The plunge in US gas prices has caught out mining companies that jumped on the shale gas train. But it has gifted America with a much needed chance to reduce its energy costs, while cutting emissions and formidably increase its competitiveness.
Every US president since Richard Nixon has promised to reduce America’s reliance on foreign oil. The difference now is that the winner of the next presidential election actually has a compelling path to achieving this.
The plunge in US gas prices – not to be confused with petrol, which they call ‘gas’ – has come about by a flood of resource majors jumping on new shale gas technology, driving the supply through the roof and the supply through the floor.
The likely emergence of the US as a lower energy, lower carbon fuelled, higher technology nation is a global event of considerable significance. The long-term impact on Australia will be dramatic.
Among the likely repercussions are:
– The US will not export its gas like Australia. As pointed out the The Economist in recent weeks, the Third Industrial Revolution – where manufacturing becomes a high-tech, automated process – will require greater access to cheaper, cleaner energy. Low cost gas will speed up this revolution. Combined with the European downturn, the US transformation will slow the export growth rate of China. The Chinese will have to develop less mineral intensive activities, like consumer demand, to maintain growth levels.
– Low priced US gas will make Australian LNG exports to China and Japan very expensive compared to US energy. Prices may be much lower than currently anticipated.
– The US gas boom will create a surplus of coal capacity, which will put a ceiling on world coal prices. Given the rapidly escalating mining and mine development costs in Queensland and New South Wales it also puts a ceiling on the coal boom in both states. The mining resource tax on coal and iron ore will become an iron ore tax.
– Longer term, this means the Australian dollar is extremely vulnerable at current levels.
Below is a pair of graphs from the US Energy Information Agency. On the left is America’s current electricity portfolio. On the right are future capacity investments. As you can see, gas is proving its viability while coal is nowhere.
Dr Bruce Piasecki, founder of energy, materials and environment consultant firm AHC Group, says it used to be that energy sources were determined by price alone.
"So in the grand scale of things, oil would be favoured over natural gas because you could make a better margin on oil globally,” Dr Piasecki tells Business Spectator. "That has changed in the 21st century.” Now, convenience and cleanliness are being seriously factored in.
The EIA estimates that shale gas will make up almost half the country’s gas consumption by the year 2035. In the process, it will more than compensate for the decline in other gas production methods and effectively eradicate the need for imports of LNG.
This picture from the EIA shows the 48 major shale basins around the world – thankfully, Australia has been blessed with a handful of them.
While LNG for electricity generation threatens the economics of coal – indeed, the coal industry has been getting skittish about price outlooks recently – the most enticing opportunity for the US is in transportation. Could the US convert enough cars and trucks to run on LNG from North America rather than oil from the Middle East?
Texan investor T Boone Pickens has been pointing out, most recently in his TED talk, that the US could reduce its OPEC oil imports by 60 per cent simply by converting its fleet of heavy-duty trucks to gas – it’d also be cheaper, cleaner and safer (LNG evaporates when spilled). Granted, the US imports oil from more places than the Middle East, but his point still stands. There’s plenty of room for gas in US transportation.
At the moment, LNG trucks cost a premium and the infrastructure for refuelling is limited. However, more gas engines are being manufactured at a cheaper cost and the US gas industry is unsurprisingly very committed to rolling out refuelling points along key freight corridors – truckies don’t need a gas pump on every corner.
Running cars on LNG would be trickier, given that it would require a far more expansive infrastructure. Dr Michael D Noel from Edgeworth Economics also adds that trucks have the greatest incentive to switch when a vehicle breaks down, which means Middle East oil will not be hit hard for quite some time. However, the greater the price gap between gas and oil, the higher the incentive to make the switch.
And Money Crashers Personal Finance co-founder Andrew Schrage tells Business Spectator it’s not just the truckies. "The ground transportation industry at airports could also benefit by switching fleets to compressed natural gas vehicles,” Schrage says, adding that the airports in Atlanta and Tampa in the state of Georgia have already done this. "The construction industry could also save money by converting to natural gas forklifts and other heavy machinery.”
The other industries that look set to benefit are, of course, manufacturing and industrials. Manufacturing is probably set for the most dramatic shift. Not only will America’s factories of the future be able to rely more on gas as a form of energy, they’ll also be much more automated and require less energy to begin with – lowering costs further.
Indeed, it’s just as important for the US to reduce its consumption of energy as it is the price of that energy. Dr Piasecki, author of Doing More With Less, argues three structural issues drive this global shift towards gas – energy technology has advanced, oil is more difficult to find and extract, and sustainability is rapidly becoming a necessity.
You can already see the major energy companies diversifying their portfolios away from a reliance on oil. They’re waiting for policy instruments from government to speed up the transition.
To fully take advantage of this development America needs an energy plan from Washington. So far, President Barack Obama has favoured alternative forms of energy. Presumptive Republican Nominee Mitt Romney has stated a much greater enthusiasm for more drilling, whether it’s for oil or gas. What the country needs is a combination of the two.
This article is part of a continuing series on the changes in the US and their affects on Australia and the world. See also: Skilling up for a US revival (April 27) and Obama and Romney's Australian reach (April 20).