Download The macro-economic effects of the shale gas revolution

Special
The macro-economic effects of the shale gas
revolution
Financial Markets Research
www.rabotransact.com
13 November 2013
Summary
Philip Marey

Senior US Strategist
+31 30- 216 9721
philip.marey@
rabobank.com
The shale gas revolution is providing a supply shock to the US economy. Firstly, lower market prices
for natural gas are likely to yield higher competitiveness in the industrial sector where natural gas is
an important input factor used in a variety of processes. Secondly, it leads to increased investment
and employment, both in extracting and distributing shale gas and in downstream industries that
pick the fruits of increased competitiveness. Furthermore, trade is getting more balanced as well due
to higher industrial exports and an improved energy bill. Considering that we see the US economy
already poised for higher growth, since substantial progress has been made in repairing private and
public sector imbalances, the shale gas revolution should provide an additional boost.
Introduction

Stefan Koopman
stefan.koopman@
rabobank.com
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Page 1 of 12
Since the summer of 2009, the American economy has grown without interruption and the
much feared double dip stayed away. Furthermore, private balance sheets were slowly but
surely repaired as the banking system was remediated and households reduced their debt
levels. Meanwhile, even the federal government is starting to put its house in order – the
budget deficit has been trimmed down from 10.1% in 2009 to a forecasted 3.9% of GDP this
year – and the fiscal cliff and the automatic spending cuts appeared to have less of an adverse
economic effect than had been anticipated.
The residential property market is also in recovery. Excess supply in the market has dwindled
and prices have been rising for a year and a half, with new investments in housing delivering a
positive contribution to economic growth again. In addition, whilst large corporations
recovered rather quickly from the Great Recession, even the small- and medium-sized
enterprises are now showing signs of stronger growth.
But still, not all that glitters is gold. Despite trying it for years, the ‘Grand Bargain’ between
Republicans and Democrats to address the structural, long-term fiscal issues (such as the rising
costs for Medicare and Social Security) still hasn’t taken place and is likely to remain out of grasp
for some time. Moreover, the US still has a substantial trade deficit. Although this year’s data
show some improvement, last year’s net imports of goods and services equaled USD534 bn. Net
imports of petroleum goods stood at USD291 bn1 and were by far the single biggest driver
behind the overall deficit. And whilst the unemployment rate has indeed dropped, the
pessimistic view is that this can partly ascribed to a decreasing labour participation rate and
increasing growth in the number of part-time temp jobs.
Despite these shortcomings, private and public balance sheets are looking much healthier
now than a few years back and all the ingredients are in place for raising the growth rate of
the American economy. In this regard we see the US gain an extra impulse from a shale gas
revolution as recently improved techniques considerably increased the extraction of shale
gas.
We recognize that the exploitation of shale gas also has several environmental risks and is a
rather controversial subject. Some of these risks are better identified than others, but such
deliberations, whilst entirely appropriate, are beyond the scope of this research.
Notwithstanding these risks, it is a fact that numerous drilling permits are issued, shale gas
extraction already takes place and that this influences a wide range of macro-economic
variables and aggregates. This makes it without any doubt worth researching. We’ll focus in
particular on how this affects 1) the US’s competitiveness, 2) investment, 3) the labour
market and 4) net trade and whether this addresses the shortcomings described above.
First things first, though. In order to get a better grasp of the magnitude and dynamics of this
shale gas revolution, we’re going to discuss some unavoidable technicalities about shale gas.
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Fracking
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Hydraulic fracturing (or “fracking”) is a procedure used to increase the flow of natural gas or oil
from a well which is drilled into a low-permeability rock formation, such as shale. This method
has been in use in the US since the mid-20th century. But it was only over the last decade that,
driven by technological advances as horizontal drilling, the production of shale gas has
increased at a rapid pace. This allows producers to drill vertically several hundred meters and
then turn 90° to drill horizontally another couple of hundred meters. This dramatically increases
the reach of one drilling rig, which boosts its productivity and economic viability. Fracking then
takes place by fracturing these low-permeability shale rocks through the injection of a mixture
of water, sand and chemicals under high pressure and this should release the natural gas.
