Ernst + Young's attempt to perpetuate the present by predicting it provides a model for the future is in complete contrast to a report from IHS that covers the impact of shale on the US. Which future looks good? I posted on the E+Y report yesterday and it is absolutely nothing new: It is hard to tell the difference between their report and the year old study from Oxford Centre for Energy Studies or recent Bernstein research that recycled it. As Shale Daily notes:
If Europe develops its shale gas resources, it will likely take its sweet time about it, according to a new report from Ernst and Young Global Ltd
Compare and contrast the two reports. This isn't really about which future will be right. Given the E+Y track record on Lehman Brothers, it's not so desirable to predict a future based on past performance. But as a report on the economic impact of US shale is based on present reality as well as past performance, IHS Cera provides a template for not only what might be, but what actually is. E+Y simply thinks shale is too much trouble. It would be nice trouble to have.
One of the first findings of IHS Cera shows how entirely and suddenly disruptive shale gas has been:
By 2010, shale gas had grown to 27% of total US natural gas production, and by September 2011, it had reached 34%.
This is an incredible figure in only nine months. In short it is a revolutionary figure. On the other hand, E+Y and the European clients they are desperately clutching at straws to protect, seek a long term evolution. They need to wind down bets on a low carbon future that is increasingly looking as unlikely as Peak Oil and Gas. But as the US figures show, shale is going to transform the US economy in fundamental ways far beyond energy. E+Y and Co will not be able to wish shale away.
In short, the revolution of shale is now making the jump across the gap of public perception. What might have been an interesting side show to the energy economy is now becoming the main event. Shale is no longer the cause but the main course. The smart money is not going to bet against the big story: The US economy is going to not merely recover, but actually take off thanks to shale.
Growth in the shale gas industry will make significant contributions to the broader economy in terms of Gross Domestic Product (GDP) and tax revenues:
The shale gas contribution to GDP was more than $76 billion in 2010. This will increase to $118 billion by 2015 and will triple to $231 billion in 2035.
In 2010 shale gas production contributed $18.6 billion in federal, state and local government tax and federal royalty revenues. By 2035, these receipts will more than triple to just over $57 billion. On a cu- mulative basis, the shale industry will generate more than $933 billion in federal, state, and local tax and royalty revenues over the next 25 years.
The extent of job and GDP contributions reflect the capital intensity of the shale gas industry, the ability to source inputs from within the United States, the nature of the supply chain, and the quality of the jobs created.
I'm quoting simply from the executive summary here for now because we need to understand that here in Europe we have a choice: Evolution as E+Y or revolution. It's not only which scenario is more likely, but which narrative do we want to tell ourselves: one based on hope or one founded on stagnation
The growth of shale gas is leading to lower natural gas and electric power prices and increased productivity:
- Without shale gas production, reliance on high levels of liquefied natural gas (LNG) imports would influ- ence US natural gas prices, causing them to increase by at least 100%.
The lower natural gas prices achieved with shale gas production will result in an average reduction of 10% in electricity costs nationwide over the forecast period.
By 2017, lower prices will result in an initial impact of 2.9% higher industrial production. By 2035, in- dustrial production will be 4.7% higher.
Chemicals production in particular stands to benefit from an extended period of low natural gas prices, as it uses natural gas as a fuel source and feedstock. Chemicals producers have already signaled their intentions to increase US capacity.
- Savings from lower gas prices will add an annual average of $926 per year in disposable household in- come between 2012 and 2015. In 2035, this would increase to just over $2,000 per household
The full-cycle cost of shale gas produced from wells drilled in 2011 is 40-50% less than the cost of gas from conventional wells drilled in 2011.
The report points out the jobs impact of shale, but also the macro-economic impact:
Natural gas prices are and will continue to be more than half of what they otherwise would have been with- out the development of shale gas resources. These lower prices are currently providing a short-term boost to disposable income, profits (except for gas producers), GDP and employment—a positive force during this period of economic stagnation and uncertainty. Over the longer term, there will be a compositional shift in the economy toward increased manufacturing due to an improvement in this country's international competitiveness. Lower energy and feedstock costs will lead to more manufacturing sector investment and employment, particularly in the chemicals industry.
Which future do want in Europe? One thing is for sure. The shale genie is not going back in the bottle. To expect that the 2012-14 EPA study of shale is going to discover some lurking problems that will bring this economic development to a griding halt is completely off the table. Environmental concerns are key, but industry is seeking certain regulation, not less. To pretend that an economic policy based on a new sustainable economy is going to work is deliberate sabotage of the economy at a time that it already teeters on the edge.
The choice we have in Europe could be certain stagnation. Or hope? Which one is the big vote getter? To pretend that Europe can afford to wait for the EPA report as the US steams ahead puts Europe at a competitive disadvantage. Shale is not going to go away, no matter how strongly conventional wisdom doomsters like E+Y tell UK and EU policy makers that it's some silly little American thing not for the likes of us. E+Y and similar self-hating Europeans who only wish to protect what they have instead of actually providing growth will get swept away. Why postpone the inevitable?