Midwest poised to become ‘Saudi America’ — economist

Source: Gayathri Vaidyanathan, E&E reporter • Posted: Thursday, March 29, 2012

Excess supply of oil and natural gas in the American Midwest will give the United States a manufacturing advantage and spur economic growth, while helping the nation achieve energy independence by 2023, a prominent energy economist predicted yesterday.

The American Midwest, bounded by the Appalachian mountains on the east and Utah and Nevada on the west, will become the new “Saudi America,” said Philip Verleger, an independent economist and former U.S. government adviser, talking at an event in Washington, D.C.

“The United States is now going to be the low-cost industrialized country for energy,” he said. “We are going to have a cost advantage of maybe 80 percent in terms of energy, relative to other countries, and this is going to persist for some time.”

And given the Obama administration’s biofuels mandate, demand for gasoline will fall at a higher rate in the United States especially once the ethanol blend is cheaper at the gas pump, which will spur the sale of cars that run on a blend, he said. This will feed back to further reduce oil dependence, he said.

“In this middle part of the United States, there is a surplus of ethanol and lots more crude coming from North Dakota, lots of crude from the Eagle Ford shale. So we are going to have a surplus in crude building up,” he said.

The excess will create a boom in manufacturing, industry and possibly exports, and lead to economic growth on a scale comparable to Asia, said Verleger.

He talked about investments in ethane crackers, such as the one Royal Dutch Shell PLC is building in Pennsylvania (E&ENews PM, March 15), as well as a boom in the steel manufacturing industry. He also pointed to cost benefits for trucking to move products, which would reduce logistical costs of business. Lower energy costs could benefit agriculture by making fertilizer less expensive, he said.

The United States’ advantage will only become more prominent as natural gas prices in the rest of the world remain linked to the price of oil, he said.

Spot natural gas prices in the United States have been at historic lows, trading at $2.27 per million British thermal units. In contrast, the price for natural gas in Japan is $15.90 and in western Europe is $11.35, according to the Wall Street Journal.

“Going forward, every increase in the world prices of oil increases the competitive advantage enjoyed by the U.S. vis-à-vis everybody else. We have literally turned everything on its head.”

U.S. advantage

The reason for the low prices in the United States is that natural gas cannot be exported to markets with higher gas prices and sold at a profit, a concept called arbitrage.

The United States does not have the capacity to export natural gas, and the first liquefied natural gas export terminal, proposed by Cheniere Energy Inc., may not come online for another four years (EnergyWire, March 27). Other proposed facilities face more regulatory hurdles, so it could take at least 10 years before gas exports become a reality, he said.

And even when export does happen, the added transportation costs of moving LNG would ensure the gas is cheaper in the United States than in a market like Japan, he said.

The second reason is that the natural gas industry in the United States is driven by smaller, low-cost independents rather than the oil majors, he said. The formation of a natural gas commodities market in the United States led to investments by Chesapeake Energy Corp., Devon Energy and others that pioneered much of the technologies of shale gas such as hydraulic fracturing

These independents operate lower overheads than the energy majors, and countries like China and Poland do not have this knowledge base, he said. And China National Petroleum Corp. and others are choosing to partner with oil majors like Shell, which are not very efficient when it comes to shale.

“China will succeed and so on, but its my perception that [smaller U.S.] companies have managed to keep much better control over their costs in expanding their production than the larger Sinopec and the major oil [companies] will have,” he said.

Meanwhile, nations like France have chosen not to exploit their shale resources for environmental reasons, which is keeping prices high in Europe, he said. Russia is not willing to exploit its shale reserves because it would prefer a high price for Gazprom’s gas exports to Europe. All this would maintain the United States’ competitive advantage in the near future, he said.

Supply side

Although producers such as Chesapeake have said they will reduce rig counts on dry gas plays given the low price of natural gas, there is still enough gas being produced in oil-rich plays such as the Eagle Ford to maintain supplies, said Verleger. New processing plants are coming up in places like Eagle Ford to deal with the boom (EnergyWire, March 27)

And companies have sold forward in futures markets at least two years’ worth of natural gas to buyers such as DuPont and some utilities, meaning they have to fulfill those contracts.

“This is a really efficient financial market, and it is moving us ahead, and it will sustain this [supply] base for some time to come,” Verleger said.