Appendix 1 shows where the major shale plays are located within the US. Not all these
formations are identical, however. Some of them are rather dry and contain relatively more
methane, whilst others are also rich in natural gas liquids (NGLs), such as ethane, propane
and butane. As we will see, whether a shale play contains these NGLs is of particular
importance to the petrochemical industry. There are also some formations that contain tight oil,
for instance the Bakken shale in North Dakota, which can be extracted using similar techniques.
The production of tight oil is likely to be a game changer on its own, but despite the seemingly
accurate map of the size of these shale plays, the identification of technically recoverable
reserves of shale gas – and tight oil in particular – comes with a lot of uncertainty. Naturally,
so do forecasts on production.
Figure 1 below shows the US Energy Information Administration’s best estimate (or: its
reference case) for the production of dry natural gas, which is published in their Annual
Outlook. The proportion of shale gas, which already became the primary source of dry gas in
the US with a production of 7.85 trillion cubic feet (tcf) in 2011, is expected to increase
significantly. The EIA reckons that around 16.70 tcf of shale gas will be produced by 2040. Still,
this is subject to a large bout of uncertainty and the EIA’s scenarios vary between an annual
production of 11.14 tcf and 23.93 tcf.
Notwithstanding the uncertainty on future production, the historically fairly stable relationship
between spot prices of WTI oil and Henry Hub natural gas2 already broke down due to the
massive influx of natural gas in the American market. Of particular interest in figure 2 is the
price differential of natural gas that arose between the US on the one hand and Europe and
Japan on the other hand. Over the last 18 months, the wholesale price for US natural gas was
slightly above USD3/MMBtu, only a fourth of the European price and a fifth of the Japanese one.
What’s more, recent upheavals in Syria and the rest of the Middle East showed once again that
oil prices at times exhibit exogenous volatility. Although home-drilled natural gas is also prone
to price movements due to temporal fluctuations in demand and supply, it still is a much more
stable and reliable source of energy – at least from a geopolitical point of view.
While a lot more can be said about the technical, geopolitical and environmental aspects of
shale gas, from now on we’ll just focus on the macroeconomic consequences. We start our
reasoning by looking how this revolution affects not only just the energy industry, but is likely
to have much wider economic implications.
Figure 1 – Increased shale gas production..
Figure 2 – .. broke the link between energy prices.
20
History
30
160
18
Projection
Price of natural gas - $/MMBtu
Annual natural gas production (tcf)
35
25
20
15
10
5
140
16
120
14
100
12
10
80
8
60
6
40
4
20
2
0
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Onshore
Source: EIA
Page 2 of 12
Oil-related
Coalbed Methane
Offshore
Alaska
Tight gas
Shale gas
0
Jan-00
0
Jan-02
US gas
Jan-04
Europe gas
Source: World Bank, EIA
Please note the disclaimer on the last page of this document
Jan-06
Jan-08
Jan-10
Japan gas
Jan-12
WTI oil (RHS)
Price of oil - $/bbl
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13 November
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Figure 4 – .. also when controlling for oil.
P(Gas)/P(Oil)
Figure 3 – Higher quantities at lower prices..
Q(Gas)/Q(Oil)
Source: Rabobank International
Source: EIA, Rabobank International (data Jan’00 – Jun’13)
A positive supply shock that leads to lower natural gas prices..
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Page 3 of 12
A technological improvement that makes it viable to drill these shale plays is similar to a discovery
of additional reserves. In economics, this is a positive supply shock, which is reflected in the supply
curve shifting outward (AS1 →AS2) in figure 3. The demand curve is unchanged and – depending on
both slopes – this generally leads to higher quantities (Q2>Q1) at lower prices (P2<P1). The US
economy has previously experienced several other positive supply shocks. The most recent was the
ICT shock, which helped people to work, communicate and organize more efficiently. This had
widespread economic effects as it raised the productivity of labor as well as returns on capital.
This helped the services sector blossom fifteen years ago and now we can draw a parallel
Indeed, the price of natural gas has dropped significantly and even fell below USD2/MMBtu when
suppliers rushed to drill the easiest reachable shale plays. At this price, there was clear oversupply
and many projects actually had negative NPVs. Although prices recovered shortly thereafter, it
illustrates the risks that arise when forecasts paint too rosy a picture. In the medium-term, when
these easily accessible formations are depleted, the EIA expects prices to moderately rise further in
a gradual pace.3 Still, prices would be well lower than under a “no shale gas”-scenario.
