Finally, Mitchell convinced the Department of Energy to cover part of the cost of an early horizontal well in the area, an impressive engineering feat he hoped would help extract the enormous supplies more efficiently.5 The technique involves drilling a standard well straight down into the dense, high-pressure shale rock, but then rotating ninety degrees and drilling outward almost two miles. Fracking a well that drives horizontally through the thin layers of shale increases enormously the amount of gas that can be extracted from a single point on the surface. Indeed, horizontal drilling can often obtain more gas with one well than a driller might obtain with dozens of traditional wells. This finally made it economical to free the huge resources trapped in the underground shale. The breakthrough technology was better for the environment, too, since fewer surface wells were needed.
After nearly two decades of work, George Mitchell’s vision of extracting natural gas from the Barnett Shale was a reality. It didn’t take long for other energy pioneers to figure out that Mitchell was doing something right. Across the country—in Texas, Louisiana, Colorado, Pennsylvania, Ohio, and New York—they began to apply Mitchell’s innovations to obtain energy in places no one had ever dreamed of trying. Most famously, Harold Hamm and his Continental Resources applied Mitchell’s fracking techniques to get oil from the Bakken Shale in North Dakota, beginning the boom that provided Andy Turco and tens of thousands of others with lucrative new jobs.
More importantly, the breakthrough shattered the peak oil myth, and with it, the excuse for a high cost of energy and the rationale for the painful policies left over from the Carter era. Thanks to the combination of technological breakthroughs and new shale discoveries, by the end of the first decade of the twenty-first century, U.S. production of oil and natural gas was rising for the first time in forty years, and the nation was on the verge of a breakout in American energy.
No Limit
In the years since George Mitchell and Harold Hamm discovered an affordable way to free molecules of oil and gas trapped in rock thousands of feet below ground, we have learned that America’s energy potential is practically without limit. Even while many Americans—especially those in Washington and in the media—continue to claim we are running out of oil, estimates of the supplies we could obtain right here in the United States keep going up.
According to the Institute for Energy Research’s North American Energy Inventory, the United States has 1.4 trillion barrels of recoverable oil and 2.74 quadrillion cubic feet of natural gas—an almost incomprehensibly large supply. To put it in perspective, that’s enough to:
• Fuel every passenger car in the United States for 430 years
• Provide the United States with electricity for 575 years at current natural gas consumption levels
• Fuel homes heated by natural gas in the United States for 857 years6
Half a millennium’s worth of American oil and gas should be enough to put even the most alarmist mind at ease, but even these figures are likely too conservative. Our estimates of recoverable oil and gas reserves increase every few months, and the continual breakthroughs in drilling technology give us access to resources that were once technically or economically unreachable.
Estimates of oil and gas reserves consistently increase once a site is explored. Indeed, officials from the Energy Information Agency have admitted that the agency’s estimates usually prove low.7
In 1977, for example, when production first began in Alaska’s Prudhoe Bay, the official reserve estimates were nine billion barrels of oil. Yet by 2012, the area had produced fifteen billion barrels—66 percent more than expected in the 1970s, and production is still climbing. In 1984 the Minerals Management Service estimated the offshore land in the Gulf of Mexico held six billion barrels of oil and sixty trillion cubic feet of natural gas. Since then, we have produced more than twice those amounts, and production is still climbing.
