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The Challenges of America’s Energy Revolution

14 minute read
Bryan Walsh

If the American oil and gas industry has a hometown, it’s Midland. The West Texas city has been a base for oil companies since drilling in the region first began in the 1920s, and the town has lived and died with the industry in the decades since. Drive the long, flat roads in and out of Midland and you’ll see nodding pump jacks, some decades old, pulling oil and gas from the ground. It all comes from the Permian Basin, a hydrocarbon-rich vein of sedimentary rock that has so far produced more than 29 billion barrels of oil. At night, the sparse scrubland is lit up by floodlights from rigs a hundred feet tall and the rig floors buzz with activity, because when times are booming and prices are high, the drilling never stops. Which is exactly why the highways, pipe yards, restaurants and hotels of Midland are so crowded and why you might have better luck renting an apartment in Manhattan than in what Texans call the Tall City.

Through the first six months of 2013, the Permian has been producing nearly 900,000 barrels of oil a day, the highest level in a generation. Unemployment in Midland is at 3.4%. Fast-food restaurants offer bonuses worth $3,000 if employees stay on the job for a few months. That hasn’t stopped many of them from seeking the far better wages in the oil and gas fields. The once foundering Petroleum Club in downtown Midland now has a waiting list for membership. And there are proposals to build a 59-story office tower in the heart of the city. “What’s happening in the Permian Basin and Texas has been dramatic,” says David Porter, head of the Texas railroad commission, which oversees the oil and gas industry. “And what’s going on in Texas can be reproduced elsewhere.”

It already is. Forty years after the 1973 Middle East oil embargo ushered in an era of energy scarcity, the U.S. is in the midst of a power revolution, driven largely by new technology. Hydraulic fracturing and horizontal drilling have allowed energy companies to unlock vast new supplies of oil and natural gas. Wind and solar have gone from green dreams to economic realities, while utilities are remaking the rickety power grid into something smarter and far less wasteful. Within a decade North America as a whole could produce as much oil as it consumes, reducing the influence of the Middle East. “The transformation we’ve seen in just the last few years from an outlook of scarcity to one of abundance is real,” says Jason Bordoff, director of Columbia University’s Center on Global Energy Policy. “It has huge economic, geopolitical and environmental implications.”

The benefits are abundant. By displacing dirtier coal, cheap natural gas has helped reduce U.S. greenhouse-gas emissions even as it has boosted U.S. manufacturers that rely on gas as a feedstock. Falling oil imports means that billions of dollars that once went abroad are now staying in the U.S., providing capital for other investments. But energy abundance comes with its own set of challenges. There’s already been an environmental backlash against the fevered exploitation of unconventional oil and gas. Nor is there any guarantee that the recent oil boom–which is dependent on high prices–will continue into the future.

Success could be even scarier: if new technologies can ensure that fossil fuels remain relatively cheap for decades ahead, it will be that much more difficult to wean the world off carbon in time to avert dangerous climate change. Global carbon emissions hit an all-time high last year, and the International Energy Agency reported in June that the world was on a path toward temperature increases that could be as high as 9.5°F by the end of the century. “People can no longer rely on high oil prices and fossil-fuel scarcity to motivate a climate agenda,” says Amy Myers Jaffe, executive director of energy and sustainability at the University of California at Davis. “It completely changes the picture.” The American energy revolution is real–but it may be too much of a good thing.

From Bust to Boom

Here are some telling numbers: in 2004 the Energy Department’s bean counters projected that the U.S. would be importing 2.5 trillion cu. ft. of liquefied natural gas (LNG) by 2011, with the expectation that the figure could grow to nearly 5 trillion by 2025. LNG terminals were constructed in East Coast cities to process expected imports of gas from the Middle East to make up for dwindling domestic methane production. The oil picture was worse: in 2005 the U.S. was importing 12.5 million barrels a day, a figure the Energy Department projected would grow to more than 15 million by 2025. “It seemed like we were stuck in an age of limitations,” says Michael Lynch, director of global petroleum at the consultancy Strategic Energy & Economic Research.

Scarcity seemed to be written into the rocks–and then the writing changed. Geologists had known for decades that shale found thousands of feet below the earth’s surface contained vast quantities of oil and gas. For decades, though, that didn’t matter. Oil and gas that are too difficult and too expensive to get out of the ground are of no use to anyone. Two innovations–both invented in the U.S.–changed all that. By drilling down into the shale and then horizontally through the rock layer while pumping millions of gallons of water laced with chemicals at high pressure to fracture the rock, energy companies could economically unlock the oil and gas found in the shale. The oil and gas industry had been fracking wells for decades, but the process was taken to a new level by the maverick energy entrepreneur George Mitchell, who hit pay dirt in 1998 when he substituted water for more expensive drilling fluids while fracking Texas’ Barnett Shale, west of Fort Worth. Washington helped as well: Mitchell and other fracking entrepreneurs benefited from federal research and a 1980 tax credit that supported drilling for unconventional gas.