Of course, that future price path of natural gas depends on developments in both demand and
supply. These are also a function of the price and production of oil, since, to some extent, gas and
oil are substitutes. To see whether higher relative quantities of natural gas compared to oil are
associated with lower relative gas prices, we took a look at monthly price, production and trade
data, starting in the year 2000. We defined relative price as the Henry Hub Natural Gas price divided
by the WTI spot price for oil; relative supply is then defined as the ratio of total domestic production
minus net exports of natural gas (numerator) and oil (denominator). Descriptive statistics are
shown in Appendix 2. Over the complete sample period, net exports of both natural gas and oil
were negative and thus contributed positively to total domestic supply.
The scatter plot in figure 4 indeed suggests a strong, negative relationship with = 0.85. When
the relative supply (and consumption) of gas over oil increases – which is what happened – the
relative price of gas to oil decreases. Thus, there is a negative relationship that could be
approached with a double-log approximation given by ln(PGAS/POIL) = -3.525*ln(QGAS/QOIL) + 14.621.
This implies that if the relative quantity of gas increases by 1%, its relative price decreases by 3.5%4.
Indeed, we’ve seen that the relative price of gas to oil fell by tens of percents over the last decade.
In a subsequent (more technical) special, we’ll take a more in-depth look into this matter and
quantify the long-term relationship between the relative prices and quantities of oil and gas.
Not only the oil market, but also the market for coal is affected by the increasing importance of
natural gas. Figure 5 (next page) illustrates this. Plotted here is the total usage of coal, natural gas
and renewable sources (e.g. wind, geothermal and biomass) to produce electricity. Whilst total
usage of the latter category grew at a gradual pace over the latest decade, the figure suggests that
in particular coal is directly replaced by gas: they are clear substitutes. In fact, the advent of shale
gas has pushed record amounts of more polluting coal into export markets, helped by rising
spot prices of natural gas elsewhere. For foreign countries, this creates the incentive to
generate electricity from cheaper imported coal rather than “local” gas; Europe now absorbs
around 50% of US exports.
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.. in particular as spatial arbitrage opportunities are limited.
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The shale gas revolution is likely to be a greater benefit to North America than to other parts of
the world, at least in the next few years.
When production of natural gas started to soar, suppliers had to dump a lot of their excess output
in domestic markets against lower prices. Selling it overseas is costly, but, more importantly,
there are no natural gas export facilities in operation. Consequently, natural gas could only be
exported over land by pipelines and 98% of exports went to Canada and Mexico.
To ship natural gas overseas, though, it needs to be A) liquefied, B) transported with carriers, C) regasified and D) transported through local pipelines. This process requires considerable fixed
capital investments that need to be recovered and also has extensive marginal costs. Therefore,
the global market for natural gas is not integrated and can exhibit considerable regional price
variation (again see figure 2). Even when the price difference between two trading regions
exceeds transportation costs, there is still just limited scope for spatial arbitrage.
The Department of Energy (DoE) has now given approval to the construction of three natural gas
export facilities; applications for a number of other facilities are pending. Two large potential
markets for US exports are Europe, which still partially relies on Russian gas that is mostly priced at
expensive oil-indexation contracts, and Japan, which is scarce in natural resources and saw a sharp
increase in demand to fill the (at least temporary) gap left by nuclear power. This process is going
slow, as several interest groups are lobbying fiercely to keep the “cheap gas at home”.
Thus, it’s still a long way before large quantities of liquefied gas (LNG) are being hauled across
continents. Moreover, considering that the future of shale gas in European countries is still very
uncertain – and due to higher population densities also far more controversial – it’s not to be
expected that Europe is scaling up its own shale gas production anytime soon. Therefore, it’s
fairly safe to assume that in the short- and medium-term, the US enjoys significantly lower gas
prices than its economic rivals. And this is benefiting the manufacturing industry.
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Lower input costs boost manufacturing competitiveness..
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Natural gas is a major input factor for a wide variety of industries. Therefore the impact of the
shale gas revolution has broad macro-economic implications beyond the energy sector. These
effects are enhanced by the fact that spatial arbitrage between prices is limited and several US
industries could face cost advantages vis-à-vis the rest of the world.
