Don’t Overhype America's Energy Revolution

"The danger is that the United States will try to leverage energy for political ends and trigger unintended consequences."

The American energy “revolution” is about a decade old, although it only went mainstream around 2010. Much has been written about its causes and even more about its consequences—yet there is so much hype about how the “revolution” will reshape global geopolitics, that one is hard pressed to get a cool, honest breakdown of what has happened and what it means. The change has indeed been remarkable, but the implications for politics and economics are far less obvious at this time—and they will depend largely on whether America can resist the temptation to use energy for political ends.

The transformation in America’s energy has been speedy and remarkable. Since 2011, energy production has reached a new record each year: from trough to peak, oil production has risen by 50 percent (2008-2013) and natural gas by 34 percent (2005-2013); by contrast, coal has declined by 16 percent as it has lost market share to gas in the power sector. The changes in demand have been profound as well: energy use peaked in 2007 and has since declined. The country is using less oil and coal and more gas and renewables. Carbon emissions from energy are down 10 percent from their high point in 2007.

The boom in oil and gas production has, first and foremost, brought on a boom in oil- and gas-related jobs. Employment in oil and gas extraction has risen by 80 percent since 2003; in supporting activities, jobs have more than doubled. These jobs pay well: in oil and gas extraction, earnings were 66 percent higher than the average in August 2014, and wages are rising fast—after relative stagnation in the early 2000s, hourly earnings have risen by over 50 percent in the last decade (and they have really boomed in recent months). This is still a capital, rather than a labor-intensive industry and so direct employment is around 600,000 to 700,000 people (against total, nonfarm employment of 140 million in the United States). Even so, the benefits of the boom are clearly trickling down to workers.

This new geography of employment, of course, has many side effects. Oil and gas bring jobs in services like trucking, lodging and entertainment, and they are also bringing tax and other revenue to states and communities. Yet much as the industry wants to be a good neighbor and has reduced its footprint, its presence is still felt through noise, surface and air pollution, traffic, increased pressure on social and health services and occasionally violence. Not all communities are enamored with oil and gas.

Nor is the country’s infrastructure and regulatory capacity able to cope with this activity. In energy, America looks like a teenager trapped in the body of an old man—so much dynamism held back by old infrastructure and even older rules. It is no wonder that the first Quadrennial Energy Review will focus largely on energy infrastructure. Meanwhile, the regulatory framework is adapting slowly—approvals for liquefied natural gas (LNG) exports, which seemed stalled for a bit, have now picked up again, driven by progress made at the Federal Energy Regulatory Commission. And the thorniest issue of all—allowing exports of crude oil—is gradually entering the national debate. The rules are catching up—slowly.

The broader economic effects have been more varied. Pundits extol the benefits of “cheap energy,” but the numbers show a more complex story. For one, energy prices have barely declined: in real terms, the price for all energy has declined by just 4 percent since its peak in 2008, and in 2012, real prices were at their third highest point ever. In fact, only natural-gas prices have fallen, but spending on gas accounted for just 7 percent of total energy spending in 2012. The rest of the spending went to oil products, whose prices are set in global markets, and electricity, where prices have stayed high. The consumer is, therefore, receiving only a small stimulus. Total energy spending, at $1.3 trillion, is barely lower than its 2008 peak, and household spending is at an all-time high at $628 billion in 2013 (just below its 2011 peak).

The presumed “manufacturing renaissance” is similarly elusive. Consider chemicals, which are meant to be a prime beneficiary of cheap gas. Chemical production has shown a minor bump, but output remained about 15 percent below its 2007 levels (when gas was expensive). Employment has jumped by 3 percent over the past few years, but it remains 7 percent below its pre-crisis level (December 2007), in effect continuing a long-term decline. Investment has picked up recently, but at a slower rate than in other sectors. If there is a chemicals boom, the data does not show it. This is no surprise: pundits routinely overstate the importance of energy in driving manufacturing activity. The nonrenaissance is just hype catching up with reality.

Pages