Since 2005, natural gas production in the United States has been constantly rising. This boom in natural gas production in the United States is the result of the combination of horizontal drilling and hydraulic fracking, which made the exploitation of vast reserves of gas trapped in shale rock possible. What is the impact of the shale gas revolution on the American economy and has it all helped the economy to recover from the economic and financial crisis?
While it is disputed if the U.S. economy has recovered from the ‘Great Recession’ (I personally do not think it has), the shale gas boom has certainly helped it. As the graph below shows, the price for one million cubic feet (Mcf) of natural gas was over U.S. $10 only a few years ago. Since then, however, gas prices have collapsed.
Natural Gas Summary Graph
In order to grasp the benefits of cheap gas, one has to know that natural gas is a very widely used commodity. It is used to produce steel, glass, paper, clothing, aluminium, bricks and to generate electricity. It is also used as a raw material for common products such as paint, fertilizer and plastics, as well as home heating fuel. More than half of all single-family homes in the U.S. use gas for heating. Thus there are lots of companies and households who have benefited from lower gas prices.
Falling natural gas prices have also given the economy a boost by bringing manufacturers and chemical companies back to the U.S.Cheaper natural gas has aided the manufacturing sector, providing it with an edge over overseas rivals. The price of gas in Asia and Europe is three to four times the price in the U.S (see graph below).
Natural Gas Price Graph
Manufacturers have announced more than $90bn worth of investments in the US to take advantage of its cheap natural gas, underlining how the shale revolution drives the country’s industrial renaissance. Since the start of 2010, industrial production is up 12 percent in the U.S.
The shale gas boom has led to the creation of around 600,000 jobs. Low gas prices in the U.S. have led to a 10 percent reduction in electricity costs to consumers and contributed to an estimated 1.1 percent increase in the level of 2012 GDP. The shale gas boom has even led to an oversupply of gas, i.e. the supply outstrips the demand for gas in the United States. This means that gas prices have collapsed and many companies fracking for shale gas have either gone bankrupt or have stopped production. Over time demand will pick up and prices will rise again but for the time being many American companies and households will benefit from cheap gas prices.
So while the American economy has not recovered from the financial crisis, the shale gas boom has given it a very well-timed shot in the arm.