For instance, petrochemical firms are heavy users of ethane, a natural gas liquid that is
separated from the raw natural gas, as a feedstock to produce ethylene. The ethylene is in turn
processed downstream to create synthetic polymers and other chemicals. With these materials, a
mixture of end-products such as food bottles and containers, footwear and clothing, house wares
and coatings can be produced. In contrast, similar European firms have to rely on naphtha as the
primary input source. Naphtha is an oil-based feedstock which price is, evidently, related to the
relatively elevated oil price. This means that US firms enjoy a substantial input cost advantage.
Of similar importance is the use of natural gas as a fuel for heating and the generation of
electricity. In this respect, the (petro-)chemical industry is a two-fold winner: they make use of it
as a feedstock for their chemistry business as well as a means to fuel its operations. The decline
and subsequent rise of natural gas consumption of the industrial sector is highlighted in figure 6.
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Figure 5 – Shale gas pushes coal out of US markets
160
35
12
30
10
output in million MWh
140
25
120
100
20
80
15
60
10
40
5
20
0
Jan-02
Coal
Source: EIA
Page 4 of 12
0
Jan-04
Jan-06
Natural gas
Jan-08
Renewables
Jan-10
exports in million short tonnes
180
Figure 6 – Gas consumption expected to increase
Annual consumption (tcf)
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History
Projection
8
6
4
2
0
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Jan-12
Quarterly Coal Exports (RHS)
Residential
Commercial
Electric Power
Transportation
Source: EIA
Please note the disclaimer on the last page of this document
Industrial
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Figure 7 – Lower gas prices ease utilities bill
Figure 8 – Rising employment
350
120
200
300
115
180
160
110
250
140
105
200
120
100
100
150
80
95
100
40
50
85
0
Jan-03
Jan-05
PPI Crude nat. gas
Jan-07
Jan-09
PPI Crude energy
Source: Bureau of Labor Statistics
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60
90
Jan-11
Jan-13
PPI Utility nat. gas
20
80
Jan-03 May-04 Sep-05 Jan-07 May-08 Sep-09 Jan-11 May-12
Total NFP
Gas distribution
Chemicals
0
Oil&Gas (RHS)
Source: Bureau of Labor Statistics
To see whether the usage of shale gas has led to lower input prices for American firms, we’ll take a
closer look at PPI data released by the Bureau of Labor Statistics.
Figure 7 shows indeed that lower spot prices for crude natural gas have significantly eased the
upward pressure on the PPI of the US crude energy mix. The divergence between these two lines
arose simultaneously as the US increased its shale drilling activity (which is marked by the shaded
area in figure 7) and reflects the price differential between natural gas on the one hand and a
composite bucket of energy materials (oils, coals and gases) on the other hand. Europe and Japan
don’t experience these benefits.
The PPI for (intermediate) utility natural gas also remained broadly flat and prices that producers
have to pay the utility firms are at levels seen back in 2004. This stands out well with the 35.2%
increase in the overall producer price inflation index in the same timeframe. It also lends to the
main idea that, whilst worldwide energy prices have increased substantially, the US economy
enjoyed an “energy dividend”; a benefit that they are likely to keep for a while.
.. while investments increase..
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Page 5 of 12
This energy dividend is believed to be the key driver behind the inflow of foreign direct investment
in the US’s chemical sector as dozens of multinational firms already announced to expand their
production facilities. Their project mix is slanted towards bulk petrochemicals (to produce
ethylene) and concentrates close to the shale plays. The American Chemistry Council estimates that
incremental capital investments of both domestic and foreign firms sum up to USD 71.7bn in
the decade through 20205.
Only USD 5.7bn of this has already been spent in the years running up to 2013 and the remaining
USD 66bn in spending will occur in the next eight years. The large bulk (USD 38.3bn) of these
investments is expected to take place between 2014 and 2016.
Note that this estimate solely counts investments made in the petrochemical industry due to the
supply-side effects of cheaper inputs. Production though, does not occur in a vacuum and demandside effects, that result from lower prices of finished chemical goods are not included.
These figures are expected to be just a fraction of total incremental investment; in particular
when we consider the direct investments made for shale gas extraction and distribution processes.
A study by IHS Global Insight6 estimated that in 2010 alone, this equaled USD 33.3bn. But, since new
drilling wells should be constructed continuously, this is expected to increase to USD 48.7bn in
2015 and USD 67.6bn in 2020.
