Resuscitating the U.S. economy was Reagan’s first priority. The new president saw a healthy economy as critical in two ways. The first was self-evident: a stronger economy would ease the hardships facing Americans at home. The second reason was external. Without a strong economy, the United States could not tackle looming challenges overseas. As Reagan recalled in his memoir, An American Life, “In 1981, no problem the country faced was more serious than the economic crisis—not even the need to modernize our armed forces—because without a recovery, we couldn’t afford to do the things necessary to make the country strong again or make a serious effort to reduce the dangers of nuclear war. Nor could America regain confidence in itself and stand tall once again. Nothing was possible unless we made the economy sound again.”
Reagan’s words reflected the experience of great world powers over time: economic vitality is the absolute cornerstone of hard power. In the modern era, a nation cannot maintain its status as a great military power without a robust economic base. Great Britain, for example, rode to global prominence in the eighteenth and nineteenth centuries on the back of the Industrial Revolution. But by the mid-twentieth century, Great Britain’s financial and economic weakness led directly to a declining role on the global stage—a connection that became painfully apparent in the 1956 Suez Crisis. The Soviet Union’s economic woes in the 1980s were at the root of its demise and ultimate dissolution. Bernard Brodie, a military theorist developing the framework for nuclear deterrence in 1959, summed it up when he wrote “strategy wears a dollar sign.”
A strong economy also underpins the willingness of the American people to expend treasure to address global problems. Times of economic weakness are frequently accompanied by calls to rein in American international involvement. The link between Americans’ economic pain in the 1930s and the growing isolationism manifest in the Neutrality Acts of 1935, 1936, and 1937 is perhaps the most extreme, but not the only, example of this connection.
In recent years, a similar dynamic has emerged. Battling the worst recession since the Great Depression, American unemployment doubled from the end of 2007 until late 2009. On average, household consumer spending—a traditional source of U.S. economic growth—dropped by nearly 8 percent from 2007 to 2010. The situation was so dire that in October 2008, billionaire financier Warren Buffett described the country as facing “an economic Pearl Harbor.” The climate in Washington in the early days of the recession was one of near panic. Hank Paulson, secretary of the treasury at the time of the Lehman Brothers bankruptcy, describes in his memoir how the anxieties of the time brought him to the verge of physical breakdown. The entire focus was on staving off a full economic collapse, well before attention could turn to resuscitating growth.
In the midst of this collapse, Americans elected a president who many thought would steer the country away from international military involvements to focus on domestic problems. In 2011, with the economic recovery still moving slowly, President Obama’s call “to focus on nation building here at home” again underscored the urge to turn away from international involvement during times of economic distress. In a 2013 public opinion poll, close to half of Americans responding felt that the United States did too much to solve global problems; half of those expressing that opinion cited economic woes as the primary reason for their view.
An American Renaissance
Amidst the economic gloom and doom, one sector seemed to be thriving: the oil and gas industry. In fact, the infusions of new technologies were leading to what many called the “American energy renaissance.” The oil and gas sector was boosting growth, employment, tax revenues, and domestic investment—all at a time when most economic indicators were still pointing downward. According to one study by the consultancy IHS, unconventional oil and gas production added almost 1 percent to GDP each year from 2008 to 2013, making it responsible for approximately 40 percent of all GDP growth during that period. A 2015 Harvard Business School/Boston Consulting Group report used a more inclusive methodology and calculated that oil and gas produced by fracking contributed $430 billion—or just about 2.5 percent of GDP—to the U.S. economy in 2014 alone. This amount translates into roughly $1,400 for each American in a single calendar year and is equal to more than half the entire stimulus package passed in 2009 to fuel investment in infrastructure, education, renewable energy, and health over the course of the following decade.
The burgeoning energy sector also meant significant increases in jobs at a time when economists were discussing a “jobless recovery” from recession. Estimates of the impact on job creation vary, depending on the benchmark used. Moody’s Analytics, a consultancy focusing on global financial markets, calculated that more than a quarter of a million jobs were directly created by oil- and gas-related industries between 2006 and early 2015, with most stemming from the shale gas and tight oil sectors. Each of these directly created jobs was estimated to have spurred another 3.4 related jobs, making a total of over one million new jobs attributable to the boom. These new jobs were roughly equivalent to half the number of American manufacturing jobs lost from December 2007 to June 2009, the official length of the recession, according to the National Bureau of Economic Research. In contrast, the 2015 Harvard Business School/Boston Consulting Group report looked at jobs supported (rather than directly created) by the unconventional boom, and found this number to be 2.7 million in 2014.
This growth in GDP and in jobs includes gains from growing U.S. competitiveness spurred by the energy boom. In April 2017, ExxonMobil and Saudi Basic Industries Corp announced plans to invest $10 billion to create a massive plastics and petrochemical plant in Corpus Christi, Texas. The two companies describe the project as “a unique opportunity created by the abundance of low cost U.S. natural gas” and note that it will create thousands of temporary construction jobs and six hundred permanent ones. This announcement follows on the heels of other such investments. Big River Steel in Osceola, Arkansas, is another big project made possible by the energy boom. The new $1 billion steel mill broke ground in September 2014, close to the prolific Fayetteville shale formation. In early 2016, the mill began hiring 425 people, with salaries averaging $75,000 a year—more than twice the per capita income of Arkansas.
