Editor’s note: This is an excerpt from “America’s newfound power: What the U.S. should do to capitalize on the shale and renewable energy revolutions.” For more of the paper, including references, contact the author or the Deloitte Center for Energy Solutions, www.deloitte.com/energysolutions.
It was hard not to do a double take when the story broke last November: By 2017, the headlines read, the United States would overtake Saudi Arabia as the world’s largest oil producer. And by 2025, the U.S. could be exporting more oil and gas than it imports. Combined, the country’s vast deposits of newly accessible shale oil and shale gas—which had been locked in subterranean rocks until innovative technologies combined with market forces to liberate them—will make America “all but self-sufficient” in meeting its energy needs within a generation, according to the International Energy Agency’s (IEA) 2013 World Energy Outlook.
The scale of this metamorphosis is such that it will likely necessitate the adoption of a new mindset by everyone who thinks about energy. Adult Americans were raised under the finger-wagging notion that energy is scarce. Now, shale fuels, together with the parallel emergence of groundbreaking technologies to produce cleaner energy, are leading from an era of energy shortage to one of abundance. Geopolitics also will change radically with power likely shifting away from global oil giants, such as the Gulf States, Russia, and Venezuela, and accruing to states newly able to rely on domestic shale resources complemented by regional energy supplies.
Amidst the euphoria over America’s newfound energy riches, however, one dark cloud cast a very long shadow. In that same IEA report was a startling forecast that received far less media attention: In a marked departure from previous predictions, the IEA warned that its central scenario for 2035 projects global temperatures rising by more than the 2 degrees Celsius that most climate scientists believe are sustainable. This could trigger extreme weather events, mass migration, rising seas, and major lifestyle shifts. As if by way of omen, the week before the report’s release, Hurricane Sandy had devastated the East Coast. Whether directly caused by climate change or not, Sandy served as a potent reminder of the tragedy that could be wrought by rising sea levels.
The Shale Endowment: A Means, Not An End
The shale oil and gas revolution has refueled muscular rhetoric about American “energy independence.” The idea is compelling, especially after a half century during which U.S. foreign policy was in great measure dictated by dependence on energy imports, while the country’s economic fortunes rose and fell in response to the price of a barrel of oil. In this context, the virtues of abundant domestic resources are many—from providing foreign policy flexibility, to lowering prices for consumers, to boosting domestic manufacturing. In short, there can be little doubt that horizontal drilling and hydraulic fracturing have produced a major national security and economic gain for the U.S.
The political triumphalism speaks to how a half century of intellectual development—during which ideas and policies were shaped by the notion of energy scarcity—has been upended. But the hype also could be dangerously misleading.
First, focusing on independence could set America badly off track—not unlike how other countries have succumbed to the “resource curse” (wherein they become dependent on a finite commodity windfall and fail to develop a balanced economy). Independence is hardly attainable; energy security is a more viable goal. And even energy security may only be attained if the shale endowment is seen as a means, not an end—and only if it is reinvested rather than consumed for instant gratification. The shale boom creates a 20-year opportunity to trailblaze a new technology path—and with it a new sustainable economic development path.
The economic and geopolitical prospects of the United States, in short, will likely now rest on how well the country uses its unexpected windfall to build a cleaner, cheaper, and more reliable energy infrastructure—on both the supply and demand sides—for the coming generations. Shale gas and shale oil can be the bridge to a lower-carbon future. They have provided America with a unique opportunity to diversify its energy portfolio away from carbon-intensive fuels as well as the time and resources needed to push hard on all energy frontiers.
This creates the opportunity to invest wisely and create a new energy and consumption paradigm on both the demand and supply sides—from wind and solar technologies, to those for energy efficiency, a smarter grid, clean coal, clean mining, clean oil and gas, storage, biofuels, deepwater drilling, and more.
At the same time, American companies can leverage their head start in shale related technologies, and other related energy technologies—and then export them to the world.
