The New and Improved Economics of North American Energy

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The New and Improved Economics of North American Energy

The story of the North American Energy Revolution is not just about a boom in one industry; it’s about laying the foundation for an American economic renaissance. 

As fuel and raw material, hydrocarbons represent a major cost component in manufacturing, transportation, construction, and defense.  These are not simply important industries, but, directly or indirectly, they represent a substantial share of the expenditures for every person in a modern economy. 

Consider the facts.  The U.S. economy grew 64.3 percent between 2002 and 2015.  But according to the Department of Energy, U.S. energy consumption grew less than one-half of 1 percent over that period.  That’s a function of dramatically greater economy-wide energy efficiency (more GDP bang for each unit of raw energy).  

At the same time, net energy imports nearly vanished as growing coal and natural gas exports combined with a steep decline in petroleum imports.  That trend should make the United States a net energy exporter well before the end of this decade.

And that progress is only likely to accelerate.  Development of shale-based oil and natural gas has taken place on private lands with private funds, despite a hostile federal government.1  Now, with the arrival of an explicitly pro-business regulatory regime, it will only get better.

How did we get here?

Let’s first explore how the average breakeven price for U.S. shale oil dropped from over $70 per barrel in 2014 to the low $40s just two-and-a-half years later.  We’ll also consider the reasons this trend is likely to keep going for the foreseeable future. 

As so often happens, extreme innovation occurs under extreme conditions.  For shale, OPEC created those conditions when it decided to relentlessly increase output in the face of a growing surplus.

As in any industry fighting for its survival, the wide range of operators and suppliers serving the shale industry were forced to work together to keep the cash flowing, even as the squeeze intensified...

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