Can the Natural Gas Sector Save the US Economy?

It may not pique the public’s interest quite like finance or information technology, but it just could just save the U.S. economy.

A hydraulic fracturing site
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A hydraulic fracturing site

Indeed, the natural gas industry supports some 2.8 million jobs — either directly through companies engaged in exploration and drilling or indirectly through manufacturers that use the fuel as a raw material, according to the American Gas Association.

The real potential for economic impact, however, lies in the vast reservoirs of shale gas that are newly accessible through hydraulic fracturing.

Better known as “fracking,” the process involves extracting natural gas from shale rock layers deep within the Earth using a highly pressurized mixture of water and chemicals.

“Energy is always a key player in the economy and because producers have been able to make these advances in technology and efficiency improvements, shale gas could be a very significant driver for the economy going forward,” says Rocco Canonica, director of energy analysis at Bentek Energy, an energy market research firm in Evergreen, Colo.

Over the last four years, fracking, along with traditional drilling, has unlocked a staggering 3,400 trillion cubic feet of natural gas in North America, enough to supply U.S. consumers at current demand levels for more than 100 years, according to business and economic research firm IHS in Englewood, Colo.

In its 2012 study, the group found that shale gas production alone will create some 1.5 million jobs by 2015, and 2.4 million by 2035.

The IHS study further concluded that the shale gas boom will continue to drive economic growth, receiving $3.2 trillion in cumulative investment between 2010 and 2035, and contributing $332 billion to U.S. gross domestic product (GDP) by 2035

Earlier data from IHS concluded that shale gas contributed nearly $19 billion in tax and royalty revenue at the state, local and federal level in 2010, and that over the next 25 years that number could exceed $933 billion to fiscally strapped states, as well as the federal government.

Its contribution to gross domestic product is projected to reach $118.2 billion in 2015 and $231.1 billion in 2035 — up from $80 billion in 2010, according to IHS.

Lower Prices Spur Growth

To get a better sense of the potential economic impact, consider the relative ubiquity of natural gas.

It is used to produce steel, glass, paper, clothing, brick and electricity. It is also used as a raw material for common products such as paint, fertilizer and plastics, as well as home heating fuel.

It is used to heat more than half of the nation's single-family homes, according to industry trade groups.

Like most commodities, natural gas has been prone to dramatic price swings for decades, creating cost uncertainty for industries that rely on such fuel as an energy source or feedstock.

As a result of current excess supply, however, the price of natural gas in North America has fallen dramatically to about $2.20 per thousand cubic feet (mcf), a quarter of its record high of $8.86 in 2008.

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Domestically, analysts expect natural gas prices to average $3.50 per mcf for at least the next five years.

By comparison, Europe and Asia, which use naphtha, a more expensive oil-based feedstock, are still paying up to $17 per mcf.

According to the IHS report, low and stable gas prices in the U.S. are contributing to a 10 percent reduction in electricity costs to consumers and a 1.1 percent increase in the level of 2012 GDP.

Perhaps more importantly, it is encouraging manufacturers to expand operations in the U.S., building new production facilities, or reopen plants that were shuttered during the recession.

The American Chemistry Council estimates that petrochemical companies and other manufacturers will spend upwards of $25 billion over the next five years on the more than 30 major domestic projects currently under development.

Among them: Royal Dutch Shell, ExxonMobil, Dow Chemical, and Chevron Phillips Chemical, a joint venture of Chevron and Phillips 66 , which is building a $5 billion ethane facility in Baytown, Texas, that should be operational in 2017.

“This is a game changer because it’s leading to an industrial renaissance,” says IHS VP John Larson. “Our manufacturing sector is recovering because they are now able to compete on energy prices where they haven’t been able to compete in the global market on labor prices or taxes.”

Lower costs, of course, lead to lower prices for consumers — and higher demand for products made in the U.S. That spurs manufacturers to hire more workers.

A 2011 PricewaterhouseCoopers report estimates that U.S. chemical, metal and industrial manufacturers could employ approximately 1 million more workers by 2025 due to benefits from affordable energy and demand for products used to extract natural gas.

Exports & Bans

“There’s a silent oil and gas boom going on in this country,” says Kevin Swift, chief economist for the American Chemistry Council. “Eight years ago, everyone was writing off the U.S. petrochemical industry, but our competitiveness has improved so much in terms of the global cost curve that the U.S. and Canada are now second only to the Middle East.”

Opportunity Abroad

Apart from job creation and capital investment from industry, the glut of natural gas on the market is also creating export opportunities for drilling companies, says Canonica.

That would contribute further to GDP. Just how much, remains unclear.

“There are 10 proposed export projects planned in the U.S. right now, so assuming politicians allow them to do it and we expect them to, it’s almost certain that natural gas companies will begin exporting to Asia and Europe,” he says, noting exports could begin as early as 2016.

That’s assuming prices don’t remain below $3 per mcf for long.

“The price of natural gas has to be high enough for these companies to continue drilling,” says Canonica. “In many locations, it’s not economical to drill when the price is below $3.50 per mcf.”

There’s also a contingent of politicians and activists who are lobbying to ban fracking out of concern it could contaminate groundwater supplies.

New York has placed a moratorium on fracking pending further study, while more recently in May 2012 Vermont became the first state in the nation to ban the process outright.

If more states follow suit, that could limit supply.

As drilling technology improves, however, and the industry becomes more efficient, natural gas will likely play an increasingly pivotal role in the story of economic recovery.

“This is the most significant development for this industry in 75 years,” says Swift, noting the last breakthrough was in the 1930s when the post-war boom led to innovations like thermoplastic polyurethane, which is used in everything from footwear, to mobile phones to medical devices. “It’s a positive shock to the economy.”