First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  April 12, 2013  

Supply Chain News: Showdown at the US Energy Corral?


I am surprised there has not been more reporting on what I believe promises to be a battle royal of sorts between rapidly growing US production of domestic oil and natural gas and forces that simply want to drive down use of fossil fuels significantly, getting rid of their use altogether if that was possible.

How that battle plays out will impact the US economy, our supply chains, the balance of global manufacturing competitiveness, and more. It will be a huge inflection point that I believe, without exaggeration, will have an impact felt for decades.

Gilmore Says:

Natural gas is running about $4.00 or so per million BTU (British Thermal Unit) in the US. The global price? Multiple times higher, somewhere around $12.00 per mmbtu in Europe, for example, and $15-18.00 for the equivalent liquid natural gas in most of Asia.

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Regardless of my views, I try to stay out of the politics of these and other matters, stick to the facts and analysis of them with an unbiased presentation – though that is not always easy to do, and never to everyone's satisfaction. Will do my best here to walk that path again, but will say frankly up front I am very much in favor of continued development of US oil and gas resources.

So here we go: over the last few years, new processes, largely "fracking," have led to a dramatic increase in oil and natural gas production in the US, with much more still to come.

Over the past five years, US natural gas production has risen from 52 billion cubic feet (bcf) per day to 65 bcf per day - a 25% increase. This rapid rise was driven primarily by shale gas/fracking production. By the end of the decade, natural gas production will likely reach nearly 80 bcf per day-almost 75% of which will originate from unconventional activity that includes not only shale gas but tight sands formations and coal bed methane. That would represent an increase of about 54% in production versus already strong 2007 levels, according to a recent report from researchers at IHS, led in part by noted energy industry expert Daniel Yergin.

This natural gas production boom led to prices falling to historic lows in the past couple of years – in the US only, not globally. This is very important – more on that in a second.

US oil production until just recently experienced a long period of decline. From 1970 to 2008, US crude oil production fell from 9.6 million barrels a day to just 5 mbd. Now, the same types of techniques developed for natural gas production are being used to produce oil from shale and other sources too. Such unconventional production volumes have increased from 100,000 barrels per day in 2003 to over 2 million barrels per day in 2012 – and volumes are rising rapidly. IHS estimates unconventional oil production in the US will reach almost 4.5 mbd by 2020.

It is hard to overstate the importance to the economy and the supply chain from this major change in the energy landscape.

The economics numbers flowing from this "revolution" are staggering, according to IHS. It expects that more than $5.1 trillion in capital expenditures will take place between 2012 and 2035 in the US across unconventional oil and natural gas activity, of which:

• Over $2.1 trillion in capital expenditures will take place between 2012 and 2035 in unconventional oil activity.

• Close to $3.0 trillion in capital expenditures will take place between 2012 and 2035 in unconventional natural gas activity.
These are huge numbers.

In addition:

• Employment attributed to upstream unconventional oil and natural gas activity will support more than 1.7 million jobs in 2012, growing to some 2.5 million jobs in 2015, 3 million jobs in 2020, and 3.5 million jobs in 2035.

• On average, direct employment will represent about 20% of all jobs resulting from unconventional oil and natural gas activity, with the balance contributed by indirect (e.g., metal pipes) and induced (e.g., housing construction) employment.

If you are looking for a job, by the way, head to North Dakota, where there is major oil and gas production going on. Its unemployment rate is just 3.3%, lowest in the nation.

As shown in the chart below, from the IHS report, this unconventional activity is expected to produce $416 billion in "value added" to the US economy by 2020 just from the production activities and investments alone, not including all the indirect activity. That is a huge number, and will help significantly lift overall US GDP.

There's more. As we reported earlier this year, cheap and abundant natural gas is driving a US manufacturing renaissance in sectors that use a lot of nat gas either as a raw material or as production fuel. That includes chemicals, fertilizers, metals, paper, glass and more. "Rust belt" areas of the Midwest are seeing many announcements about major new plants or expansions, including the first new US fertilizer plant in 20 years and several major new chemical facilities.

Here is why: natural gas is running about $4.00 or so per million BTU (British Thermal Unit) in the US. The global price? Multiple times higher, somewhere around $12.00 per mmbtu in Europe, for example, and $15-18.00 for the equivalent liquid natural gas in most of Asia. This is a staggering advantage for US manufacturers in many sectors – and why many of them are now expanding here.

Besides that supply chain impact, the effects on the logistics industry are likely to be huge. I agree with T. Boone Pickens, who says we are likely see to widespread adoption of natural gas-based truck engines in the next 4-8 years, with that range dependent in part on what the government does in terms of loans.

