The Future Of American Shale: Political & Energy Realities

The Future Of American Shale: Political & Energy Realities
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The battle lines around energy policy in this Presidential election cycle have been drawn early and starkly.  It distills simply to shale versus solar.  (Wind turbines can be included in the solar category since they capture the effect of the sun’s heat on the atmosphere.)

What a shame. America and the world will need a lot more of both.  And America has a big role, and stake, in both.

Secretary Clinton and Senator Sanders have been nothing if not clear that they want to see an end to fracking -- the use of smart drilling and hydraulic fracturing to unleash oil & gas from shale rock – and instead vigorously expand solar and wind. Senator Cruz, Governor Kasich and Donald Trump are all full-throated supporters of the benefits of shale oil & gas while also supporting solar energy in various ways, if sometimes tepidly. 

New York State is, for the anti-fracking forces, the archetype of how the nation should progress.  Not only has that state banned shale production within its boundaries, but activists have moved on to target shale infrastructure, specifically opposing pipelines to ensure that natural gas from neighboring Pennsylvania and other states does not flow into New York State.  The “fractivists” goal is a 100 percent “Renewable NY” campaign.

For its part, the Obama Administration, in its lame-duck year, is slated to issue a bevy of new regulations to hobble the oil & gas industry and target, for the first time, the small intrastate pipelines that have historically been unregulated and that are a vital part of the system that gathers natural gas (and oil) from all the scattered shale wells.

The essence of the political debate isn’t about whether the shale industry has brought economic benefits to the nations.  There has been extensive coverage of the indisputable facts regarding the scale of the shale contribution to U.S. energy supply (doubling total American oil & gas output), and the consequent triggering of a global collapse in oil prices. The rapid and unsubsidized growth in shale hydrocarbon production during the Obama Administration contributed a total of more than $1 trillion to the U.S. GDP and some one million jobs.  The thousands of small and mid-sized shale companies thus played a disproportionate role in keeping America from sliding back into negative GDP growth during the long recovery from the Great Recession.  In fact, President Obama touted shale’s benefits during the 2012 campaign.

Nor is the debate about whether more shale production is possible.  Shale pioneer Harold Hamm recently summarized the technical prospects in a simple sentence: “We can do it again.”  Rather, the political divide now is over whether shale production should be encouraged at all, or indeed if it should reigned in or even eliminated.

The anti-shale proposition is, in essence, that we just don’t need it given the prospect for an imminent revolution in alternative energy – stimulated with a few more dollars in subsidies and incentives.

You know there is a problem for the shale industry when an often reasonable and knowledgeable pundit like David Ignatius, the foreign affairs and political columnist for the Washington Post, appears to have bought into thesis of an imminent hydrocarbon-free revolution.  In his recent column, “Quiet Energy Revolution,” Ignatius is clearly agog at the prospects for alternative energy after touring a DOE-sponsored alternative energy ‘fair’.  His column provides a well-articulated summary of the widely believed propositions about America’s energy future.

Thus, let’s briefly explore Ignatius’ observations in light of his belief that “America’s future is at stake” in this presidential election cycle.

1.“… the Obama administration has made startling progress that could be reversed if either of the GOP front-runners becomes president.”

David Ignatius, Quiet Energy Revolution

When President Obama was sworn into office, America obtained slightly more than 2% of all energy from the combined total of biofuels, solar, and wind sources.  That share has grown to just over 4% now.   Over that period, alternative energy technologies received a startling $150 billion in cumulative federal subsidies.  

Meanwhile, over the same period shale oil & gas added 800% more to U.S. energy supply than the combined total growth from solar, wind and biofuels.   That might properly be termed “startling progress” on an energy front that was unexpected and unsubsidized.  

2. “Energy Secretary Ernest Moniz, arguably President Obama’s best Cabinet appointment, has been leading a quiet revolution in clean-energy technology.”

“Quiet”?  A Google search of “President Obama clean energy” yields over one million hits.  There have been countless speeches from the President and Secretary Moniz touting clean energy, and innumerable high-profile media stories and high-volume public and political debate around the proposals.

