Listening to the Shale Revolution

Commentary, Environment, Frontier Centre

With turmoil in the Middle East comes the inevitable spike in oil prices, topping $90 this week. Look for energy security to make one of its recurrent runs to the top of the national agenda. This time, though, we should listen to the shale gas revolution that has put an unexpected energy bonanza at our feet in places like New York, Pennsylvania and Ohio.

Any energy forecast a few years ago that failed to anticipate the shale boom and associated technological breakthroughs now mostly looks like a wasted effort. And that’s the point.

Shale gas came painlessly into the world, though on paper the number of rich and powerful interests it upset would be nearly endless. Every owner of an oil well or coal mine or conventional gas well. Investors in the U.S. and Europe and Canada who spent billions building terminals to import liquefied natural gas (LNG). Investors in a long-planned pipeline from Alaska to the upper Midwest. Investors in the massive Russian Shtokman field, tipped for LNG exports to the U.S.

Just a few years ago, Russian leaders talked up the inevitability of a natural gas cartel more powerful than OPEC. Never mind. The U.S. last year topped Russia in natural gas production for the first time since 2001.

In 2003, then-Fed Chairman Alan Greenspan urged a rapid expansion of LNG imports to make up for a domestic shortfall. "We are not apt to return to earlier periods of relative abundance and low prices anytime soon," he said. Never mind. The U.S. is now building an LNG terminal all right, so it can export its growing gas bounty—nearly two Saudi Arabias’ worth—to Asia.

Last month’s stock-swap deal between BP and Russia’s Rosneft might, a few years ago, have caused strategic jitters in Washington. Never mind. The Putin regime remains as odious as ever, but the balance of power already is perceptibly shifting away from the world’s petrocrats to consumers, thanks to shale gas.

The organized interests whose world is being knocked for a loop by shale gas surely aren’t happy about it. The quality on display here is freedom to innovate, also known as freedom to disrupt the rich and powerful who would prefer not to be disrupted. In the U.S., landowners enjoy mineral rights and are free to sell or lease those rights to drilling companies, whatever the neighbors might say. It wasn’t the Exxons and BPs but smaller companies that figured out how to make shale gas pay.

Under U.S. labor law, these companies were free to take a chance on new workers without making a lifetime commitment. Also important, back in the 1970s and ’80s, a series of deregulatory moves eliminated price and usage controls on natural gas, without which the business would never have been interesting to innovators and entrepreneurs. One company, Mitchell Energy, worked out how "slickwater" fracturing combined with horizontal drilling could free gas from dense shale rock previously uneconomical to develop. The firm’s founder, George Mitchell, last year received the Gas Technology Institute’s lifetime achievement award.

The U.S. shale boom has ignited a search elsewhere, from China to Central Europe. Poland alone is estimated to hold shale gas reserves equal to half of Europe’s existing conventional reserves—a fact already altering the strategic balance between Europe and its soon-to-be-former energy overlord, Russia.

Europeans have also discovered, however, they lack some of America’s institutional advantages, from private ownership of resources to flexible labor markets. In the U.S., says the Oil & Gas Journal, "Companies generally can develop shale plays located in the U.S. Midcontinent and East, where most land is owned privately, with minimal political wrangling. The fact that shale developments can cover entire counties means that royalties are spread among thousands of individual landowners, often aligning them with operators."

Before we wallow in self-congratulation, let’s note the impossibility of equivalent transformations in other areas of American life. Our air traffic control system is controlled by government and has failed miserably to keep up with traffic growth. Our public schools are laboratories of stasis. Detroit is bound by a monopolistic labor regime from the 1930s. To touch on an especially sore point, federal and state regulation of health insurance has all but extinguished innovation in health insurance, even as government policy has made us more and more reliant on these third-party payers.

The shale gas revolution has been a surprise, in a sector where surprises are still permitted. Nobody "planned" it. There’s a lesson here for every kind of reformer: Often the only plan needed is a plan to remove obstacles to innovation.