The drilling boom is the best U.S. energy news in generations and is crucial for reviving domestic manufacturing.
The U.S. is on the verge of an industrial renaissance if—and its a big if—policy makers dont foul it up by restricting the ability of drillers to use the technology thats making a renaissance possible: hydraulic fracturing.
The shale drilling boom now underway in Texas, Louisiana, Pennsylvania, Oklahoma and other states is already creating jobs, slashing natural-gas prices, and spurring billions of dollars of investment in new production capacity for critical commodities like steel and petrochemicals. Better yet, its spurring a huge increase in domestic oil production, which has been falling steadily since the 1970s.
Despite the myriad benefits of the low-cost hydrocarbons that are now being produced thanks to hydraulic fracturing, the media, environmental groups and politicians are hyping the possible dangers of the process, which uses high-pressure pumps to force water, sand and chemicals into shale formations. Doing so fractures the formation and allows the extraction of natural gas or petroleum.
Although hydraulic fracturing has been used more than one million times in the U.S. over the past 60 years, environmental activists are hoping to ban the process or have it regulated by the Environmental Protection Agency (EPA). Opponents claim the process can harm groundwater even though drinking-water aquifers are separated by as much as two miles of impermeable rock from the shales that are being targeted by the fracturing process.
New York currently has a moratorium on hydraulic fracturing. On May 31, New York Attorney General Eric Schneiderman sued several federal agencies, claiming they had not done a proper environmental assessment on the possible effects of drilling in the New York City watershed. On June 6, the New York Assembly passed a bill that will ban all forms of hydraulic fracturing in the state until mid-2012. And the EPA has launched “a comprehensive research study” on the possible “adverse impact that hydraulic fracturing may have on water quality and public health” nationwide.
Despite the opposition, some of Americas biggest industrial companies are evangelizing about the merits of natural gas. Among the most fervent advocates are John Surma, the CEO of U.S. Steel, and Dan DiMicco, the CEO of Nucor. Mr. Surma told me in an interview that the shale revolution is “the first bit of good news in U.S. manufacturing in two decades.” Mr. DiMicco went further, telling me that “we could change the entire manufacturing base in the U.S. if we just embrace whats happening in natural gas.”
In March, Nucor, Americas biggest steel producer, broke ground on a new $750 million direct-reduced-iron (DRI) plant in Louisiana. The plants key commodity is low-cost natural gas, which will be superheated and then mixed with iron ore pellets and scrap in a furnace. The DRI process allows companies to produce about the same amount of steel with about a quarter of the capital theyd need to build a conventional integrated steel plant. And they can produce that steel with lower carbon-dioxide emissions because they are replacing metallurgical coal with methane.
Nucor may ultimately invest $3 billion in Louisiana on plants that could create as many as 1,000 permanent, high-paying jobs. Meanwhile, U.S. Steel may soon build a DRI plant of its own.
Thanks to hydraulic fracturing, U.S. drillers are producing lots of ethane and propane, which are key feedstocks for the petrochemical sector. Last October, Chevron Phillips Chemical Company announced plans to build a new plant in Baytown, Texas that will provide components for the production of polyethylene, a plastic resin used to make milk jugs and beverage containers. A few months later, the company said it was examining the feasibility of building a major petrochemical plant on the Gulf Coast.
In April, Dow Chemical announced plant expansions at several facilities in Louisiana and Texas, including construction of a new ethylene plant on the Gulf Coast that will begin operating in 2017 and a new propylene production facility that will begin operating by 2015. Dows reason for the expansions: “competitively priced ethane and propane feedstocks.” And last week Shell announced that it is developing plans to build a large ethylene plant in the Appalachian region. Ethylene and propylene are building blocks for a wide variety of consumer products including plastics, fibers and lubricants.
The drilling industry itself is creating jobs. Over the past 12 months, some 48,000 people were hired in Pennsylvania by companies working in the Marcellus Shale, a massive deposit that underlies several Eastern states, including Pennsylvania and New York.
While the Pennsylvania economy is getting a much-needed lift from drilling, opposition in New York may mean that the state loses out on jobs and investment. A new study by Tim Considine, an energy economist at the University of Wyoming, estimates that drilling in the Marcellus Shale could add as many as 15,000 new jobs to the New York economy by 2015. The study, conducted for the Manhattan Institute (a think tank where I am a senior fellow), estimated that shale drilling in New York could add some $1.7 billion to the states economy by 2015 and increase the states tax revenue by more than $200 million.
Regardless of what happens in New York, hydraulic fracturing is unlocking huge quantities of oil from shale. In March, domestic crude production was 5.63 million barrels per day, the highest level since 2003. Amazingly, production is rising despite the Obama administrations de facto moratorium on drilling in the Gulf of Mexico. And shale oil production will likely continue rising from deposits like the Bakken Shale in North Dakota, where state officials are predicting output will hit 700,000 barrels per day by 2018, double the states current production.
A vibrant industrial base requires cheap, abundant and reliable sources of energy. The shale revolution now underway is the best news for North American energy since the discovery of the East Texas Field in 1930. We cant afford to let fear of a proven technology stop the much-needed resurgence of American industry.
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