As for “revolution” – one can certainly imagine that an energy revolution is yet possible in theory, but none other than Bill Gates and Google have recently observed that the technologies don’t yet exist to effect an energy revolution of the scale required to significantly displace hydrocarbons. 

3. “…the [Department of Energy] Advanced Research Projects Agency-Energy, or ARPA-E. As the name implies, it tries to do for energy what DARPA has done for defense science.”

There is a basic flaw with the idea of modeling wide-scale commercial technology development on military programs – the idea of a ‘Manhattan Project’ for energy.  Fueling all of civilization is not like building a few aircraft carriers or dozens of fighter jets, or new kinds of bombs.  And when the military needs to perform the types of tasks commonly needed in civilian life – say moving tens of thousands of people and thousands of tons far distances – commanders emulate or use civilian technologies, from merchant ships to commercial airliners (literally commandeered in time of war).

If one wants an example of a revolutionary energy technology pioneered by the military, look no further than nuclear power – and consider how remarkably effective it has been in submarines and aircraft carriers, but how devilishly challenging to build commercial power plants at scale.  After five decades and hundreds of billions of dollars spent, less than 10 percent of America’s total energy comes from fission. 

4. “…the cost of producing large-scale solar energy has fallen 60 percent over that period; prices for wind energy and efficient batteries have declined by more than 40 percent.”

Solar and battery costs have dropped mainly from rising production (along with subsidized capital) in China and other Asian nations – and not from either new technology or spending from DOE programs: 90% of global batteries and 70% of all solar photovoltaic modules are fabricated in Asia (with China dominant).  Meanwhile, essentially all of the DOE-subsidized U.S. battery companies, as well as many of the subsidized solar companies, have failed.

As for wind: subsidies from preferred rates to mandated utility programs have indeed stimulated the demand for and the associated development of far bigger wind turbines.  (Set aside that about 50% of turbines in America are foreign built, along with 60% of those on order.)  The attendant economies of scale are evolutionary and not revolutionary: the average new turbine has grown some 3-fold in size over the past two decades, thereby yielding lower per-kilowatt-hour costs.  But those gains from scaling up are leveling off:  now that turbines are as tall as the Washington monument, they will not be growing another 3-fold bigger.

Meanwhile, energy technology gets better across the board not just with alternatives. The average cost to operate a shale rig was 40% lower and productivity (output per rig) was 50% higher in the past year alone.  Over the last half-dozen years, EIA data shows that shale-rig productivity has improved more than 400% -- without subsidies or mandated purchasing.  And gains in shale technology have just begun.

5. “Wind energy production has tripled; production of solar energy has increased nearly 20-fold. And scientists say we’re still fairly early in the cycle of innovation and cost reduction.”

Big growth rates are an arithmetical artifact of starting from a very small number.  Put simplistically, analogized to investing; compare a 20-fold gain on $1 versus a 2-fold gain on $10,000.  Thus, while oil & gas production grew ‘only’ 2-fold over the same period, the total increase in actual energy supplied was 10-fold greater than the combined total from wind and solar. And as noted in #4, while the cycle of innovation continues for all energy sources, engineers are now in sight of physics limiting future gains for solar and wind as significant as those of the past.

6. “Wandering through the ARPA-E exhibition hall … you get a sense of how fast new technology is being applied to big, real-world problems. … Rebellion Photonics demonstrates a system for chemical imaging that can spot [natural] gas leaks and other potential problems before disaster strikes. A consortium of universities and private companies, dubbed TERRA, shows off robots that can assess biofuel crops and select the best genetic traits, doing in four hours what now takes seven days. A company called Local Motors pitches a car built with 3-D printing.”

Offering a litany of ‘cool’ energy technologies is common in enthusiastic writing about the future, but such lists rarely include inventions that profoundly change how energy is produced.  Chemical imaging for gas leaks is mainly valuable for improving safety and maintenance of natural gas pipelines; important but not revolutionary.  Robots will bring greater economic efficiencies to all agricultural and industrial processes – and are already doing so in the oil & gas industry.  But they don’t constitute a “revolutionary” new energy source.  As for a 3-D printed car – it’s still a car. And if 3-D printing makes cars cheaper, that will increase the future sales of cars and thus demand for fuel.  

