Posted on 12/31/2013 3:06:01 PM PST by ckilmer
Shale gas to the rescue? By Robert Skidelsky
LONDON ― The developed world is slowly emerging from the Great Recession, but a question lingers: How fast and how far will the recovery go? One big source of pessimism has been the idea that we are running out of investment opportunities ― and have been since before the 2008 crash. But is that true?
The last big surge of innovation was the Internet revolution, whose products came on stream in the 1990s. Following the dot-com collapse of the early 2000s, speculation in real estate and financial assets ― enabled by cheap money ― kept Western economies going. The post-2008 slump merely exposed the unsoundness of the preceding boom; the mediocrity of the recovery reflects the mediocrity of previous prospects, coolly considered. The risk now is that a debt-fueled asset spike merely perpetuates the boom-bust cycle.
The economist Larry Summers has reintroduced the term “secular stagnation” to describe what awaits us. By the mid-2000s, Summers argued at a recent International Monetary Fund conference, the average prospective return on new investment in the United States had fallen below any feasible reduction in the Federal Reserve’s benchmark interest rate.
That remains true today. We may be in a permanent liquidity trap, in which nominal interest rates cannot fall below zero, but the expected rate of return to investment remains negative. Unconventional monetary policies like quantitative easing may inflate a new generation of asset bubbles, but the underlying problem ― negative returns to new investment ― will not have been solved by the time the next crash comes.
So the problem is poor investment prospects. Why? In the 1930s, the economist Alvin Hansen argued that opportunities for new investment in already-rich countries were drying up. Investment growth had depended on population growth, technological innovation, and westward expansion.
With the closing of the frontier and static populations, growth would depend on innovation; but future innovation would require smaller inputs of capital and labor than in the past. In other words, the returns to capital were bound to fall as it became more abundant relative to population. In this situation, full employment could be maintained only by running continuous fiscal deficits.
John Maynard Keynes held a different view. In 1945, he wrote to T.S. Eliot: “(T)he full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally, I regard the investment policy as first aid… Less work is the ultimate solution.”
Developed countries’ strong postwar investment performance dispelled fear of secular stagnation. But this occurred after a world war that had created huge pent-up demand for new equipment, transport infrastructure, and household appliances, together with a military-industrial complex that armed the West during the Cold War.
The real rate of return to capital may have started to decline by the early 1970s; productivity growth certainly has slowed since then. Some crucial changes in the political economy of Western capitalism in the 1980s can also be viewed in this light: the rise of neoliberal ideology, the growing inequality of wealth and incomes, the increase in structural unemployment, the growth of financial services, globalization, the invention of post-Cold War threats to sustain military spending, and so on.
The question today is whether a new upsurge of investment will come to our rescue. Optimists point to the shale-energy revolution in the U.S.
The McKinsey Global Institute has identified shale energy as a “game changer” for the world economy, estimating that it could boost America’s GDP by as much as 4 percent ($690 billion) per year and add 1.7 million permanent jobs to the labor market by 2020. From 2007 to 2012, North American shale-gas production grew at an average annual rate of more than 50 percent. As a result, the share of shale gas in America’s overall gas production rose from just 5 percent in 2007 to 36 percent in 2012. With the share of imports in U.S. natural-gas consumption dropping from 16.5 percent in 2007 to 11 percent in 2010, America is on the path to energy self-sufficiency.
Likewise, a September 2013 report by IHS concludes that midstream industries like transportation and downstream industries like manufacturing and chemicals are also receiving a massive stimulus. As a result of the shale-energy boom, “over $216 billion in total will be invested in the midstream and downstream oil and gas industries” from 2012 to 2025. Nearly 380,000 of the 2.1 million jobs that shale-related industries generated in the U.S. in 2012 were created in these areas.
Beyond this, the most dramatic impact of shale oil and gas on the economy has been the fall in energy prices. In the U.S., the price of natural gas has fallen to $4 per MMBtu, from $13 in 2008, boosting household purchasing power. IHS estimates that in 2012, developments in the shale-energy industry increased households’ real disposable income by more than $1,200. Thus the shale revolution represents a huge stimulus for America, in terms of investment, exports, and a reduction in energy costs.
I am not in a position either to judge the quantitative impact of shale energy on the U.S. economy and, via growth there, on the rest of the world, or to comment on its geopolitical consequences or net effect on carbon emissions. But it does seem to me that contemporary apostles of secular stagnation like Summers and Paul Krugman at least ought to be taking the shale-energy revolution into account.
Robert Skidelsky, a member of the British House of Lords, is professor emeritus of political economy at Warwick University. For more stories, visit Project Syndicate (www.project-syndicate.org).