Thus, whilst other countries are able to gain from lower oil prices as well due to lower prices paid
for imported oil (oil-exporting countries, on the contrary, face worsening terms of trade), shale gas
seems to be a benefit mostly to North America. This has of course everything to do with the
significant transaction costs in cross-continental trading of natural gas, which limits the possible
convergence in gas prices.
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.. and jobs are created
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Enhanced competitiveness and increased investment also provide a boost to the labour market.
We recognize three different stages in which the exploitation of shale gas affects job creation. First,
labour is needed to explore, drill, transport, administer and market shale gas. Second, there is a
large number of jobs indirectly dependent on cheap natural gas prices, e.g. suppliers that
support the above-mentioned activities and manufacturing firms that benefit from lower prices for
their inputs. The third stage results from multiplier or ripple effects from workers that spend a
certain fraction of their income from the first two stages on housing, food, durable goods etc.
Labour is of course needed to produce these goods as well. This creates a ripple effect that could
arguably be pretty large. One can say that it’s not a pebble, but a rock that’s being thrown in the
pond.
Figure 9: Downstream flow chart of shale gas production
Exploration of
shale plays
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Page 6 of 12
Construction
of drill rigs
Extraction of
shale gas
Distribution
via pipeline
network
End-point
delivery
First, we’ll focus on jobs that are directly created in the process of extracting shale gas. This is a
procedure that involves several steps (figure 9), from geologists exploring the soil structure
beneath the surface to engineers designing and building the distribution network. All these steps
require substantial upfront investment, in terms of capital as well as employment. Since a lot of
gas companies directly set up shop once the first drilling permits were handed, some of this
direct job creation is likely to have taken place by now. Despite that, job growth is expected to
continue in the near future as more drilling rigs at other locations need to be installed.
The Bureau of Labor Statistics’ non-farm payrolls data support this idea. Whilst total private
employment in the US economy increased by 4.3% (which translates in 5.7M jobs) over the last
decade, the number of filled positions in – and supporting – the oil & gas industry7 more than
doubled from 242K to 491K. This boils down to a 4.4% contribution in total US job growth.
Second, there is a large number of industries indirectly dependent on shale gas. These industries
can be divided into two groups: supplier- or supporting industries involved in natural gas
production and other (chemical) industries that benefit from the abundant supply and resulting
lower gas prices. The shale gas industry is relatively capital intensive and has to rely on a wide
range of suppliers to deliver construction materials, fabricated metals and fracking chemicals. Since
the US is relatively closed economy, the industry can already draw on a broad domestic supply
chain.
However, employment in the chemical industry still seems to lag the overall economy,
suggesting that the onshoring of manufacturing jobs hasn’t gathered pace yet. In January 2003,
923K people were registered as working in the chemical industry and this amount has receded to
797K in July this year. However, after more than a decade of declines, the level of employment
seems to have bottomed out in 2011 and since then, there are tentative signs of actual job
growth in (petro-)chemical industries. Besides, a large number of the announced expansions of
existing assets is still in a developmental phase, leaving enough potential for further growth.
Calculating the benefits from induced job creation (or, the dimensions of the ripples) is a rather
theoretical exercise that is subject to many unobservable factors. In particular longer-term
projections are prone to significant forecasting errors. That said, the study by IHS Global Insight6
estimated that in 2010, the shale gas industry alone supported more than 600K jobs, of which
nearly half are of the induced kind. The total employment contribution is predicted to grow to
more than 850K by 2015 and more than 1.6 million jobs by 2035. But, considering the uncertainty
that is inherent to such predictions, we take these conclusions with a grain of salt.
In spite of that, we do know that the higher quality of jobs created through the shale gas revolution
is already reflected in higher-than-average wages. Currently, workers in the oil and natural gas
sector are on average paid around USD34 an hour, which is ten dollars more than the average
hourly earnings on private non-farm payrolls8. This also means that these workers have higherthan-average spending on food, housing, etc. and this supports the idea of relatively large
multiplier effects.