All such technologies, and many more, are exciting and may solve various “big, real-world problems” but they don’t change the fundamentals of the energy landscape or obviate the need for hydrocarbons.

7. “… the government in modern times has been a key incubator and facilitator for business. DARPA’s research spawned the Internet and its world-transforming networks, and it is now helping to drive the astonishing progress of machine learning and autonomous systems.”

We have here what philosophers term a “category” error.  The federal government has a long and admirable record in funding basic research and episodically stimulating new technologies.  However, it was private capital in private companies that built the Internet from seeds of federal research to be sure, but the networks were built based on the maturation of associated commercial technologies.  And, critically, it was the absence of government direction, control, mandates or subsidies that enabled the rapid flourishing of the Internet infrastructure and industry. 

As for the “astonishing progress” now emerging in computer machine learning and automation, while these are important domains for government research the leading edge and big spending programs are found predominantly in the private sector.  Both machine learning and automation are anchored in electricity-consuming computing technologies that will bring more productivity and efficiency to every aspect of the economy and all energy sources including shale, not just alternatives.  

8. “[The] innovation summit was a bracing reminder of why, as Warren Buffett likes to say, people have never gone wrong betting on America.”

The aphorism is an excellent one.  If one were betting on America you’d bet on the shale entrepreneurs to “do it again,” and avoiding government polices that hobble a critical industry.  And you’d bet on continuing innovations in both shale and solar.  But “betting on America” doesn’t mean betting on DOE, whether it’s DOE money or DOE choices of where to place those bets.  It means betting on the entrepreneurs and innovators in private companies, and betting on investors and risk-takers in those companies and in private venture capital across America.

Again we have a “category” confusion, this time rooted in conflating basic research with engineering, and thus mixing up two different domains where the strengths of government and industry are inverse.  Basic research is properly dependent on the long-term vision possible from federal support, while engineering new products (the “development” part of “research and development”) is best suited to private markets.

9. “The leading GOP candidates, Donald Trump and Sen. Ted Cruz (R-Tex.), offer know-nothing denials of this march of [climate] science.”  

Of course global warming is the unhidden elephant in the room on all the debates over energy technologies.  But you don’t have to know anything about or debate climate science to know something about the indisputable underlying realities of the economics, engineering, and physics of energy.

Bill Gates has lucidly articulated the challenge that civilization-wide energy transformations entail: “[W]e need innovation that gives us energy that’s cheaper than today’s hydrocarbon energy, that has zero CO2 emissions, and that’s as reliable as today’s overall energy system. And when you put all those requirements together, we need an energy miracle.” Gates went on to clarify that he didn’t view energy “miracles” as impossible, but that such options don’t yet exist and thus the critical policy actions should focus on increasing support for basic scientific research where such miracles may one day emerge.

10. “This intense interaction between technology and the marketplace is what powers innovation in the United States.” 

There is much truth in, and wide agreement with David Ignatius’ above concluding observation.  But subsidies and government preferences can deeply distort if not destroy a productive “interaction” between technology and the marketplace.  And neither subsidies nor any of the technologies Ignatius described will eliminate the use of hydrocarbons.

In fact, just expanding solar energy will require consuming oil, coal and natural gas associated with producing all of the associated materials.  For example, reaching a goal where wind supplies 25% of global electricity demand (which equals an 8% share of all energy use) would entail burning 600 million tons of coal to produce the 450 millions tons of steel needed for those wind turbines, along with 600 million barrels of oil needed to fabricate the 20 million tons of fiber-composite turbine blades. 

A matching build-out of solar (25% of global electricity) would require another nearly 600 million tons of coal to produce the needed 200 million tons of steel and aluminum (the latter is particularly energy-intensive), along with burning natural gas equal to 1 billion barrels-of-oil to produce the 200 million tons of glass needed. If built out over a single decade, it would using 75% of annual world glass production each year. 

Such are the realities that tech revolutions face in the real world of energy.

Mark P. Mills is a Manhattan Institute senior fellow.

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