The reason for the higher estimate is that fracked oil/natural gas is already adding 400 billion to the US economy--plus 100 billion to federal coffers. That's with just an additional 3 million barrels a day added over the last several years.
The IEA expects the USA to +-1 million barrels@ day in each of 2014 and 2015. But they think oil production increases will flatten out after that. They are dead, and totally dead wrong.
Oil production will continue to increase by at least 1 million barrels @ day through 2020.
Why? Because the IEA has not even begun to focus on the production potential of the permian basin which literally dwarfs the baaken and eagle ford. The permian basin of west texas has a dozen or more baaken and eagle ford formations stacked one on top of the other. The permian basin already has the infrastructure in place to extract the oil. The Permian basin is producing 1.5 million barrels a day mostly without fracking. This area could easily produce 5 million barrels@ day without much trouble. They have only begun to frack.
Result? if you add another 5-6 million barrels @ day to oil production in the USA in stead of 2 million barrel's @ day which the author is assuming--then oil adds north of 1 trillion dollars a year to the US economy by 2020.
ping
The Saudis and opec had a strangle hold on world energy production. Fracking has opened up the energy production and I expect there will be a gas/oil glut that will make low energy prices and business and the world economy will boom.
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Yeah, I think that will happen. And it will represent a strategic victory in the global war on terror. But the real crushing oil price reductions that kill the gulf states and spark an immense surge in world wide wealth is 10-15 years away. Global demand for oil is so powerful and growing—that I don’t think there will much price reduction for 3-5 years. And then it won’t be that much.
Meanwhile, the immense surge in oil/gas production in the USA means there’s a tidal way of money coming the way of the USA.
Nobody needs to worry anymore about the feds funding social security.
This article nails the macro economic forces at work. In the 2000s as a result of the attack, Bush/ Barney Frank pushed for a higher home ownership percentage to take our focus from fear to opportunity. The economy was also driven by home equity withdrawels. All along, we were sending a trillion per year to other countries for basic energy.
Lucky for us, the oil/gas industry responded to the high prices we were willing to pay by a leap in hydrocarbon recovery technology that a medium sized business can pursue. Re-enter American capitalistic urges amidst the uncertainty of a socialist executive branch.
So far so good.
Nobody needs to worry anymore about the feds funding social security.
If the crooks in government hadn’t taken $13.4T out of social security for PORK we would be setting good. It looks like the plan all along was to sink SS and get their death panels going.
Last I looked we were importing a bit more than 20% of the world’s oil. That’s a lot to leave on the market plus potentially add our own future surplus.
With all the ballyhoo about the fracking oil boom I gullibly expected gasoline prices to moderate a bit. As of today, gasoline prices in south central Pennsyltucky are bumping $3.75 a gallon. When will prices begin to reflect the oil boom? Or am I a proverbial cockeyed optimist, a la Rodgers & Hammerstein?
If the market is allowed to work there will always be investment opportunities. However I am worried about the inflated price of stocks; there is nothing substantial supporting them.
I strongly recommend waiting for the crash before moving in to pick up the under rated gems.
Sidelsky is wrong and so is Keynes.
I strongly recommend waiting for the crash before moving in to pick up the under rated gems.
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imho the stock market will go to 20k before it goes to 10k...because of oil/gas.
With all the ballyhoo about the fracking oil boom I gullibly expected gasoline prices to moderate a bit. As of today, gasoline prices in south central Pennsyltucky are bumping $3.75 a gallon. When will prices begin to reflect the oil boom? Or am I a proverbial cockeyed optimist, a la Rodgers & Hammerstein?
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15 years from now gas prices will be crushed. Five years from now gas prices will be lower than now by maybe as much as a dollar. Three years from now gas prices will be down maybe 30-40 cents.
There is tremendous demand for oil all over the world. unlike natural gas—oil prices are set internationally. US production is just keeping up with demand.
Meanwhile there is a great wall of money coming to the USA as a result of fracking gas/oil. All the bad federal policy will be covered over by the wall of money from oil. The worries about funding for social security will go away.
Last I looked we were importing a bit more than 20% of the world’s oil.
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I think the USA is net importing about 5 million barrels @ day.
I also think that five years from now the USA will be importing 0 million barrels @ day.
Sidelsky is wrong and so is Keynes.
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Well there was a moment when Sidelsky and Keynes were dangerously wrong.
Now its academic.
There’s a pretty massive recapitalization ahead using real money coming the way of the USA —thanks to the oil industry.
The sad thing is the acolytes of Sidelsky and Keynes will never know how their bacon was saved by oil. so they’ll go with their gibberish.
The democrats won’t get it either. But they’ll sure claim credit for the good results.
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