Fueling Up: A Conversation at CGEP with Trevor Houser
Reporting on oil and gas in recent years suggests that an American energy “renaissance” will lead to gains for American producers, manufacturers, and other consumers. In Fueling Up, Trevor Houser examines the economic and environmental implications of America’s oil and gas boom and delves into the accuracy of these claims.
Houser, who is a partner at the Rhodium Group, a research and consulting firm that focuses on economics and energy issues, visited Columbia SIPA’s Center on Global Energy Policy on February 26 to present some of his findings. He noted that the American oil and gas boom has undoubtedly helped the U.S. avoid a gloomy future of ultra-high oil prices, but asked if the picture remains quite as rosy otherwise.
One of the major opportunities created by the energy boom has been a larger domestic price spread for chemical feedstocks. Petroleum-based naphtha, which is tied to higher oil prices, has become far less competitive with natural gas-based ethane, which is tied to the much lower domestic price of natural gas. This has led to lower production prices for chemical manufacturers. Houser noted that overall, however, these benefits have not accrued to manufacturers of more advanced final products like aircrafts and automobiles.
In his lecture, Houser explained that the oil and gas boom is not an economically transforming phenomenon akin to the adaptation of electricity or proliferation of information technology. Instead, he argued, American policymakers should view increased resource exploration and production as a shorter-term gain that allows governments to invest in truly transformative measures like education and infrastructure.
One can look at the Netherlands for a cautionary example of what can happen when a country is too reliant on natural-resource extraction. In the 1950s and 1960s, large natural gas finds catalyzed a boom in Dutch natural gas exports, which caused inflation, later hurting the competitiveness of other parts of the Dutch economy such as manufacturing. Known as “Dutch Disease,” Houser presents other examples of “infected” natural-resource dominated economies like Australia and Canada, where currency values increased, leading to a less competitive manufacturing sector. The United States has a larger and more diverse economy than the Netherlands, Australia or Canada, but the lessons are not incongruous.
Several American states such as Texas and Alaska have set up their own investment funds (akin to sovereign wealth funds), and since 2011, North Dakota has had its own Legacy Fund that has served as an illustrative proxy in the debate about how oil and gas revenues should be used. These revenues from resource extraction have begun to help several states fill coffers, but given the inherent volatility of prices, how long can this last? Recently, Michelle Michot Foss, an energy economist at the University of Texas, predicted that the “shale gale” was about to peak due to economic constraints of a lower gas price, with many operators moving to areas with abundant petroleum resources that will fetch a higher price in the market. What will this mean for states that have relied too much on resource extraction for extra revenue?
Houser’s book and presentation provide an insightful and data-packed look at one of the United States’ biggest opportunities and challenges. How can policymakers effectively navigate the economic temptations posed by abundant resource wealth? What steps can they take to ensure that the short-term economic impacts of the oil and gas boom can create long-term benefits for American citizens?
— Seth Levey MPA ’15