This week, the Congressional Budget Office (CBO), a non-partisan federal agency, released a new report, “The Economic and Budgetary Effects of Producing Oil and Natural Gas From Shale,” measuring the national benefits of shale development.
According to the report, shale development has increased our gross domestic product (GDP), reduced energy prices for consumers and businesses, and increased government revenues.
The report states:
“Virtually nonexistent a decade ago, the development of shale resources has boomed in the United States, producing about 3.5 million barrels of tight oil per day and about 9.5 trillion cubic feet (Tcf) of shale gas per year.”
“Those amounts equal about 30 percent of U.S. production of liquid fuels (which include crude oil, biofuels, and natural gas liquids) and 40 percent of U.S. production of natural gas.”
Shale development has revolutionized the global energy market and transformed our nation into the world’s fastest-growing hydrocarbon producer over the past few years. The combination of pioneering technologies – hydraulic fracturing and horizontal drilling – is what made all of this possible.
The increased production through shale development has also led to massive investments by the energy industry into our nation’s infrastructure, which translates into jobs across the supply chain – from research and development in exploration and production, to personnel recovering oil and gas from a well site in the Marcellus shale. It means more steelworkers building pipe, and more manufacturing coming back to the United States.
The CBO’s long-term projections also suggest that these benefits are going to be with us for awhile, too:
“The production of tight oil and shale gas will continue to grow over the next 10 years – by about 30 percent and about 60 percent, respectively, according to a recent projection by the Energy Information Administration (EIA).”
The rapid increase in energy production will allow us the opportunity to shift from a net natural gas importer to a net natural gas exporter by 2020. Shale development will also lead to lower dependence on foreign oil – imports are projected to fall from 60 percent in 2005 to 34 percent in 2019.
The CBO report puts this further into perspective:
“The shale gas increase has been so large that, if it came from a separate country, that country would now be the world’s third-largest natural gas supplier.”
The tenfold increase of shale gas supplies between 2005 and 2010 has had a profound impact on natural gas prices across the nation. If you thought gas bills were high last winter – during a period of lower-than normal temperatures, known as the “polar vertex”— take a step back to think about what heating bills would have been without shale. The good news is that the U.S. Energy Information Administration’s (EIA) October 9, 2014 ‘Natural Gas Weekly Update’ estimates a five percent reduction in residential heating bills in the 2014-15 winter. Shale development will account for nearly 75 percent of natural gas development in the future, which will translate into lower energy prices for businesses and consumers for years to come.
The CBO study measured the benefits of shale development on a macro-economic standpoint based on three primary indicators:
- Energy Markets
- Economic Output
- Federal Budget
As CBO notes:
“Projections of shale development’s impact on energy markets are inherently uncertain. A recent illustration of the uncertainty was EIA’s energy market forecast in 2012, which projected that 2013 tight oil and shale gas production would total 0.9 million barrels per day and 7.6 Tcf, respectively. The agency now expects 2013 production to have totaled 3.5 million barrels per day and 9.4Tcf.”
“CBO estimates that if shale gas did not exist, the price of natural gas would be about 70 percent higher than currently projected by 2040…”
The numbers speak for themselves – shale development has transformed the U.S. energy market and will continue to do so for the coming years. Case in point:
“EIA expects production of shale gas to rise from 9.5 Tcf in 2013 to 20Tcf in 2040.”
“Also, EIA projects that the production of oil from shale formations will be 1.4 million barrels per day higher in 2020 than in 2013…”
What do these projections mean? In simple terms, they mean higher energy consumption at lower prices for both consumers and businesses. And those low gasoline prices currently displayed at our local gas stations? They’re a direct result of U.S. shale development.
Key findings of the CBO study show that shale development has led to an increase in economic output based on the following factos:
- Increased Output of Oil and Gas – Sales from shale gas and tight oil combined totaled “about 195 billion, or roughly 1.2 percent of GDP.”
- Increased Investment in the Oil and Gas Industry and in Supporting Industries – For example, “between 2004 and 2012, investment in the oil and gas extraction industry increased from 0.4 percent of GDP to 0.9 percent.” That increase in GDP is related only to the gas extraction industry. In this report, CBO leaves out investments in other forms of energy infrastructure such as pipelines, storage facilities and trains.
- Increased Investment and Production in Other Industries – Shale energy powered manufacturing industries, which benefited from the low energy prices – so much so that, “A number of new U.S. petrochemical and fertilizer facilities are being planned, for example, and one company is in the process of moving two methanol plants from Chile to Louisiana.”
- Increased Demand – Consumer benefits from shale have revitalized the middle-class. According to CBO, “Higher employment resulting from shale development…increased investment in the development and use of shale resources, has led to higher household income and thus greater demand for goods and services.”
In the long term, the CBO study predicts that shale development will raise GDP in two significant ways:
- Increased Productivity
Shale development related productivity will “make GDP 0.4 percent higher in 2020 and 0.5 percent higher in 2040 than it would have been in the absence of shale development.”
- Increased Total Labor and Capital
Shale development will lead to more jobs and more investment and both of these factors combined “CBO estimates, GDP will be 0.3 percent higher in 2020 and about 0.4 percent higher in 2040…”
Let’s put those numbers in perspective. According to the Bureau of Economic Analysis at the U.S. Department of Commerce, 2013 Annual GDP in current dollars was about $16.8 billion. Even a third of a percent of that total is still an enormous infusion of investment – for the United States, for U.S. businesses and for all tax paying citizens.
Finally, CBO states that the long term effects of shale development on GDP “are subject to considerable uncertainty.” Remember real oil and gas production from shale development was significantly higher than the U.S. Energy Information Administration’s (EIA) estimates – so, there is a very good chance that the shale development’s impact on GDP will be higher than what the CBO estimates in this report.
According to CBO, Gross Domestic Product (GDP) increases tied to shale development have led to:
- Increased Federal Tax Revenues: Shale development led to increased activity across the spectrum, which led to increased wages, higher household incomes, and a number of other factors. All of these factors combined, “CBO estimates that revenues will higher by 0.8 percent (or about $35 billion) in 2020 and by 1.0 percent in 2040…”
- Increase in Payments for Federally Owned Resources: The federal government receives revenue from companies producing on federally owned oil and gas fields, and then directs around 50 percent of those revenues back to States. According to CBO, “federal royalties from shale (minus the amounts that the federal government transfers to the states) will be about $300 million annually by 2020.”
The benefits of shale development resonate across the entire economy and have led to an increase in government revenue and lowered energy prices for consumers and businesses alike. Shale development is also bringing about a change in the manufacturing sector – moving jobs from overseas back to the United States.
As this latest report from the CBO clearly shows, the numerous other benefits of shale development will continue to have a profound impact across the entire energy value chain.