Could cheap gas save the economy?

@CNNMoney June 27, 2012: 10:14 AM ET
New techniques to extract oil and gas from shale, such as fracking, are a boon for the American economy.

New techniques to extract oil and gas from shale, such as fracking, are a boon for the American economy.

NEW YORK -- Martin Neil Baily is a senior fellow in Economic Studies at the Brookings Institution and was the Chairman of the Council of Economic Advisers under President Clinton. Philip K. Verleger Jr. is an economist who has studied energy for 40 years, President of PKVerleger LLC, and a visiting fellow at the Peterson Institute for International Economics.

Something is badly needed to get the economy moving again and avoid another slowdown.

The good news is that cheaper gas could be the answer. America has hit the energy jackpot with new techniques to extract oil and gas from shale.

The recent widespread use of a technique called hydraulic fracturing, or "fracking," and improved drilling technologies such as horizontal completion to harvest gas from shale, could provide a much-needed economic boost.

Shale extraction represents one of the most important developments for the economy in the last 60 years. It's pushing down energy prices and creating many new opportunities for jobs, investments and manufacturing.

And the new innovations are unique to the United Sates. Although other countries will exploit shale, none will come close to the low costs in the U.S. That's because the U.S. has a unique governmental structure in which many powers remain with the states, along with a very competitive market for the product, as opposed to the monopolies and oligopolies that control the market in almost every other country.

While it may sound like the latest energy fad, the shale boom is for real and a serious game changer because of its size and potential longevity. Based on equivalent amounts of energy, natural gas has been about half as expensive as oil for many years.

The Energy Information Administration now predicts gas will be only a quarter or a fifth of the cost of oil through 2030, a big enough price difference to overcome the disadvantages of gas, such as its lower energy intensity by volume.

How did the situation change? Was it because of the tax advantages given to the large oil companies? In fact, no. Big oil largely gave up on drilling onshore in the U.S. to concentrate on finding big fields in other countries or offshore.

But small, innovative companies continued to drill for gas and oil here at home and figured out how to drill sideways and use computer technology to find deposits and extract them. Financial markets helped make this happen because small drillers could sell oil and gas using futures contracts and protect themselves against wild price swings.

An economic boom

The prospect of cheap gas for years to come is already spurring investment. Waste Management Inc (WM, Fortune 500). is investing in natural gas trucks that cost $30,000 more but save $27,000 a year in fuel costs.

The big engine manufacturers are developing long-haul trucks to operate on liquefied natural gas.

Eighty percent of future electricity generating capacity is expected to be from natural gas and many coal-fired plants may be shifted to gas. The market incentives are already there and jobs are flourishing.

Government could throw gas on this economic fire by allowing facilitation, better coordination and cutting of red tape between federal and state agencies. Working together, government at all levels can set clear standards that protect both people and profits, yet speed the approval process to create more jobs at a faster pace.

The industry, too, needs to cooperate by disclosing the nature of the fluids they are injecting during the fracking process, and by limiting emissions from the thousands of wells they will drill to alleviate some environmental concerns.

Environmentalists should recognize the longer-term benefits of abundant gas supplies -- burning gas emits a lot less carbon than burning oil and coal, and extracting it is far cleaner than extracting oil from Canadian tar sands -- and work to achieve a compromise that allows rapid development with the necessary safeguards.

And President Obama should help promote a cleaner fossil fuel that shows such promise and is already creating new jobs.

But government support isn't the main problem. Drilling is being authorized today at rates that exceed the industry's capacity to drill. The real problem is that drilling for shale gas and oil could be slowed or stopped if disputes over fracking are not resolved in a way that addresses the public's concerns. Activity has already been suspended in some promising areas.

Cheap gas may not be enough to offset the drag of a slowing global economy this year, but it will boost long-term investment, help the beleaguered manufacturing sector and increase exports.

Building petrochemical plants could suddenly become attractive in the United States. Manufacturers will "reshore" production to take advantage of low natural gas and electricity prices. Energy costs will be lower for a long time, giving a competitive advantage to companies that invest in America, and also helping American consumers who get hit hard when energy prices spike.

Other countries like China will attempt to replicate America's good luck, but will fail because they lack the unique legal, political and market institutions which have led to our success.

After years of bad economic news, the natural gas windfall is very good news. Let's make the most of it. To top of page

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