Unconventional gas is no cure-all

The effect of shale gas on America's three big thorns – foreign oil dependence, manufacturing decline and climate – is not as revolutionary as first thought.

The boom in shale gas production in the US has captured the imagination of the business press across the world. The shale gas revolution, as it has been billed, is seen as reviving manufacturing in the United States, freeing it from dependence on volatile Middle-Eastern oil, and solving the carbon emissions problem. 

But it pays to keep this so-called revolution in perspective.

There can be little doubt that a surge in gas supply from shale has had a dramatic effect on US gas prices: it dropped from about $9 per MMBtu in 2008 to $3 in 2012. At the same time, gas-fired power's market share rose from 21 per cent in 2008 to 30 per cent in 2012. 

Yet these charts of the week, from the US Energy Information Administration, illustrate that this ‘revolution’ may not be the ultimate cure-all some would have us believe.

Firstly, the extent of the reversal in the US dependence on imported petroleum, clearly illustrated in the chart below, is quite remarkable. This has probably been the area that has caused the most excitement among shale revolution advocates.

US liquid fuels supply by source (millions of barrels per day)

Graph for Unconventional gas is no cure-all

Source: US Energy Information Administration, Annual Energy Outlook – 2014 (Early Release version)

But what many miss is that the turnaround in import share is as much a function of events on the demand side as the supply side. Firstly, look at the growth in demand for petroleum fuel from 1980 until 2007. If this had continued imports would have maintained their market share in spite of a surge in tight oil (largely shale) production. But growth in demand for petroleum in the US has been arrested. Initially this was due to the GFC economic downturn – but its growth in the years beyond is kept low, and consumption declines from 2020.

The unsung hero in all of this is the reduction in passenger vehicle fuel consumption. Thanks in part to fuel economy standards that have been introduced by the Obama administration, passenger car fuel consumption will steadily decline by over a fifth to 2040.

Energy consumption by light duty vehicles in the US (quadrillion Btu)

Graph for Unconventional gas is no cure-all

Source: US Energy Information Administration, Annual Energy Outlook – 2014 (Early Release version)

In terms of power generation, the boom in shale gas production and drop in price has meant gas has gained significant market share in power generation which has played an important part in lowering US greenhouse gas emissions. But 2013 was concerning for a reversal in growth, as gas prices rose. As the chart below illustrates, power generation gas consumption in 2013 was noticeably lower than 2012 and not all that far off the five-year range of 2007-2011.

US power generation gas consumption (billion cubic feet per day)

Graph for Unconventional gas is no cure-all

Source: US Energy Information Administration, Natural Gas Monthly and Short-Term Energy Outlook (STEO). Note: October 2013 and November 2013 consumption volumes represent preliminary STEO estimates.

Now the latest EIA projections released just a few days ago still expect gas to resume its growth in electricity generation and ultimately overtake coal around 2035. Yet this isn’t great news for the climate because, while gas power production grows, coal generation doesn’t decline, according to the EIA's forecast. The end result is overall carbon emissions rise from power generation.

Also, we are yet to really see a boom in US manufacturing as a result of low gas prices. The chart below illustrates that industrial gas consumption in 2012 and 2013 was not a huge amount higher than the five-year range of 2007-2011, which includes a severe economic recession.

US industrial sector consumption of natural gas (billion cubic feet per day)

Graph for Unconventional gas is no cure-all

Source: US Energy Information Administration, Natural Gas Monthly and Short-Term Energy Outlook (STEO). Note: October 2013 and November 2013 consumption volumes represent preliminary STEO estimates.

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