“Peak Oil.” For years, people ascribed to the theory that the United States and the world was quickly running out of oil. In the U.S., this idea was widely accepted becausfor decades, U.S. oil production had been declining, while natural gas production had essentially flat lined. As the following charts indicate:
But something changed and over the past decade or so, the U.S. has seen a massive increase in both oil and natural gas production.
This drastic shift in production is known as the “shale revolution” as the influx in production has largely come from the development of shale resources. As the U.S. Energy Information Administration notes, “the combination of horizontal drilling and hydraulic fracturing has provided access to large volumes of oil and natural gas that were previously uneconomic to produce from low permeability geological formations composed of shale, sandstone, and carbonate.”
How much oil and gas does the U.S. have?
The U.S. never lacked for oil and natural gas resources. The abundance of the U.S.’s oil and gas resources is staggering. The U.S. has 1.44 trillion barrels of technically recoverable oil resources, which means resources that can be recovered using existing technologies. To put that in perspective, that’s enough to power America for the next 210 years at current rates of consumption. That’s more oil than the rest of the world’s total proved reserves, which means resources that have already been discovered and can be produced economically.
The U.S. also has 2,744 trillion cubic feet of technically recoverable natural gas resources, which his enough to power American for the next 105 years at current consumption rates. That’s more natural gas than the combined total proved reserves of Russia and Iran.
What enabled the shale revolution?
For decades, geologists knew that shale formations held billions of gallons of oil and natural gas, but they didn’t know how to get the oil and natural gas out of solid rock in an economical way. Before entrepreneurs combined directional drilling and hydraulic fracturing, it simply did not make economic sense to tap into these resources.
As a result of the shale revolution, total U.S. oil production increased by 88 percent from 2006-2015. Similarly, U.S. natural gas production increased by 51 percent from 2006-2015.
While technological advancements deservedly get much of the credit for the uptick in production, there’s another piece of the puzzle that made the shale revolution possible: private property rights.
In the U.S., landowners generally own the subsurface rights as well as the surface rights to the land. This means that landowners have an incentive to tap into oil and natural gas resources since they will directly benefit from them. In many countries in Europe and around the world, the government owns the subsurface rights for oil and natural gas. For example, in the United Kingdom, which has significant shale gas resources, the government owns much of the subsurface rights.
In the U.S., the importance of individual subsurface property rights shows in the discrepancy between oil and natural gas production on federal lands versus private and state owned lands. From 2010-2015, oil production on non-federal lands increased by 113 percent, but only increased by a mere 0.8 percent on onshore federal lands.
It’s a similar story for natural gas. From 2010 to 2015, natural gas production on non-federal lands increased by 55 percent, but it actually dropped by 27 percent on onshore federal lands.
This stark difference between non-federal and federal lands is largely due to policies from the Obama administration aimed at keeping oil and natural gas resources in the ground. These policies include offering fewer lease sales and delaying drilling permits. For instance, it takes the U.S. government over 220 days to process a permit to drill. In the state of Texas it can take fewer than 5 days.
Another factor that has contributed to the shale revolution is the proximity of the U.S.’s shale resources to population centers. Not only is the U.S. blessed with these vast resources, but also they are typically located in sparsely populated regions, which is not necessarily the case in other areas of the world with shale resources.
As a result of these factors, the U.S. has emerged as the largest combined producer of oil and natural gas in the world.
What does the U.S. shale revolution mean for the rest of the world?
To put it simply, the increase in U.S. oil production means lower oil prices and greater stability in the oil market. For years, the Organization of Petroleum Exporting Countries (OPEC) dominated the global oil market and had a large influence on the price of oil. But the dynamic of increased U.S. oil production, along with the recent lifting of the U.S. ban on oil exports, has completely altered this paradigm. As a result, OPEC can no longer single handedly raise or lower prices by increasing or decreasing production.