Doing all this will require a new approach to innovation, one that learns from the underpinnings of the shale revolution—which resulted from a very old technology (fracking) being combined with a new technology (horizontal drilling) enabled by market forces. The federal government has the ability to create equally fertile conditions in order to allow for the next generation of technological innovations to flourish and be brought to market.
America will likely never be energy independent in another important way as well: the threat of climate change ties America’s fate directly to the policies of all other major energy consumers in the world. Put another way, the U.S. cannot be independent from the potential adverse impacts of global warming. Nor can abundant domestic supplies necessarily protect American consumers from price shocks. Oil prices, set globally, are likely to continue to rise.
Move On Four Fronts
To capitalize on the revolution in unconventionals and in clean energy technologies, the U.S. government should consider vigorous action on four fronts:
• Husbanding the shale revolution. Public opposition to hydraulic fracturing remains strong. One major accident could chill the industry. Hydraulic fracturing (fracking) can be done well or it can be done poorly. In order to help secure a social license to operate in the shale oil and gas industry, the U.S. government will need to work hand-in-hand with states to lead a vigorous regulatory effort.
The technology is maturing quickly enough to mitigate or avert future ecological risks—despite public perceptions, to date there have been no serious fracking-related incidents—as long as standards are developed and enforced. There will likely be industry resistance to these efforts—but this is shortsighted. By way of analogy, the Clean Air Act met with fierce opposition. Yet not only did it protect air quality in the United States, it also helped foster an environment control technology industry that produced over $37 billion in exports in 2010.6
• Building a policy bridge to a low-carbon economy. Already, the shale gas revolution has helped spur development of wind and solar power, since natural gas-run plants are a complement to the intermittent supply produced by wind and solar. This combination can be the engine that drives America to a low-carbon future. Nurturing it demands a portfolio of smart policies. One linchpin will likely be a continued push for a broad range of new and emerging technologies, rather than allowing them to languish due to low-cost natural gas.
The federal government will spend $3.8 billion this year on clean energy research and development—which pales next to the $30 billion it spends on medical research. A joint report from the American Enterprise Institute, the Breakthrough Institute, and the Brookings Institution—a trio that represents most of the political spectrum—recently urged an addition $25 billion a year for alternative energy. Innovation focused on efficiency gains and reducing demand will be especially crucial: The U.S. ranks just eighth among the G20 countries when measured by energy productivity.
• Using the current political moment to strike a balanced approach to a carbon price. Establishing a realistic price for carbon is a goal that might be achieved through a carbon tax that is carefully constructed over a timeframe that allows for adaptation to the tax and for technology to evolve. With the intense pressure to reduce the U.S. deficit, a carbon tax might not only do wonders for technological innovation, it also could be an avenue to reduce America’s debt. The prospects for such an approach may well rest on the outcome of the 2014 congressional elections.
• Putting the U.S. back in the game on climate change. Twelve of the 13 hottest years on record have occurred since 2001, according to the World Meteorological Organization. Global temperatures this year are expected to be over one degree higher than the long-term global average of 14 degrees Celsius. Unless the U.S. acts to mitigate the potential impacts of climate change, neither will China—the two responsible for almost 50% of global carbon emissions. Given this—and after the collapse of the 2009 talks in Copenhagen—it will likely take vigorous American leadership and realistic involvement to lead the world to a lower-carbon future.
Dr. Joseph A. Stanislaw is founder of the advisory firm The JAStanislaw Group, LLC, specializing in strategic thinking, sustainability, and environmentally-sound investment in energy and technology. He is an independent senior advisor to Deloitte’s energy and sustainability practices. Dr. Stanislaw was one of three founders of Cambridge Energy Research Associates in 1983 and is co-author of The Commanding Heights: The Battle for the World Economy. Dr. Stanislaw serves on several boards in the energy and clean technology space. He is a member of the Council on Foreign Relations. He can be reached at firstname.lastname@example.org