First, this likely to reduce operating costs substantially (yes, natural gas prices could skyrocket and erase this advantage, I suppose, but Pickens says once the price reaches $5.00, it will bring out many more producers and create large supplies). It will reduce CO2 emissions by around 25% per mile driven, and spur lots of jobs and activity making the new trucks. As we reported just a few weeks ago, the rail carriers are also starting to look at natural gas powered engines.

Finally, many believe the US is on a path from all this to true energy independence. US oil production is expected to exceed oil imports in 2013 for the first time since 1995. Every dollar not spent on foreign oil is a dollar not subtracted from GDP, the way the calculations work. While true energy independence may not come fully or even be desirable, obviously having the US mostly reliant on domestic sources would have a significant impact on the economy, security, foreign policy and more.

Now we have to get a little political, but I believe fairly. Something like all the good things I have described above is going to happen – unless the government tries to slam on the brakes, or at least hit them pretty hard. That the Obama administration has still not approved the Keystone pipeline project I believe is telling – this seems like a no-brainer to me. The energy boom is going to require thousands of more miles of pipe. New York's governor continues to block fracking in his shale gas-rich state.

There is a lot more to note on these real and potential barriers, but I am unfortunately out of space. You may believe the risks of global warming and the US' role in it are worth roadblocks set up to thwart the US energy boom, as obviously many environmentalists do. To what extent will the current administration try put up those obstacles? That is the multi-trillion dollar question.

Maybe public policy can walk the fine line between reducing use of oil and natural gas generally in favor of renewable or low carbon energy sources while still encouraging US domestic energy production. Or is this idea a contradiction to begin with? Does it have to be one way or the other? This is my point. I think Yes.

How this energy show down plays out will be of significant historical import. I will end with this: we have a major competitive advantage in natural gas - and absolutely none in solar panels. I like solar panels too, but we're the Saudi Arabia of natural gas.

Do you think the explosion in US energy production can transform the economy and supply chains? Do you see a looming show down between US domestic energy production and the anti-fossil fuel forces? Let us know your thoughts at the Feedback button (email) or section (web form) below.


Recent Feedback

I agree with you that we ought to be pushing full ahead with oil & gas production in this country and we should not let politics put undue curbs on this. Unfortunately, we live in very divisive political times where everything has become subject to extreme political interpretation by both sides. Any hope of compromise is seen as weakness and any Congressman or Senator who even attempts to reach across the aisle is quickly shuffled out of office by his or her own party.

 In the case of fracking, the environmentalists do have valid concerns about potential effects which should be further studied. And we must be concerned about greenhouse gas effects from carbon fuels for the sake of our children and grandchildren. But the two sides do not have to be mutually exclusive. We can continue to explore energy independence from both fossil fuel and natural sources concurrently. The dream of a totally fossil fuel free energy environment is a good one we should continue to pursue, but it will not occur in our lifetimes and should not prevent us from exploiting the resources we have at our disposal today. If we realize how unproductive the current divisiveness is and start compromising again, in and out of politics, we can accomplish both.

Jim LeTart
Sr. Manager, Marketing
JDA Software
Apr, 12 2013

Thought you would find this interesting.  Read it at lunch just before your column.

Apparently we are not the only country with an abundance of natural gas.

Kevin McCarthy
Director Consulting Services
C. H. Robinson Worldwide, Inc.
Apr, 12 2013

Great article on energy issues and opportunities.  In my opinion, there will not be a showdown between environmentalists and people in favor of using and expanding non-conventional oil and gas.  I think you will see environmental forces continue to question individual programs such as the Keystone pipeline as they come up.  And we probably need someone keeping industry honest about environmental risks, remember the BP oil spill.  Interestingly, a case can be made for more natural gas pipelines vs. Keystone, but I would predict that Keystone will get approval.

 It is exciting to think that we can significantly reduce our dependence on imported oil and, as Dan points out, this has great benefit to the long term prospects for the U.S. economy.  However, I think that we need to continue to invest in renewables for the future, they represent the best way to reduce the amount of pollutants that even natural gas puts into the atmosphere.

Herb Shields
HCS Consulting
Apr, 12 2013

Great article! I knew the gas market was low, but the comparison to other markets was excellent.

Trevor Pinto
Not Provided
Apr, 12 2013

I believe that our only hope for this country is the natural gas revolution.  It provides clean energy, the hope of energy independence (less reason for wars), and energy exports that could lead us away from the brink national bankruptcy. 

Our greatest natural resource has always been our people and their innovation.  Now that innovation has led to a way to produce clean energy for the world.

 Consider buying compressed natural gas vehicles for your fleet.  I am thinking about one for a personal car.  Current price of natural gas is just over $1 per gallon vs. $3.50 for gasoline.    

Wade Mosteller
Not Provided
Apr, 20 2013