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Trade is getting more balanced as well
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The final point we’d like to bring forward is how developments in the exploitation of natural gas are
expected to affect the US trade balance. On the surface of it, the direct impact is obvious. When the
US produces more energy at home, it is less dependent on foreign resources (for instance,
Canadian natural gas or oil from the Gulf states) and has a better energy trade balance. What’s
more, regained competitiveness in a rejuvenated manufacturing industry is also expected to
give net trade a boost. However, there are some non-negligible caveats.
Trade data show that global natural gas markets are not fully integrated (see table 1a+b). The
liquefaction, transport and re-gasification of natural gas bear significant transaction costs that limit
the scope for arbitrage and for convergence of regional gas prices. Since regional prices still moved
in accordance before 2009, there was no compelling reason to build LNG export facilities in the US
– so, currently there isn’t such a facility in operation. Along with the transaction costs, the risk
premium demanded to finance the construction of these export facilities drive a wedge
between domestic and foreign prices and act as a tariff on in particular cross continental trade.
Still, the large price differential allows at least for some overseas trading for natural gas and this
stirs debate on whether the US should export some of its production. There is a conflict of
interest between natural gas producers, who’d like to send their surpluses abroad, and
manufacturers that consume natural gas as input and fear for spiking domestic prices. This will dent
their competitive advantage vis-à-vis foreign processors. The Department of Energy currently
seeks to strike the right balance and makes its export decisions on a case-by-case basis9.
We expect the DoE to tentatively continue issuing these export permits in upcoming years and to
examine to what extent this affects domestic market conditions. Provided that welfare increases
from rising US natural gas production – through higher quantities and prices – exceed the
welfare losses of consumers and downstream producers that are the consequence of higher
domestic prices, the net result should be an overall increase in US real GDP. The distribution of
this, however, will then be favoring gas producers.
This means that the US are slowly lifting their export restraints and reduce the infant industry
protection that downstream processing industries now enjoy. This, in turn, might ex ante induce
these firms to adjust their investments in capacity expansions, which holds up job growth in the
wider manufacturing sector. Although at face value higher gas exports are good for both job
creation and growth, the more the US diverts its production to exports, the higher the price of
domestic natural gas will be compared to a no-export scenario. This will partially offset the boost
in competitiveness of downstream firms, as they face a convergence in input costs vis-à-vis their
European and Asian counterparts. This, in turn, negatively affects both jobs and trade.
We would argue, though, that these effects should be limited.
Firstly, the DoE has proven to be rather reticent on the issuance of export permits, closely
monitoring and balancing the effects this will have on both supply and price developments of
natural gas in the US domestic market. Secondly, in order to liquefy natural gas before shipping,
some of the ethane – a natural gas liquid – content should be removed. It is this “byproduct” that is
used in the industrial sector and after the process of separating, this leaves a lot ethane that could
be sold in domestic markets, perhaps against only somewhat higher prices.
Table 1: Majority of trade in natural gas is regionally orientated
To / From
North Am.
South Am.
EU
F. Soviets
M-East
Africa
SE Asia
SUM
TOTAL
a) Trade flows in natural gas by pipeline (2012, billion m³)
North Am.LatAm EU
F.Soviets M-East Africa
SE Asia
128,9
0,0
0,0
0,0
0,0
0,0
0,0
0,0
16,9
0,0
0,0
0,0
0,0
0,0
0,0
0,0
197,5
132,9
7,5
39,3
0,0
0,0
0,0
0,0
91,0
0,9
0,0
0,0
0,0
0,0
0,0
9,4
19,2
0,6
0,0
0,0
0,0
0,0
0,0
0,0
6,0
0,0
0,0
0,0
0,0
21,4
0,0
0,0
34,1
128,9
16,9
197,5
254,7
27,6
45,9
34,1
705,6
To / From
USA
Can + Mex
South Am.
EU
M-East
Japan
Pacific
SUM
TOTAL
b) Trade flows in liquefied natural gas (2012, billion m³)
USA
LatAm Eurasia M-East Africa
Oceania SE Asia
0,0
3,2
0,2
1,6
0,1
0,0
0,0
0,0
2,2
0,0
3,1
1,1
0,0
0,3
0,2
10,5
1,7
1,6
1,2
0,0
0,0
0,1
5,2
4,2
31,1
28,5
0,0
0,0
0,0
0,4
0,2
3,0
1,0
0,1
0,0
0,4
1,6
12,3
34,6
11,9
21,6
36,3
0,1
1,9
4,1
56,4
10,2
6,4
29,3
0,8
25,0
22,7
131,4
54,0
28,1
65,9
327,9
Source: BP Statistical Review of World Energy 2013
Page 7 of 12
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

Assuming that the DoE will continue issuing export permits, the estimates of the impact on trade
balance are heavily dependent on future external demand, spot prices and overseas reserves.
