evolution

Kevin Logan

by Kevin Logan

Chief US Economist, HSBC

US revolution, global evolution (Getty Images/drnadig)

US energy consumption has fallen, but production has risen

Oil shale was used in Mesopotamia in 3000 BC for road construction and native Canadians used the Athabasca tar sands in the 1700s to waterproof canoes. Yet, only in the past five years has unconventional oil and gas – specifically, shale gas and oil – excited the whole world.

While US energy consumption fell over the past few years, production has soared, thanks largely to the shale revolution

However, for all the promises of cheap oil and gas plus possible energy self-sufficiency for the US and other countries, the reality is more sobering. And duplicating US energy advances elsewhere is far from straightforward.

While US energy consumption fell over the past few years, production has soared, thanks largely to the shale revolution. Yet, oil and gas extraction accounts for just 1.5 per cent of GDP, so even with substantial increases, the impact on the broader economy will be modest. We estimate US growth will be only 0.2 per cent to 0.3 per cent higher a year over the next decade because of the boom in energy production.

Shale gas – not oil – is the really big story in the US and one reason why domestic gas prices have plunged relative to gas prices elsewhere. Whether this price gap can be maintained ultimately depends on US construction of liquid natural-gas export facilities. While energy companies will want to sell gas at the higher global price, there is pressure to keep gas at home for strategic reasons and other US industries – especially chemicals, plastics, metals, wood, and paper products – stand to gain from the discount.

The boom is already affecting America’s neighbours. Mexican manufacturers benefit from lower electricity costs, because of cheap imports of US gas, but the impact is more nuanced for Canada. Its oil producers have increased exports to the US by 20 per cent over the past two years but the US shale gas boom, by reducing US imports of natural gas, could lead to Canada increasing gas supplies to Asian markets.

Shale facts

  • US shale oil production, almost zero a decade ago, is now 2.2 million barrels a day
  • The US overtook Russia as the world’s biggest natural gas producer in 2011
  • Shale gas comprised 32 per cent of US natural gas production in 2012, up from 5 per cent in 2006
  • The US should become a net exporter of gas by 2020
  • Globally, there are 345 billion barrels of recoverable shale oil, according to the US Energy Information Administration
  • Russia has most recoverable shale oil, followed by the US, China, Argentina, Libya, Australia, Venezuela, Mexico, Pakistan and Canada

Source: Shale oil and gas: US revolution, global evolution, HSBC Global Research, September 2013

Already, exports to the US by the Organisation of Petroleum Exporting Countries (OPEC) producers of light, low-sulphur oil – such as Algeria, Angola, and Nigeria – have dropped by more than half in just two years as US shale oil, with similar properties, has displaced imports.

Other nations have plentiful reserves of unconventional energy but the US is one of the few to turn shale potential into a reality, because of helpful geology, its extractive skills, well-defined property rights, low population densities, plentiful water supplies and incentives for landowners. But some states question the technology, with Maryland, New York and Vermont banning drilling that employs hydraulic fracturing techniques. Overseas, France and Bulgaria have refused to jump on the shale bandwagon despite China, Poland, Canada and the UK showing considerable enthusiasm.

Even for the enthusiasts, there are problems. In China, groundwater contamination is a real risk. Poland’s Lubin Basin now appears to be more hot air than plentiful gas. And local opposition to exploration is strong in the high population density UK. Argentina has large reserves but its persistent abuse of property rights may deter foreign investment. Worldwide, the ‘shale revolution’ sits oddly with environmental concerns over carbon dependency or methane emissions.

There are geopolitics too. An energy self-sufficient US raises questions for the Middle East and Russia – both major energy exporters.

For the Middle East, the big question is the impact on oil prices of greater US self-sufficiency. A weaker OPEC could easily lead to lower oil prices that hit welfare provision in countries already suffering from political unrest. Any US withdrawal from the region risks creating a power vacuum that draws in other international powers.

Russia’s main energy market is currently the European Union, but by mid-century we expect Asia to be its biggest consumer, pointing to further future pipeline diplomacy.

This research was first published on 23 September 2013.
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