The Competitive Edge -- The Boom in Natural Gas

Dec. 10, 2009
Abundant domestic supplies and new extraction technology offer competitive advantages for U.S. industry.

One of the more encouraging economic developments in recent years is a significant turnaround in the ability to find and produce natural gas in the United States. New and improved drilling and extraction technologies have opened up immense new shale-based resources of natural gas from the Rockies to the Appalachians. Using these new supplies has important benefits for U.S. industry and the U.S. economy.

In the last few decades, new horizontal drilling and rock-fracturing techniques have given access to previously unavailable supplies of shale gas in the continental United States, and improved offshore drilling methods have made deep gas drilling in the Outer Continental Shelf economically attractive. "Proven" resources of gas have increased by 38% in the last 10 years. But, according to the U.S. Geological Survey (USGS), the "potential" reserves -- those thought to be economically recoverable with existing know-how -- are many multiples of this number and growing as fast as technology improves. All told, USGS estimates indicate at least a 90-year supply of available domestic gas. Added to this is enhanced import capacity through the addition of liquefied natural gas facilities to tap the growing global supply of this abundant resource.

Due to the increased supplies and recession-induced decline in demand, the wellhead price of natural gas has fallen from $10.62 per MCF in July 2008 to $3.43 in July 2009, and around $4.00 in late 2009. The Manufacturers Alliance/MAPI forecasts that annual average wellhead prices will remain at or below $5.00 per MCF through 2014.

Such abundant supplies of this clean-burning fuel will benefit the U.S. economy and U.S. industry in a number of ways. At the macroeconomic level, they will enhance our energy independence, contribute to keeping overall energy prices at reasonable levels, and provide an important backstop to alternative energy development. The latter factor is due to the flexibility of natural gas-fired electricity production, which is both relatively fast and inexpensive to put in place to provide quickly available electricity when wind, solar or hydro plants are failing to generate to capacity. Moreover, natural gas combustion results in significantly less polluting emissions than other fossil fuels.

Industrial users account for about 30% of all domestic gas consumption. Roughly two-thirds of chemical production in the United States, for instance, uses gas as the primary feedstock. Domestic gas is likely to remain at price levels lower than in Europe and Asia, which rely on imports from Russia and other suppliers, and which also depend on petroleum products for about two-thirds of their feedstock. This should provide a nice price advantage for U.S.-based production for the near-to-medium term. The glass, wood, primary metals, food processing and metal processing industries also depend on natural gas as an industrial heating source and should see benefits from the new natural gas boom. Industrial uses of natural gas are also more efficient, clean and flexible than many other heat sources, making it an increasingly important fuel of choice in a fast-changing economy.

As with all resource extraction industries, there are environmental risks with exploiting our huge natural gas reserves. Such risks can be mitigated with modern technology, and the environmental benefits of gas versus other fuels can help tip the balance in its favor. The only danger to this scenario would be to repeat the policy of the Clinton years when use of natural gas (especially to generate electricity) was encouraged while access to the resources (through the permitting process) was limited, resulting in the high prices we saw earlier this decade.

Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

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