Harvesting Unconventional Oil And Gas

The success of unconventional oil and gas production from shale formation is reshaping the U.S. energy industry and may prove to be a major force pulling U.S. GDP growth off the floor. Comparing the relative performance of the conventional and unconventional oil and gas sector is a study in contrasts.
 
The conventional oil and gas sector was setback by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Now two years later, Federal permitting of new drilling is returning to average, pre-spill approval rates, or six new permits a month. There are new regulations in place to prevent a repeat of the accident, with new safety regulations to protect crews, but reports from the New Orleans Economic Development Agency confirm the U.S. Government’s newly organized Bureau of Safety and Environment Enforcement report that permitting is returning to pre-spill levels.
 
The reasons for the return to normal include the global demand for energy and worries over the potential for supply disruptions in the Middle East. High oil prices also stimulate drilling and E&P activities. And reality is setting in as this year's presidential election looms. But progress in the Gulf of Mexico was offset by disputes over approval of the Keystone XL pipeline and the relentless opposition to expanding use of fossil fuels by the environmental constituencies that make up the President’s Democratic base.
 
Compare the return to normal in the conventional sector to the boom taking place in the unconventional oil and gas arena. CERA Chairman Dan Yergin recently told the Canadian Globe and Mail that, “U.S. oil production is up 20% since 2008. If we hadn’t added 1 million barrels per day of supply in the U.S.," he said, "we’d be looking at much higher oil prices. you have a spare capacity of between one (million) and two-million barrels per day in the world market. You take away one million (barrels), you don’t have much spare capacity at all.”

Think about that for a minute. Growth in unconventional oil production in the U.S. alone from horizontal drilling and hydraulic fracturing is increasing global spare capacity as profoundly as Saudi Arabia's ability to pump more oil.

Spare capacity is the single biggest factor in setting global oil prices. So increasing U.S. domestic energy production is the fastest way to bring down high gasoline prices in an election year. It's also a sure way to reduce foreign-oil imports, improving the U.S. trade balance. Indeed, expanding global oil production is the fastest way to create jobs. Now you understand why the President is in favor of the Keystone XL pipeline from Cushing to the Gulf of Mexico even though he opposes the northern segment crossing Canada's border.

But it's not clear sailing for domestic-energy production. The U.S. EPA is working feverishly to preempt state control by issuing new environmental regulations controlling fracking practices. That's setting off alarm bells among the states that see mischief in the EPA’s methods. The growth of domestic energy production from shale oil and gas has happened because states were willing and able to be more flexible than the EPA at balancing environmental and economic-development interests. The fear is that weak fracking regulation will engender more flexibility to crack down on the practice once the president is safely re-elected.

It is also not clear sailing for our economy. Slowdown in economic indicators suggest the risk of recession is real. Europe has already slid back into it as fear of “Greek contagion” looms over Spain, Italy and other EU countries. America’s persistently high unemployment rate remain a key problem. Uncertainty about the economy, global competition, regulation and health-care costs -- not to mention tax spikes due by year's end -- all conspire to keep business sitting on the sidelines, hoarding their cash.

Perhaps November's election will bring more certainty, regardless of the winner. Perhaps the EU will get its fiscal and debt act together, though elections in France and Greece suggest austerity is not sitting well with voters anxious for a return to prosperity. Even China is struggling with rising costs, as exports slow and real estate bubbles. Volatility is here to stay in our global and domestic economy.

One thing we do know. Domestic-energy production is real. It's producing economic growth and energy security. It produces jobs, increases tax revenue and raises public confidence. Domestic oil production is raising global capacity, which naturally leads to lower prices.