Nonetheless, a back-of-the-envelope calculation suggests that if the US raises its exports to 5 billion
ft³ a day (which translates into 1.83 tcf or 52 billion m 3 annually) against a rate of USD10/MMBtu (3y
historical average of Europe spot prices), this will gross USD50 million a day or, roughly, USD18
billion on an annual basis and implies a significant windfall.
In 2012, the US recorded a deficit in trade of goods and services of USD534 billion 1 and just the
gross exports of LNG alone imply an improvement of 3.5% in the trade balance. This excludes
any substitution effects resulting from increased coal exports and decreasing oil dependency. Since
roughly 55%9 of the 2012 US trade deficit was related to petroleum products, if the US is able to
reduce its net petroleum imports by a conservative 10%, this will trim another 5.5% of the trade
deficit. Naturally, shifts in the saving and consumption quota yield much more fundamental
enhancements, but an energy overhaul could be a really sizeable change for the better.
Conclusion





Page 8 of 12
If the shale gas revolution continues in the upcoming years, this should have a positive macroeconomic impact on the US. The extraction and distribution of shale gas will lead to additional
investment, while lower input prices for natural gas will yield higher competitiveness. As a result,
more and better jobs will be generated and we should see more balanced trade.
Translating this into the GDP equation, the exploitation of shale gas positively affects consumption
(through increased employment leading to multiplier effects), investment (both for natural gas
extraction and for the wider industrial sector) and net exports (through fewer energy imports and
increased competitiveness).
Despite the obvious limitations of large scale macroeconomic models to capture a specific supply
shock such as the shale gas revolution, with all its indirect effects, they can give us a rough idea of
the impact of a number of the effects that we have discussed in this special on the overall
economy. Therefore, Rabobank’s Economic Research Department10 has run simulations with
NiGEM, a well-known global economic model developed by the National Institute of Economic and
Social Research, to estimate the impact of the exploitation of shale gas and shale oil in a global
macro-economic setting.
They consider an exogenous investment shock (0.5% of GDP) – spread over three years – that
reflects the investments needed to start the extraction and the refinement of shale gas.
Furthermore, they assume that continuous annual investments, starting at 0.6% of GDP and
reaching 0.9% from 2020 on, are necessary to continue the extraction and keep output growing.
Finally, they assume that natural gas prices fall by almost 50% and that oil and electricity prices
decrease by a small amount.
According to the NiGEM-simulations, this leads to a 0.3%-point increase in GDP in the first year,
despite the relatively small size of the US industrial sector. In the subsequent four years, this
increases to a cumulative 0.9%-point added to GDP (compared to a scenario without a shale gas
supply shock). While the simulations may not capture all the indirect effects caused by the shale
gas revolution, they do suggest that increased investment, lower energy prices and lower oil
imports are sufficient to give an additional impulse to US GDP growth. The impact outside the US
is rather limited, confirming our expectations that the shale gas revolution will mostly benefit
the US and give the ongoing recovery an extra boost.
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Appendix 1
Where are the shale plays?
Figure 10: Shale plays in the lower 48 states (i.e. excluding Alaska and Hawaii)
As the figure above and the table below show, the US’s shale gas reserves are heavily concentrated in a
few areas; not more than six basins contain over 97% of total proven reserves. Most of these basins are in
rural areas with relatively low population densities, yet the Dallas-Fort Worth Metroplex with its 6.5
million inhabitants is built right above the Barnett shale.
The Bakken shale in North Dakota differs from the other shale plays in that it is an oil reservoir and thus is
currently primarily used for the production of tight oil. Nonetheless, in April this year, the US Geological
Survey estimated that the Bakken and Three Forks formation approximately contain a mean of 6.7 tcf of
undiscovered, technically recoverable natural gas reserves.