The most dramatic increases have occurred where technological breakthroughs have magnified our capabilities. For instance, no one used to think that the Marcellus Shale in Pennsylvania, New York, Ohio, and West Virginia held much gas worth extracting. The U.S. Geological Survey estimated as recently as 2002 that the formation had about two trillion cubic feet of recoverable natural gas. Just ten years later, however, the USGS revised its estimate to eighty-two trillion cubic feet—an extraordinary 4,100-percent increase.8 Even this estimate is on the low end. Professors at Penn State and the City University of New York, Fredonia, now estimate that Marcellus could hold an astounding five hundred trillion cubic feet of recoverable natural gas.9
Perhaps the best example of how our understanding of America’s energy resources is constantly changing is how far off the initial estimates of the Bakken Shale in North Dakota proved to be. In 1995, the USGS estimated that the formation held just 150 million barrels of technically recoverable oil. As drilling technology improved and pioneers like Harold Hamm explored further, however, the USGS revised its estimate upward to four billion barrels in 2008—a twenty-five-fold increase. Even that figure pales in comparison to the latest estimate from Hamm’s Continental Resources, the largest drilling operation in North Dakota. Continental now forecasts a whopping twenty-four billion barrels of recoverable oil in the Bakken Formation—160 times (16,000 percent of) the initial estimate.10
Remarkably, the latest estimates of the Bakken may be just scratching the surface. As Stephen Moore of the Wall Street Journal reported recently, the amount of recoverable oil in the formation could exceed five hundred billion barrels as drilling technology continues to improve.11
New oil and gas discoveries and technological breakthroughs are occurring at such an impressive rate that by the time you read this book, many of these estimates will likely be out of date. As Nansen Saleri of Quantum Reservoir Impact put it in a recent interview, in the coming decades we will look back at today as the “initial dinosaurish phase of shale and unconventional resource development.”12
Thanks to oil production from shale, we are truly in a new world of American energy—a world that almost no one expected, but one that offers exciting opportunities for all Americans.
A Better Life for All Americans
We have already begun to see big changes from the explosion of oil and gas potential.
Take, for example, North Dakota, sitting atop the Bakken Formation. The story of Andy Turco, whom you met at the beginning of this chapter, is far from unique. Five years into the Obama presidency, when the national unemployment rate was stuck at around 7.5 percent, North Dakota’s jobless rate was just 3.0 percent, thanks largely to the energy boom.13 Tens of thousands of people with only a high school education have moved to North Dakota for jobs in the industry with starting salaries in excess of a hundred thousand dollars a year.14 NBC News recently reported from Williston, North Dakota, that “there is such a large influx of people that thousands are staying in ‘man camps’—shipping containers converted into housing units for the workers new to town. When more teachers were hired to deal with the rising number of students, an apartment building had to be built to house the new teachers.”15
While other states were struggling with fiscal crises, raising taxes, and cutting services, North Dakota was actually cutting taxes because of the massive influx of revenue from its booming energy economy.
Similarly huge discoveries of natural gas in the Marcellus Shale spurred a wave of growth and opportunity in Pennsylvania, Ohio, and West Virginia, a region that had been written off as the “Rust Belt.” The onetime backbone of American manufacturing had been decimated in recent decades as factories moved overseas, but finally, after many years of decline, new jobs and investments are rushing into the area.
Pennsylvania, one study showed, got sixty-seven thousand new jobs related to natural gas development in 2010 alone, including 23,000 jobs in construction, 13,600 in mining, and 1,900 in hotel and food services. The study found that the “total employment impact” of natural gas development that year was 140,000 jobs.16 Penns
ylvania’s Department of Labor estimates that the average salary for jobs in shale-related industries is $73,000 per year—$23,000 more than the average in all industries.17 Meanwhile, one gas well in Susquehanna County has provided more than a million dollars in royalties to the Elk Lake School District,18 and a Dutch petrochemical company recently announced plans to build a two-billion-dollar plant in Beaver County.19
The American energy breakout is not only benefiting the places fortunate enough to produce oil and gas. It is improving the lives of Americans throughout the country. A recent study by IHS Global Insight showed that hydraulic fracturing supported 1.7 million jobs in 2012, including many workers outside the energy industry. This number is projected to increase to 3.5 million by 2035.20
Moreover, it has caused an astonishing drop in the cost of energy nationwide. In 2008, the average price of natural gas was $8.86 per million BTUs. In 2011, it was four dollars. In 2012, it was just $2.75. In April 2012, the spot price for natural gas hit a thirteen-year low at just $1.95, an 80-percent drop from the same month in 2008. By the summer of 2013, the price had rebounded a little to $3.62, but the decline is still staggering.21 It is leading to a lower cost of energy for all Americans and powering a renaissance of manufacturing here in the United States.
