EconoMatters

Carried Away by the Shale Gale

Is the so-called shale boom in the United States just hype?

Marcellus shale gas drilling tower, Pennsylvania, U.S. Credit: Ruhrfisch - Wikimedia

Marcellus shale gas drilling tower, Pennsylvania, U.S. Credit: Ruhrfisch - Wikimedia

Takeaways


  • The new gas supplies are not expected to last forever -- and the impact on the overall US economy will be modest.
  • The boom in US gas production doesn’t help the US vs other economies. All trade partners gain when one gets richer.
  • Let’s not exaggerate shale’s economic effects, nor turn a blind eye to its environmental risks.

The United States is in the midst of a boom in energy production. Over the past five years, production has increased by over 25% and net oil imports are down 40%. All this has led to some euphoria.

“This shale gale, I describe it as the energy equivalent of the Berlin Wall coming down. This is a big deal,” says Robin West, chairman and CEO of PFC Energy. The American Enterprise Institute’s Carpe Diem blog claims “America’s shale energy revolution is taking us from resource scarcity to a new era of resource abundance.”

The boom does offer some reasons to rejoice. New technologies have been developed. A resource boom, properly managed, can be a source of wealth for many. And the boom has come at a time when the rest of the economy has been in poor straits.

Still, there are reasons not to get carried away:
1. The new supplies are not expected to last forever.
2. The impact on the overall U.S. economy will be rather modest.
3.The boom in U.S. energy production does not give this country a leg up over other nations — all trading partners gain when one country gets rich.

Limited supplies

The U.S. Energy Information Administration expects production of tight oil—petroleum found in formations of low permeability, generally shale or tight sandstone—to increase until 2020 but then start to fall off during the next two decades. U.S. shale gas production is expected to increase until about 2040.

But even after factoring in this additional production, the share of the energy sector in the U.S. economy remains very small, only about 1.5% of GDP.

Limited impact

The small energy share in turn implies that the impact of the boom on the overall U.S. economy is also modest. Results from the IMF’s Global Economy Model show that the additional production will raise U.S. incomes (as measured by real GDP) by about 1.2% at the end of 13 years and U.S. employment by 0.5%.

That roughly translates into an increase of 0.8 million jobs—each of these jobs is valuable but this is a small number in an economy with nonfarm employment of 155 million. The impacts are only a little bit greater when the economy exhibits slack, as is the case at present.

Results from the IMF’s model also show small impacts of the energy boom on the U.S. trade balance. For sure, the energy component of the trade balance will decline as U.S. imports of energy fall. But since part of the increase in U.S. incomes will be spent on (non-energy) imports, this will act as a strong offset.

Not a zero-sum game

The increase in (non-energy) imports as United States incomes rise is the reason why other countries do not stand to lose as a result of the U.S. energy boom.

Particular sectors in these countries, chemical firms for instance, might be put at some disadvantage, but this is offset by gains in other industries that import to the United States. The IMF’s results show small positive impacts on GDP levels in other country blocs (with the exception of a very small decrease in the GDP of other energy-exporting countries).

So let’s cherish the innovation and entrepreneurship and innovation that brought us the shale gale. But let’s not exaggerate its economic effects, nor turn a blind eye to its environmental risks.

Editor’s note: The views expressed are those of the author and should not be attributed to the IMF.

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  • Andreas

    Prakash,
    could you please quantify the trade balance and offsetting effects?
    Thanks

  • Charles McHugh

    Dear Dr Prkash Loungani,

    I was wondering about point number 3 … does not give the US a leg up over … . I’m a non-expert, an observer, but I would still like to add comments.

    It also seems to me that by and by natural gas will become a secure energy source within the US. It will power more vehicles, power plants, and heavy industry. Which other major, highly industrialised country (Russia has resources and is on her way) has this extent of a potential petroleum energy source within its own safe borders? And who can guarantee that the Middle East exporting countries, along with the others, will maintain this current level of volatility, or less, over the next 30 years? Any, even minimal, amount of ‘secure energy source’ would seem to be ‘a step up’ to me.

    It is my rough understanding that the cost of natural gas in Japan is three times higher than what it is in the US. If the US exports natural gas to Japan then it would at least offset a part of the perennial trade deficit. But it would take enormous exports of raw food stuffs and gas to counter the value-added imports that Americans cherish, like you mentioned.

    I think that just five years ago it was unimaginable, even among those in the oil industry, that the US could pump out as much shale gas as it has up to now. Technological developments are unlikely to remain static over the next 27 years, so I could expect companies to find ways to squeeze more out of the rocks.

    You are probably right that this shale gas energy source will not drastically add to employment (800,000 good paying jobs?) or bump up the GDP much for the country with the world’s largest GDP. An oil field workers income is probably 5-8 times higher than the minimum wage, so the earning power of many of these jobs is what counts, not just the raw number.

    What a fortunate country the USA is to have such fertile agricultural land in addition to the opportunity to exploit several major new petroleum discoveries. I don’t think its potential economic impact should be disregarded so lightly.

    Sadly, the US government may end up being the one to pick up the bill for the clean up of the environmental damage long after the drillers have made their fortunes and abandoned their wells.

    Thank you for the posting.