The fracking boom spread first from Texas to Louisiana and Oklahoma and then to Pennsylvania, which essentially went from zero to 60 on gas drilling in just a few years. From 2006 to 2012, U.S. production of natural gas increased by 30%, to more than 25 trillion cu. ft. a year. The price of natural gas fell by some 50%, which allowed utilities–preparing to meet tougher air-pollution rules from the Environmental Protection Agency (EPA)–to replace older coal plants with cleaner gas-fired facilities. Coal went from providing 50% of U.S. electricity generation in 2007 to 37% in 2012. Those terminals that were being built just a few years ago to process imported LNG? They’re now being retrofitted to export excess American LNG, which will sell overseas for much less than what it takes countries like China to produce it.

Meanwhile, with oil prices soaring through the 2000s, the same breed of wildcatters who led the way by fracking for gas were ready to try fracking for crude in the vast Bakken shale formation in western North Dakota. In 1995 the U.S. Geological Survey (USGS) took a look at the Bakken shale field that runs from Saskatchewan to South Dakota and estimated that it held just 151 million barrels of undiscovered “technically recoverable” oil. Technically recoverable means crude that is drillable using current technologies, and with the technologies of 1995, when a barrel cost only about $27, the oil in the Bakken field might as well have been on the moon.

But fracking and directional drilling changed the equation, and in 2008 the USGS raised the technically recoverable estimates in the Bakken up to 3 billion to 4.5 billion barrels. Oil production in the state rose from about 36,000 barrels a day at the start of 2008 to 810,000 a day in July of this year. Now North Dakota has the lowest unemployment rate in the country; its state budget surplus is projected to hit nearly $1.6 billion over the next two years. On nighttime satellite images of the U.S., rural western North Dakota is lit up nearly as brightly as Chicago–because of hundreds of oil rigs flaring off excess natural gas.

Partly as a result, domestic oil production hit 7.75 million barrels a day in September, the highest level since 1989, while oil imports are at 7.5 million barrels a day and falling. Earlier this year, the U.S. became a net exporter of oil distillates, and the International Energy Agency projects that the U.S. could be almost energy self-sufficient in net terms by 2035. The country that was spending $341 billion on crude-oil imports in 2008 managed to export $117 billion worth of processed oil products in 2012. That’s a lot of money that is staying in the U.S. “This is a transformational phenomenon,” says Leonardo Maugeri, an associate at the Harvard Kennedy School’s Belfer Center for Science and International Affairs.

Of course, those projections assume that the new energy boom is sustainable. Some analysts have their doubts. Unconventional oil wells deplete quickly, which means that companies have to drill over and over just to keep production steady. Right now shale oil extraction is profitable only while the price of oil remains high; the boom could end if prices fall. And then there are the environmental limitations. Fracking uses less water than farming or industry, but it still requires millions of gallons per well, which is already becoming an obstacle in arid states like Colorado. And while states like Texas and North Dakota have embraced fracking wholeheartedly, local fears about water contamination have stopped drilling in gas-rich New York and are likely to slow it elsewhere. The next big shale resource is in California, where influential environmentalists want nothing short of a ban on fracking. “There is no safe way to frack,” says Becky Bond, president of CREDO, a green super PAC. “It endangers communities with water contamination, toxic air emissions and climate change.”

Energy companies are working to mitigate local pollution from unconventional oil and gas exploitation, though not as fast as environmentalists and many local residents demand. But the shale revolution won’t stop while the U.S. still relies on oil and natural gas for much of its energy. Green activists have persuaded President Obama to delay the proposed Keystone XL oil-sands pipeline, but they haven’t been able to persuade him to curtail fracking. In his most recent State of the Union speech, Obama boasted about rising domestic oil production and said, “After years of talking about it, we are finally poised to control our own energy future.”

Renewed Clout

But the biggest source of new electricity in the U.S. last year wasn’t a fossil fuel. It was the humble wind. More than 13 gigawatts of new wind potential were added to the grid in 2012, accounting for 43% of all new generation capacity. Total wind-power capacity exceeded 60 gigawatts by the end of 2012–enough to power 15 million homes when the breeze is blowing. Nine states, including Iowa, South Dakota and Kansas, rely on wind for more than 20% of their total electricity consumption. “We went mainstream,” says Tom Kiernan, president of the American Wind Energy Association.