Over the past few decades, turmoil around the world, particularly in the Middle East, led to considerably higher oil prices. However, the abundance of U.S. oil has kept oil prices low and made the world less susceptible to global disturbances—such as the rise of ISIS in the Middle East.
America’s role in lowering oil prices should not be understated. As the following chart shows, from 2008-2014, the U.S. was responsible for 82 percent of the increase in total world oil production.
The surge in U.S. natural gas production will similarly have an impact on the rest of the world. Currently, the U.S. is largely self-sufficient when it comes to natural gas and is set to become a major exporter of liquefied natural gas (LNG). Since its peak in 2007, U.S. natural gas imports have fallen by 40 percent, while exports have risen by 116 percent.
Introducing more U.S. natural gas to the global market means that countries like Russia won’t be able to exert as much pressure on other countries around the world. As my organization, the Institute for Energy Research (IER), stated in a recent report:
“unleashing our natural resources at home and abroad might just be the boldest assertion of soft power available to the U.S. and the free world. For example, prospects of significant reserves of natural gas in places like Poland and Israel could prove extremely liberating from reliance on energy giants in the Middle East and Russia. Similarly, using the immense reserves available in the U.S. could upend long-standing international tensions provoked by some of the biggest government-controlled energy producers in the world.”
And the U.S. isn’t the only new player when it comes to LNG exports. Investors have spent nearly $200 billion in Australia to increase Australia’s LNG exports. When the U.S., and other stable democracies like Australia, are producing and exporting more oil and natural gas, it means less friendly governments around the world can no longer use energy as a weapon.
The future will be decided by politics
As previously mentioned, much of the increase in U.S. oil and gas production occurred on state and private lands. However, the U.S. has vast amounts of resources located beneath federal government-owned lands and waters. Unfortunately, government policies and a campaign launched by the national environmental movement, known as the “keep it in the ground” movement, are working to leave many of these resources untapped.
Stopping the production of oil and natural gas would mean that the U.S. would miss out on the domestic economic benefits of oil and gas production. Simultaneously, it would diminish the U.S.’s role as an energy superpower, which would relinquish power back to countries in the Middle East and Russia.
This is why the upcoming U.S. presidential election, just a few months away, is truly a crossroads for the future of the U.S. oil and gas sector.
The differences between Democratic candidate Hillary Clinton and Republican candidate Donald Trump’s energy platforms could not be greater.
Clinton has vowed to continue the Obama administration’s hostile approach to oil and gas production on federal lands and waters. While on the campaign trail, an environmental activist asked Clinton if she would support banning fossil fuel production on federal lands. Clinton’s response: “Yeah, that’s a done deal.”
On top of these statements, Clinton has taken an antagonistic position on the use of hydraulic fracturing, one of the key factors that led to the shale revolution. In a debate with former presidential candidate Senator Bernie Sanders, Clinton stated, “By the time we get through all of my conditions, I do not think there will be many places in America where fracking will continue to take place.”
Donald Trump, on the other hand, has taken a much different and more free-market approach. Trump has promised to reverse the Obama administration’s “keep it in the ground” policies by embracing the U.S.’s vast oil and gas resources and opening more federal government-owned areas to energy exploration. Citing an IER study, Trump has outlined how his approach would be an economic boon for the U.S.—leading to more jobs, higher wages, and increased revenue. But this strategy also has global implications as it would allow the U.S. to sustain and grow domestic production and continue to be a positive force for lower prices and greater stability in global energy markets.
The days of “peak oil” in the United States are a thing of the past. Thanks to the abundance of resources, technological advancements, and private property rights, the U.S. has emerged as the largest combined oil and natural gas producer in the world. This dramatic change in the energy landscape not only benefits the American people, but also people across the globe. With lower oil and natural gas prices and more stable markets the world has greater access to affordable energy and is less susceptible to heavy-handed regimes like Russia or disruptions in places like the Middle East. If the right policies are in place, the U.S. can continue this trend by boosting our oil and natural gas exports to the rest of the world.
By Thomas J. Pyle