In other instances, low cost natural gas has helped motivate the return of factories that had been transferred overseas. For instance, in 2008, the U.S. company Dow Chemical shuttered American plants and moved production to the Middle East in order to be closer to cheap energy inputs. Several years later, Dow spent $4 billion to build new factories in Texas and to reopen old ones it had sealed shut in Louisiana. Such stories are indicative of a larger trend noted by President Obama when, in his January 2014 State of the Union address, he referenced nearly $100 billion of investments in “new factories that use natural gas.” While some of this investment was domestic, much of it flowed in from abroad.
Of course, low energy prices do not provide a leg-up over international competitors in every manufacturing sector. The advantages are limited to industries where energy inputs are a substantial percentage of overall costs. But these sectors, which include chemicals, metals, and paper, constituted not quite a third of all U.S. manufacturing and 3.5 percent of the U.S. economy in 2016—which is greater than the size of the U.S. automotive industry.
Other economic benefits also accrued on account of the unconventional boom. Increased oil and gas production raised government revenues in 2014 alone by $111 billion, with roughly half going to the federal government and the other half to state and local coffers. For context, this increase in government revenues is slightly more than a fifth of the whole federal defense budget for the same year, or somewhat more than a tenth of the defense budget if one just considers the boost in federal revenues from the boom.
While North Dakota, Texas, Ohio, and other states with shale gas and tight oil reserves boomed visibly during the worst years of the recession, consumers nationwide enjoyed the benefits of low energy prices. The Brookings Institution found t
hat, collectively, residential, commercial, industrial, and electric power customers saved a whopping $74 billion in 2013 thanks to the shale gas boom. Homeowners around the country saw residential gas prices drop by a fifth from 2006 to 2014. The average customer of Public Service Electric & Gas Company, New Jersey’s largest utility company, saved even more. In part by purchasing its supply from the nearby Marcellus shale formation, the company was able to report in 2015 that it had cut residential gas bills virtually in half since 2009. One firm estimated that in 2014 the average American household pocketed between $425 and $725 a year thanks to lower energy costs attributable to the boom in shale gas production.
Such numbers are eye-popping, but they still underestimate the contribution of the boom to the U.S. economy. The benefits—to employment, revenues, and investment—need to be appreciated in the context of an otherwise fragile economic recovery. Imagine what the economy coming out of the recession might have looked like in the absence of the boom. Energy prices would have been significantly higher. As a result, the recession would have been deeper, and recovery from it likely longer and even more painful. In 2013, political unrest in the Middle East knocked unusual amounts of oil out of production in the wake of the Arab revolutions. Had American innovators and entrepreneurs not previously figured out how to extract tight oil at a reasonable cost, oil prices would have shot up. By one estimate, oil prices might have risen as high as $150 in 2013—rather than the $109 they actually were. Similarly, another study suggested that, had the surge in shale gas not materialized, U.S. natural gas prices would have risen to $7.07 per mmbtu in 2013, rather than resting at half that price.
Higher energy prices like these would have hit not just American but global growth hard. The International Monetary Fund (IMF) estimates that a 10 percent increase in oil prices can trim 0.2 percent to 0.3 percent off global growth. When the world was growing at 3.4 percent, or when growth in the Euro area was negative as was the case in 2013, such haircuts can be particularly damaging. In this hypothetical world without tight oil production, the U.S. trade deficit would have been bloated by rising costs of ever more expensive oil imports. One calculation suggests that the tight oil boom alone slashed the U.S. oil import bill from $360 billion to $215 billion in 2014. Estimates of the savings incurred from virtually phasing out natural gas imports are less precise, but energy guru Daniel Yergin places them in the realm of $100 billion a year.
The low prices of the oil and gas downturn beginning in late 2014 did throw a damp towel over this economic exuberance. Fortunately, the slowdown didn’t start until 2015, when the overall American economy had regained much of its economic composure. As lower prices for oil took away the incentive to produce, towns across North Dakota, Texas, and other states began to shrink as quickly as they had sprouted up several years earlier. But the boom had already helped pull the U.S. economy through the worst of the recession.
While the slowdown in the U.S. oil industry was pronounced, it did not decimate the economic gains of earlier years. In fact, some economists looking years and even decades beyond the slowdown are quite sanguine about the unconventional energy boom, its contributions to the American economy and, therefore, America’s hard power. Even in the context of somewhat lower oil prices, they still anticipate significant future economic gains from the unconventional boom. The Harvard Business School/Boston Consulting Group report published in June 2015, as oil prices hit six-year lows, projected that overall economic gains of the unconventional boom—apart from the benefit of lower prices but including potential oil and gas exports—could reach $590 billion annually by 2030. U.S. government revenues from the boom should continue to rise, possibly reaching more than $150 billion a year by 2030.