Table 2: Six basins contain over 97% of total proven reserves (EIA data, 2011)
Basin
Page 9 of 12
Play
State(s)
2011
2011
production reserves
2
32.6
Forth Worth
Barnett
Texas
Appalachian
Marcellus
Pennsylvania, West Virginia, Ohio
New York, Tennessee, Kentucky
1.4
31.9
Texas-Lousiana
Haynesville-Bossier
Texas, Louisiana
2.5
29.5
Arkoma
Fayetteville
Arkansas
0.9
14.8
Anadarko
Woodford
Texas, Oklahoma
0.5
10.8
Western Gulf
Eagle Ford
Texas
0.4
8.4
Other
0.3
3.6
Total
8
131.6
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Appendix 2
Descriptive statistics
Table 3: Descriptive statistics of input variables
Descriptive statistics
Mean
St.Dev
Min
Dependent variable
N
Max
Henry Hub Price
162
5.29
2.30
1.95
13.52
WTI Oil Price
162
61.23
28.42
19.31
133.93
Natural gas supply (million ft³)
162
2014496
125630
1703024
2304773
Oil supply
(in 1000 barrels p/day)
162
16063
1413
13097
18480
Relative price
162
0.1035
0.0536
0.0188
0.3151
Relative supply
162
126.92
18.41
98.09
172.24
Table 4: Increased relative supply associated with lower relative price
Orange: P(Gas) / P(Oil) (lhs)
Blue: Q(Gas) / Q(Oil) (rhs)
0,35
180,00
170,00
0,30
160,00
0,25
150,00
0,20
140,00
0,15
130,00
120,00
0,10
110,00
0,05
100,00
0,00
90,00
jan-2000
okt-2001
jul-2003
apr-2005
jan-2007
okt-2008
jul-2010
apr-2012
Notes and sources
1)
In 2012, the US trade deficit in goods and services equalled USD 534 billion. The deficit in trade in goods alone was even
bigger at USD 741 billion, the lion’s share was caused by a deficit in petroleum goods of USD 291 billion in 2012.
2) The Henry Hub is a distribution hub on the natural gas pipeline system in Louisiana. It lends its name to the pricing point for
natural gas futures contract, which are traded on the New York Mercantile Exchange (NYMEX). Spot prices are denominated
in USD/MMBtu (million British thermal units). One Btu is the amount of energy needed to heat one pound of water by one °F
and describes the energy content of fuels. A ballpark figure is that 1 MMBtu equals 1000 cubic feet of natural gas.
3) EIA, Annual Outlook 2013, (2013) – Figure 86, p. 76. The EIA reckons that “the cost of developing new incremental production
needed to support continued growth in natural gas consumption and exports rises gradually” and that “Henry Hub spot
prices for natural gas increase by an average of 2.4% per year, to USD7.83 per MMBtu (2011 dollars) in 2040”. This is still wellbelow current EU and Japan prices.
4) Although the time span is relatively short, this relationship might work both ways: prices determine quantities just as
quantities determine prices. If so, this is problematic as it makes it impossible to make causal inferences without further
research. In a subsequent special, we’ll take a more in-depth look into this matter.
5) ACC (2013) Shale Gas, Competitiveness, and New US Chemical Industry Investment: An Analysis Based on Announced Projects.
http://chemistrytoenergy.com/sites/chemistrytoenergy.com/files/shale-gas-full-study.pdf, last retrieved 24-10-13.
6) IHS Global Insight (2011) The Economic and Employment Contributions of Shale Gas in the United States
7) We’ve aggregated the Oil & Gas (NAICS 211) and Oil & Gas Support (NAICS 213112) data that are compiled by the BLS.
8) BLS, Employment Statistics for Industry Group NAICS 211. http://www.bls.gov/iag/tgs/iag211.htm, data retrieved 24-09-‘13
9) In their decision to approve the construction of an export facility near Freeport, Texas the DoE concluded that: “We find that
the exports [of natural gas] are likely to yield net economic benefits to the United States [..] granting the requested authorization is
unlikely to affect adversely the availability of natural gas supplies to domestic consumers or result in natural gas price increases or
increased price volatility such as would negate the net economic benefits to the United States”.
http://energy.gov/sites/prod/files/2013/05/f0/ord3282.pdf , last visited 24-10-’13.
10) Rabobank Economic Research Department (2013) Schalierevolutie vanuit een macroeconomische context
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