The season for predicting 2012 shouldn't really be the period between Christmas and New Year when no one is in the office or lucid enough to digest forecasts, it should be the first week of business. This week, I'll point out a number of smaller trends in shale that I think we should watch out for, but first we need to think of what is both a mega- and meta- trend.
I have been saying for over two years that shale won't change everything - it's far more important than that. We can now see how important. Shale is moving, far more rapidly than even bulls such as I predicted, from an energy story to an economic one.
2012 will be the year when the acceleration in US economic growth becomes the global growth story that came out of left field -just as shale itself appeared to most to come out of nowhere. Shale will be the story too big to ignore. The elephant in the North American room is becoming increasingly obvious, but here in Europe too many conventional economic experts have made the key mistake of listening to energy experts who constructed a peak oil scenario of scarce and expensive energy at at time when a glut of cheap (and clean!) energy is swamping North America. Those experts dismiss the impact of shale. They tell us that shale won't work for any number of self-serving reasons constructed to serve their narrow interest: Europe is too crowded, shale is too dirty, the geology isn't right and it destroys renewables are only some of those rationales.
As 2012 progresses we will see that the final quarter GDP growth in the US not as outlier, but omen.Cheap energy alone would, and will, give a boost to the economy via lowered industrial costs and higher disposable income for consumers. Conventional wisdom has pointed ups and downs in energy prices as key to economic growth in the past. This time it's different and the key change this time is that the energy is not only cheap, but domestic. Low energy prices not only ripple through the economy but shale production itself has an echo effect that amplifies the economy even further. Drilling itself, the steel used in drilling, the jobs of all those truck drivers staying in all those hotels create jobs and wealth that in turn ripple through the US economy. I pointed out the key impact of gas on the chemical sector several times in 2011 and chemicals are one big job creation machine. The conventional wisdom saw places like Ohio as rust belt states condemned to an inexorable decline. Manufacturing was for China, not Cleveland, but now cheap energy will invigorate industries far beyond steel, chemicals and concrete. Fertiliser and food costs is another meta-trend in an industry where natural gas is 80% of the cost of nitrate ferlitiser, the highest input cost in food. All the while the US balance of payments is improving. At the same time the US is gaining significant economic advantage and becomes more competitive.
Shale is now becoming an energy story, not simply a gas one:
You'll know the U.S. energy industry is really on the rebound when North Dakota's newfangled Bakken oil field starts pumping more crude than Alaska's stalwart Prudhoe Bay. Energy experts expect it to happen in 2012.
Crude-oil imports are falling, balance-of-trade payments are improving and thousands of oil-field jobs are being created from Texas to Ohio, from West Virginia to Wyoming.
Who saw this coming? Very few:
"I didn't see it, and I don't know anyone else who saw it coming," said James L. Williams of WTRG Economics, an energy consultancy in London, Ark.
No matter that a handful of energy experts such as Daniel Yergin saw this developing two to three years ago, now followed belatedly but enthusiastically by European experts such as Dieter Helm. Modesty prevents me from pointing out my record here of course :) But no one has been right about shale with the possible exception of a few geologists, and economic mainstream expertise has simply channeled mainstream energy experts who have made a career of saying that the future of energy is simply a continutation of the past.
But this time it's different. Shale gas and oil is an inflection point in first energy and now the economy. People seek simple explanations and one way of looking at this is as a technology play:
The Bakken wasn't discovered so much as unlocked. The energy industry figured out that a combination of technologies—hydraulic fracturing and vertical wells that turn underground to run horizontally through oil-rich rock—could free petroleum and natural gas trapped in dense rock formations.
Until now the energy industry has been existing in a world impervious to the changes that globalisation and technology brought to every other sector. Expert view that energy was immune to sudden change led to their deficiency in predicting the radical, disruptive and systemic changes in first energy and now the economy.
Peak energy and all it stands for is now as relevant as the electric typewriter. Suddenly, something wonderful is happening. In countries like the UK where the glass is forever half empty, the notion that the economy may actually improve, taking peoples's lives with it is almost an alien concept pyschologically, but one that can no longer be ignored. Both Sarkozy and Cameron agreed in their New Year's addresses that there is no alternative. But there is, and North America proves it.