More Than Wine for Cloth
The energy boom provides the opportunity for even greater economic benefits should the United States and Mexico take advantage of it to grow more closely together, rather than succumb to pressure to build physical and other barriers. Already the two economies are much more closely integrated than most Americans might appreciate. Looking only at the volume of bilateral trade, in 2015, the United States and Mexico traded more than $1 million of goods and services every minute. In 2016, Mexico was the first or second largest export market for 28 of the 50 states; for the same number of states, it was the first, second, or third largest source of imports. But, even more important than the size of bilateral trade is the unique nature of the manufacturing relationship between the two countries. Rather than simply trading in final products, the United States and Mexico build goods together, utilizing complex supply chains that crisscross the border. Take this example from the Mexico Institute at the Woodrow Wilson Center. Mexican oil might be shipped to the United States where it would be refined and transformed into plastic in Louisiana. It could then be sent to the American Midwest, where that plastic could be used to create parts for the dashboard of a car. Those components could return to a factory in Mexico and be incorporated into the assembly of a car, which might then be sold to an American consumer north of the border. Such an example clarifies how 40 percent of the value of U.S. imports from Mexico actually originate in the United States—meaning that greater Mexican manufacturing exports also boost U.S. exports, jobs, and the American economy. Because of this almost unique trading relationship, an increase in productivity on one side of the border actually benefits the other side as well.
Given these complex realities, it is far too simplistic to just focus on the bilateral trade deficit that the United States has with Mexico as a litmus test of the health of the relationship. There is a risk that U.S. policymakers will do just that—either by withdrawing from NAFTA or seeking “remedies” that could jeopardize the nearly 5 million American jobs reliant on U.S.-Mexico trade. But should American policymakers assess the U.S.-Mexico trade relationship on broader grounds, they will see that there are even more possibilities for mutual benefit.
In particular, the energy sector offers more opportunities to integrate these two economies further and, hence, to enhance the competitiveness of both countries. This is in part because when NAFTA was negotiated in the early 1990s, Mexico insisted that energy be left out of the accord given the high political sensitivities among its own public. In addition, the recent energy boom creates possibilities for new synergies. Together, the United States and Mexico could foster a “manufacturing renaissance”—a much broader, more sustained association that would have even greater economic impact. To this marriage, the United States could contribute cheap and abundant energy, particularly natural gas. Mexico could bring to the table some of the lowest labor costs in the world. By some assessments, Mexican manufacturing labor costs are not only on par with those of China, but are lower than most other countries in the world apart from India, Indonesia, and the Philippines.
Progress has already been made in this direction. More than twenty natural gas pipelines already crisscross the border, moving molecules south from the United States. Since NAFTA was signed in 1993, U.S. natural gas exports to Mexico have risen dramatically from almost zero. The volume of exports nearly doubled between 2009 and 2013, and then again from 2014 to 2016. Unless politicians take steps that cause investors to change plans, companies intend to spend more than $14 billion to expand Mexico’s pipeline gas connections; this will help Mexico to nearly double its capacity to import U.S. natural gas over the next three years.
Further expanding access to the cheapest natural gas in the world, just across the border, will be a huge boon to the Mexican manufacturing sector as well as be good for the United States. In 2014, Mexican industries paid 80 percent more for electricity than U.S. ones did. As a result, high-energy-intensive industries in Mexico have done poorly when compared to low-energy-intensive ones. Companies of all varieties suffer shortages and spikes in electricity prices, hurting productivity and dragging down GDP. Princeton scholar Jorge Alvarez and IMF economist Fabián Valencia measured gains that would accrue to Mexico if, as they deemed plausible, Mexican electr
icity prices eventually converged with U.S. levels, on account of the Mexican energy reforms; increased imports of cheap U.S. natural gas would also contribute to such a price convergence dynamic. These scholars envision that this cheaper electricity would drive increases in the Mexican manufacturing sector by as much as 14 percent and expansion in GDP by as much as 2.2 percent. Again, given the synergies between the U.S. and Mexican economies, this boost for Mexico would not only mean more U.S. exports of natural gas, but it would also create wider gains for the American economy.
Oil as a Strategic Interest
On February 15, 2003, a giant puppet depicting President George W. Bush holding buckets of oil bobbed above crowds of freezing protesters marching through Manhattan. More than 100,000 people pressed against barriers outside the United Nations, all there to protest the looming Iraq War. This gathering, boisterous as it was, was relatively small compared to others occurring simultaneously around the world. In cities including London, Damascus, and Sydney, an estimated six to ten million protesters participated in hundreds of antiwar rallies. The Rome protest reportedly involved approximately three million objectors, winning it a place in the 2004 Guinness Book of World Records as the largest antiwar rally in history. Speaking to London’s largest demonstration ever, then-mayor Ken Livingstone said, “This war is solely about oil. George Bush has never given a damn about human rights.” From Switzerland to Taiwan, people took to the streets to chant “No Blood for Oil.” A group of scientists stationed in Antarctica even protested at the edge of the ice on the Ross Sea. Academics writing about the date years later called it “the largest protest event in human history.”
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