The American energy breakout has also made us safer. A record 60 percent of our oil was imported in 2005. Six years later, that figure had dropped to 45 percent thanks largely to new domestic production.22 The Energy Information Agency now predicts that the United States will replace Saudi Arabia as the world’s leading petroleum producer by 2017 and will become a net oil exporter by 2030.23
The geopolitical implications of this change cannot be overstated. For decades the members of the Organization of Petroleum Exporting Countries, many of which are dictatorships, have been able to blackmail Western countries with their power to manipulate oil prices. As oil production in the United States (and Canada) increases, the influence of OPEC falls.
This shift hasn’t been lost on the Saudis. In the summer of 2013, Prince Alwaleed bin Talal warned his country’s oil minister that demand for OPEC oil was “in continuous decline” and that the kingdom’s economic dependence on oil was a “truth that has really become a source of worry for many.”24
“Our country is facing a threat with the continuation of its near complete reliance on oil, especially as 92 percent of the budget for this year depends on oil,” he continued.25
Much of the money the West pays Saudi Arabia for its oil ends up sponsoring some horrible activities. The kingdom is the top funder of Wahhabism, a virulently anti-Western, anti-Christian, and anti-Semitic version of Islam, and Saudi-based “charities” remain one of the top sources of funding for Al Qaeda and the Taliban.26 Thanks to the shale oil and gas breakthrough, fewer and fewer of our dollars are going to support our enemies.
Peak Oil: A Self-Fulfilling Prophecy
The breakthroughs in American energy might already have produced some impressive results, but the broad breakout we could see based on this huge potential is still far from inevitable.
A straight line that runs through the Marcellus Shale illustrates why. On one side of this line, energy companies are paying local residents thousands of dollars per acre for the rights to drill on their properties. Many families have enjoyed huge paydays as the new technology has come online and developers have competed for mineral leases. On the other side of this line, the shale is much the same—full of natural gas just waiting to be released. Above ground, however, the region’s major energy company is packing up and leaving town, abandoning leases it made years ago for as little as three dollars an acre.27
What is this line? It’s the New York–Pennsylvania border. South of the border, Pennsylvania counties are prospering in the fracking revolution, seeing jumps in per capita income of nearly 20 percent since 2007. Their neighbors to the north are shut out of the party by a state government that continues to ban the technology despite ample evidence of its safety.
The artificial restrictions on our energy potential are perhaps most vivid here, but similar prison-guard policies are restricting energy production throughout the country. In fact, a large portion of the resources I have mentioned—the supplies that could fuel every passenger car in the United States for 430 years—are on federal lands owned by the American people. But rather than leasing them for development and putting downward pressure on the price of gasoline, prison guards in the government have kept them under lock and key.
The question of whether America can break out in energy is almost entirely dependent on government policy and not on the amount of oil and gas within our borders.
While oil and natural gas production potential was exploding in the first decade of the twenty-first century, most of our leaders in Washington were oblivious. A full six years after George Mitchell made his big breakthrough, Congress passed legislation to speed the construction of liquefied natural gas terminals for importing—not exporting—the hundred billion dollars per year of natural gas it thought we would need for electricity.
I have to admit that while I was bullish on America’s capacity to produce more oil, it was a while before I appreciated the magnitude of the shale oil and gas revolution. In fact, in my 2008 book, Drill Here, Drill Now, Pay Less, I advocated steps to diversify the ways the United States produced electricity, expecting a shortage of natural gas.
