Effects of Shale Gas on US Energy Outlook

Ian Schultz
December 14, 2012

Submitted as coursework for PH240, Stanford University, Fall 2012

New Technology Leads to US Gas Boom

Fig. 1: Cartoon diagram of shale gas deposit, showing horizontal well. (Source: Wikimedia Commons.)

Cheap and plentiful natural gas in the United States has led to an unanticipated energy revolution not seen since plentiful coal deposits gave rise to the industrial revolution some 200 years ago. New technologies have enabled the low-cost extraction of so called "tight" and "shale" gas, unlocking vast deposits of natural gas which may dwarf conventional supplies. [1] Many of these reservoirs lie over conventional oil and gas sites; geologists and industry experts have known about them for decades but previously they were too expensive to extract with conventional technologies. In the first key piece of technology, a gas a well must be drilled horizontally about 2000 meters below ground, as shown in Fig. 1. This enables the well to access a large area of the shale layer containing the gas below ground. The other important step is called hydraulic fracturing, where millions of gallons of water, sand, and chemicals are pumped down the well to fracture the rock and promote permeability of the gas through the rock and down the well once the water is pumped out. [2] This wealth of new gas has contributed to the recent pronouncement by the EIA that the US will become a net exporter of natural gas by about 2022. [3]

Effects of Plentiful Gas

One of the primary problems with the shale revolution has been finding a place to sell all of this newfound gas. Without a carbon tax policy, gas remains too expensive to entice current coal-burning power plants to switch. Since natural gas produces about half the greenhouse gas CO2 per unit energy, it would take a carbon tax of about $25/ton to be advantageous to convert from coal to gas electricity. [2] Similarly, there is no cost incentive for auto manufacturers to retool for production of natural gas fueled vehicles. Besides that, there is no infrastructure for refueling them. [2] These barriers mean that even though gas may be plentiful, it may remain under-utilized for the time being.

Since 2000, shale gas has gone from 1% of the US energy production portfolio to about 20% in 2010. [3] This increased supply has brought the US from a gas shortage and prices of $14 per thousand cubic feet in 2005 to an oversupply and prices as low as a quarter of those in Asia or Europe. [4] Price reduction is beneficial for businesses that use natural gas as a primary feedstock such as the petrochemical and power generation industries. [5] Even some manufacturing jobs outsourced long ago are may return to the US at least partially due to cheap gas. [4] At first blush price reductions seem beneficial to everyone, even oil companies extracting the gas now have plentiful supplies to sell. However, cheap gas also leads to severe under-utilization of liquid natural gas (LNG) capacity and increased market uncertainties that have prevented further investment in LNG storage and export infrastructure. [6] So long as gas remains plentiful and cheap, the lack of these infrastructure investments may not be felt. But if shale gas supplies do not live up to current expectations there may be severe price fluctuations which could be felt throughout the economy.

Meanwhile, Europe, Asia, and South America have struggled to replicate the success found in the US, even where there is high demand and sizable shale oil reserves. Key to the US success is the fact that landowners retain their own mineral rights, which encourages development and exploitation of natural resources and is not common throughout the rest of the world. Further barriers have been placed because of environmental concerns, including an outright ban on hydraulic fracturing in France. [7] With prices much higher in the rest of the world, many businesses have migrated to the US despite large upfront costs. [4,8]

Looking Forward

Current estimates of shale and tight gas reserves are changing so rapidly that it is difficult to tell exactly how much gas will ultimately be recoverable. [2] Moreover, well depletion rates in the US have increased dramatically in recent years. [9] This further muddles the already complex calculus of projecting supply, price, and profit. As the economy picks up speed, demand for gas will likely rise. If the shale gas revolution does not continue to track with increasing demand there could be shortages in the gas markets which will of course lead to higher prices for consumers while investment decisions realign with economic reality. Environmentalists also fear the opposite problem: cheap natural gas will continue to flood the markets for decades to come, displacing investment in carbon-neutral renewable energy. [6] With the industry still in its infancy it is too early to tell how it will play out; for now the only thing certain is uncertainty.

© Ian Schultz. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.


[1] D. Byrne, "Fracking and the Road to Energy Independence," Chicago Tribune, 23 Aug 11.

[2] D. Rotman, "Natural Gas Changes the Energy Map," Technology Review, 15 Oct 09.

[3] "Annual Energy Outlook 2012," U.S. Energy Information Administration, DOE/EIA-0383(2012), June 2012, pp. 91-3.

[4] S. Mufson, "The New Boom: Shale Gas Fueling an American Industrial Revolution," Washington Post, 14 Nov 12.

[5] A. DiPaola, "Fluor CEO Sees Shale Gas Reviving US Industries," Bloomberg Businessweek, 29 Nov 12.

[6] A. M. Jaffe, "How Shale Gas is Going to Rock the World," Wall Street Journal, 10 May 10.

[7] R. Gold and M. Kruk, "Global Gas Push Stalls," Wall Street Journal, 2 Dec 12.

[8] N. Lundeen, "OMV CEO: Europe Must Accept Shale Gas," Wall Street Journal, 18 Nov 12.

[9] W. Youngquist and R. C. Duncan, "North American Natural Gas: Data Show Supply Problems," Natural Resources Research 12, 229 (2003).