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The Gas Revolution

Amazingly, an era of energy abundance is upon us, unless politicians and environmentalists get their way.

Apr 18, 2011, Vol. 16, No. 30 • By STEVEN F. HAYWARD
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When Andrew Liveris took over as CEO of Dow Chemical at the end of 2004, the company was in the midst of a wrenching reorganization that saw it shed 7,000 jobs​—​14 percent of its workforce​—​and close 23 older chemical plants in this country. Looking ahead to a new product cycle in a fast-growing global marketplace, Liveris faced a stark choice: Should Dow invest in new capacity in the United States, or should he locate more facilities in emerging markets? One factor made expanding overseas much more attractive​—​not labor costs but the price of natural gas.

A Chesapeake Energy natural gas well near Burlington, Pennsylvania, April 23, 20

A Chesapeake Energy natural gas well near Burlington, Pennsylvania, April 23, 2010

AP Photo / Ralph Wilson

Dow and several other industrial manufacturing sectors use natural gas as a basic feedstock for much of their product line, not primarily as an energy source. As such there are few substitutes or efficiency strategies the company could use. As Liveris told the Senate Energy and Natural Resources Committee in the fall of 2005, “This [natural gas] price of $14, simply put, renders the entire U.S. chemical industry uncompetitive. .  .  . We simply cannot compete with the rest of the world at these prices. .  .  . When faced with a choice of investing in the United States at $14 gas versus $2 to $3 elsewhere, how can I recommend investing here?” Not long after, Dow Chemical announced plans for a major expansion in Kuwait and Oman, both of which were able to guarantee long-term rock-bottom natural gas prices. Other chemical companies followed suit, and a sector that was once among the nation’s strongest export industries became a net importer. Between 1997 and 2005, overall industrial consumption of natural gas in the United States fell 22.4 percent.

One of the less appreciated facts of the U.S. energy marketplace is that the price of natural gas has been much more volatile than the price of oil over the last 15 years. Unlike oil, which trades at globally uniform prices, natural gas has always been a more locally traded commodity, with wide price differences from region to region. And in the middle years of the last decade, when the U.S. natural gas price spiked to $14 per thousand cubic feet, up from $2 or less for most of the 1990s, both Middle Eastern and Russian gas could be had much more cheaply​—​if you were located in their neighborhood.

Like domestic production of oil, U.S. production of natural gas had been relatively flat for years. All of the official public and private forecasts expected domestic gas production to decline, with the result that the United States, hitherto nearly self-sufficient in natural gas (we have been importing about 10 percent of our gas from Canada and Mexico), would have to import as much as 20 percent of our needs by the year 2020. Most of the new gas imports were expected to come from the Persian Gulf, extending American dependency on that politically sketchy region. The oil and gas industry argued that the only way to turn around our gas fortunes was to open up more areas for exploration and production, especially offshore on the continental shelf, but this ran into the same buzzsaw of political opposition that has hobbled domestic oil production.

Now, within an astonishingly short time, the entire picture has changed. In mid-December the Energy Information Administration released new estimates of U.S. natural gas showing proved reserves at their highest level since 1967, up 33 percent in the last three years and 62 percent over the last 10 years. Natural gas production in the United States in 2009 (21.6 trillion cubic feet) was the highest since 1973, even though demand was down on account of the recession. The Department of Energy now predicts gas reserves will grow by at least another 20 percent over the next decade, though a number of energy forecasters think reserves will grow by much more, securing a 100-year supply for our needs. Even as oil and gasoline prices rise again to uncomfortable levels, the price of natural gas has declined 80 percent from its mid-recession level in the summer of 2008, to about $4 per thousand cubic feet, and it is likely to stay at this level or perhaps fall further. Although price volatility may not be a thing of the past, it is unlikely we’ll see spikes to $14 again for a very, very long time.

How did this startling turnabout occur? The phrase suddenly in every newsroom copybook (the cover of Time magazine last week, a series in the New York Times last month) is “unconventional gas,” chiefly shale gas and coal-bed methane, produced through a technique known as hydraulic fracturing or “fracking.” Fracking involves sending high pressure fluid deep into wells to force cracks in the surrounding rock formations, which releases gas (and also oil where oil deposits are mixed in rock).

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