Solar is not far behind. The price of a crystalline solar panel has dropped from $76.77 per watt in 1977 to less than $1 per watt today. Over the same period, solar generation has gone from essentially zero to 4.3 million megawatt hours. This fall will see the full launch of the Ivanpah Solar Electric Generating System in the Mojave Desert on the California-Nevada border. At 377 megawatts, Ivanpah–which has curved mirrors to reflect the desert sunshine and generate steam–will be the largest solar power plant in the world, using the sun’s heat to create electricity. Meanwhile, production of corn-based ethanol–though down a bit thanks to a major drought in the Midwestern Corn Belt–reached 13.3 billion gal. in 2012, displacing nearly half a billion barrels of oil. And the first commercial cellulosic biofuel plant–which relies on sources like wood chips and switchgrass that can’t be used for food–opened in Mississippi last fall. The industry as a whole expects to produce about 200 million gal. this year.

A green future hasn’t arrived yet–solar still accounts for less than 1% of the total energy consumed in the U.S., and dumb meters still outnumber smart ones. But there’s another boom, little noticed, that’s already under way in the nation: efficiency. When the Middle East oil embargo struck in 1973, the average vehicle got just 11.9 miles per gallon. Today the U.S. uses less oil as a whole than it did 40 years ago, when the economy was a third of its current size. Some of that shift is due to deindustrialization and the end of oil-fired power plants, but the amount of crude-based distillates used in vehicles, homes and businesses has declined as well, down 14% last year from a peak in 2005. The growth in electricity demand has fallen behind growth in population, as everything–from TVs to refrigerators–has become more efficient.

Under Obama, Washington has dialed up efficiency in a big way. The corporate average fuel efficiency standard, which governs auto gas mileage, will rise to 35.5 m.p.g. in 2016 and 54.5 m.p.g. by 2025, enough to save 12 billion barrels of oil over the lifetime of the regulation. A decade after a cascading power failure led to a major blackout in the Northeast, the electrical grid is stronger and more resilient. Smart software can identify where energy waste is occurring, allowing utilities to reduce power use during peak periods like hot summer days, which in turn means fewer power plants need to be built and operated. All told, the U.S. gets twice as much economic value out of a single unit of energy today as it did in 1980, and we’ll keep getting more in the future. “You can look at natural gas, nuclear, new oil drilling,” says Ralph Cavanagh, a co-director of the energy program at the Natural Resources Defense Council, “and all of it together is less important than energy efficiency.”

Gambling With the Earth

In 1980 biologist and environmental icon Paul Ehrlich and conservative economist Julian Simon made a simple wager. Ehrlich bet that the price of five common metals would rise over the next decade, and Simon bet that the price would fall, with the loser paying the price change on a $1,000 bundle of the five metals. The bet was really a contest of visions. Ehrlich–a neo-Malthusian best known for his 1968 book The Population Bomb–believed that rising prices for materials would show that the world was headed toward scarcity and catastrophe. Simon believed that human creativity would always find ways to make basic resources cheaper and more widely available.

In 1990, Simon won the bet (and $576.07 from Ehrlich). Ever since, his vision has prevailed. Scarcity, by and large, gave birth to the new technologies that have ushered the U.S. into a time of relative energy abundance. Geology didn’t decide our destiny. Human ingenuity did. “Today we’ve got booming production of oil and natural gas, rapidly falling oil consumption and rising renewable energy,” says Michael Levi, a senior fellow at the Council on Foreign Relations. “It’s not just one boom. It’s several at the same time.”

But as Yale historian Paul Sabin notes in The Bet, his new book on the Simon-Ehrlich wager, “the lessons of the bet don’t extend to climate change.” The same innovations that have resurrected oil and gas production in the U.S. have extended the age of fossil fuels, making it that much more difficult to break free of them. A number of independent studies have suggested that the world has to stop emitting carbon dioxide by midcentury to avoid dangerous climate change. We’re not likely to get there if we keep inventing ways to extract and then burn the hydrocarbons still in the ground. “It appears that the good Lord has set up a real test for us,” says Bill McKibben, the writer-activist who helps lead the group 350.org “We have to decide if we want a habitable planet or not–and if we do, we can’t dig this stuff up.”

The threat of climate change is very real, and we now know that we’re ingenious enough to extract more than enough hydrocarbons to burn ourselves alive. McKibben is right. If we want a habitable world, we’ll need to choose it. Geology won’t do it for us.

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