This ignorance of the energy revolution occurring beneath our feet was not limited to Washington. Most energy “experts” were unaware as well. In 2008 the International Energy Agency predicted that the planet’s oil production would begin to decline permanently by 2030. The United Kingdom Energy Research Centre predicted the decline would begin even sooner, by 2020.28 Then in 2010 the IEA announced that we had reached peak oil in 2006 and that crude oil production would flatline until 2030 and then decline. The Institute for Policy Studies summed up this conventional wisdom in an article that declared, “It is the beginning of the end of the Petroleum Age.”29
Even those who rejected the notion that we were running out of oil nevertheless thought we were reaching a maximum capacity of oil production. In late 2007 the Wall Street Journal reported, “A growing number of oil industry chieftains are endorsing an idea long deemed fringe: The world is approaching a practical limit to the number of barrels of crude oil that can be pumped every day.”30
The survival of the peak oil myth long after the fracking and horizontal drilling breakthroughs is a perfect example of the power of the prison guards of the past to embalm bad ideas as conventional wisdom. Worse, it proves that conventional wisdom can become a self-fulfilling prophecy.
Even before the fracking and horizontal drilling breakthroughs, there was mounting evidence that the peak oil model was wrong. While Hubbert had correctly predicted that U.S. production would level off in 1970, his model badly miscalculated global oil production. Hubbert estimated global peak oil to occur in the year 2000 at just under forty million barrels of crude oil per day.31 By 2000, however, the world was already producing 68.5 million barrels per day, and production has continued to rise since then. In 2011, the world produced seventy-four million barrels of oil per day.
So why were the peak oil predictions so far off when it came to global oil production but accurate about U.S. production? Why did U.S. oil production peak in 1970 and then decrease so substantially after 1985? The evidence suggests that federal energy policy based in part on the peak oil model, not dwindling supply, led to decreased domestic production of oil and gas.
While crude oil production in the United States fell steadily from 1985 until 2008 (about when the Bakken in North Dakota came on line), global production rose—growing to over 73.5 million barrels from 54 million barrels. Furthermore, estimates of the oil we could recover in the United States rose steadily—increasing to 166 billion barrels from 143 billion in 1996—even as actual production declined.32 That discrepancy suggests that the forty-year stagnation and then decline in U.S. oil production h
ad more to do with U.S. energy policy than with the amount of recoverable oil in the United States. The government had put so many restrictions on energy development that production collapsed as existing wells were depleted and too few new ones took their place.
In my 2012 book, $2.50 a Gallon: Why Obama Is Wrong and Cheap Gas Is Possible Now, I lay out in extensive detail the many barriers to U.S. oil and gas development. Here are a few highlights (or lowlights, as the case may be):
• For more than thirty years, the government has banned production in an energy-rich area of the Alaskan National Wildlife Refuge (ANWR) that the EIA predicts could boost our production of oil and gas by 20 percent. The debate about whether to permit drilling for these enormous resources centers on an area that amounts to less than 8 percent of the ANWR and just 0.3 percent of the total land area of Alaska (by far the most sparsely populated state). The ban endangers the Trans-Alaska Pipeline, a vital artery for American energy, which will need to be shut down completely if the amount of oil flowing through it decreases any further.
• Offshore, the government has imposed de facto moratoriums on energy development. The U.S. Outer Continental Shelf comprises hundreds of millions of acres underneath the ocean. The American people own this land, but the bureaucrats and elected officials in Washington have refused to allow the vast majority of it to be explored. The Minerals Management Service (now the Bureau of Ocean Energy Management) estimated in 2006 that the OCS contains lots of energy resources—86 billion barrels of oil and 420 trillion cubic feet of natural gas—but the true numbers are likely to be dramatically larger.33 Today, however, the government blocks all but 2.4 percent of the area from oil and gas production, while the unleased acreage is ten times the size of Texas.34
Breakout: Pioneers of the Future, Prison Guards of the Past, and the Epic Battle That Will Decide America's Fate Page 9