Professional Documents
Culture Documents
American West —
From Remote
Outposts to the
Global Spotlight
By
OCCASIONAL PAPER 52
J. C. Whorton, Jr.
&
John Whorton
2016
International Research Center
for Energy and Economic
Development
Occasional Papers:
Number Fifty Two
by
2
natural landscapes still exist in a form that would be recogniza-
ble to those first gazing upon them. Several things account for
such change. The most obvious one is the increased number of
people. The second is the astounding array of resources that are
required to support growing populations and their associated ac-
coutrements: buildings of every variety, description, and purpose;
parks; transportation venues; reservoirs; energy infrastructure; and
so on. Since most urban areas grow outward and gradually, much
of the construction goes unnoticed. What is becoming more and
more noticeable, and annoying to most, are the “landscapes of
power,” the utility poles and wires, transformer stations, drilling
rigs, production equipment, and numerous other eye sores re-
quired to fuel this rapid growth and the associated modernization
it commands. All of these factors have created landscapes of
power in such numbers and variety that their familiarity often
times camouflages their origins. We started making landscapes
of power as soon as we started burning wood to warm ourselves.
The resulting global imprint was as small as the population.
Thousands of years later, when we began wresting coal from the
earth, our ability to create landscapes of power grew in variety
and intensity. Later, with oil and natural gas, we added to the mix
of these landscapes: wells, pipelines, tankers, refineries, un-
counted drilling rigs, and, always, more roads. In other venues
we turned canyons into lakes, open spaces into power lines and
generating stations, quiet shores into harbors. We then connected
all of it with a million miles of transmission lines, railroads, and
pipelines. What we have now produced is a complex, interdepend-
ent network—a “mega” landscape of power.
In his book, Saving the West from the Landscapes of Power,
Mike Pasqualetti writes that:
3
Unfortunately, that is all beginning to change.
Just as plants and animals need energy to grow and be func-
tional, so do modern societies. Energy allows human beings seem-
ingly unlimited potential to create technological advancements
never before imagined. Today, nothing is impossible, just mathe-
matically improbable—for a while at least. Deirdre McCloskey,
the economic historian and philosopher, calls this the Great En-
richment. In the case of the United States, there has been a roughly
9,000-percent increase in the value of goods and services available
to the average American since 1800, almost all of which are made
with, made of, or powered or propelled by fossil fuels, the very
things that are creating “landscapes of power” and the impas-
sioned controversies surrounding them, the very things that the
West is so blessed to possess in abundance, and the very things
that are changing the balance of geopolitical and economic power.
Thus, as the West and its inhabitants strive to better understand
and manage their role as the custodians of the nation’s energy
treasure chest and as the apparent new unofficial regulator for
global crude-oil-market supplies and pricing benchmarks, one
needs to fully understand the range of perspectives and fundamen-
tal issues that they face. These issues are growing in importance
daily as reflected in local and national discussions, news, and at
the polls. Decisions made going forward will dictate policy for
decades to come as the West manages growth for today and tomor-
row, while preserving its natural resources and majestic beauty;
recognizing and reacting to the significance and magnitude of fos-
sil fuels in global societies present and future development; and
how we accept the West’s new role as guardian of U.S. energy
security and re-establishing our role as the global swing producer
for crude oil supplies.
4
The history of an era often can be defined by a particular
commodity that most influenced the economic and political deci-
sions of that time. For instance, the 18th century belonged to
sugar, the 19th century to cotton, and the 20th and the beginning
of the 21st century certainly belong to oil.
The necessity for a growing United States to focus its interest
in western expansion was accelerated significantly with the
discovery of gold in the western frontier, which began in the
mid-1800s and thus began the mythical “California Dream”
metaphor. Gold strikes, or more often, simply stories told or
written about them, created a general euphoric feeling of a “free
for all” in income mobility, in which any single individual,
regardless of religion or nationality, might become abundantly
wealthy almost instantly. The discovery of crude oil in the mid-
1800s exacerbated the universal perception that the American
West was a place of new beginnings where great wealth would
reward hard work with opportunity and good fortune. This
indelible perception soon began to stimulate an immigration that
led to the exploration and permanent settlement of many new
regions that continue to define a significant part of numerous
areas that remain and thrive along the western frontier. An
example is Wyoming, a state that is still fueled by the minerals
and energy industries. Accounting for as much as 50 percent of all
tax revenue in the state, natural resources and agriculture remain
the lifeblood of the Wyoming’s economy. The importance of
energy tax collections, or the lack of it resulting from current
declining energy revenue, is almost incomprehensible to those not
residing in energy resource states.
As the West’s history has proven, natural resource wealth is
built on big bets that affect all of those around—boom towns can
quickly become ghost towns. Most of these benefits of this new
“Black Gold Rush” have been very noticeable economic stimuli
felt appreciatively in every level of local, state, and national
coffers. The unforeseen consequences have created tsunami
shockwaves in elections across the nation as well as geopoliti-
cally. Communities and the commodities that they produce and
5
consume go through numerous transitions, often in a very short
time, that become very difficult to forecast and manage.
When one looks to the future growth of the energy industry in
the West, we must ask: can environmentalists and those wishing
to use private and public lands for private enterprise find ways to
work together; how will the West continue to evolve in its new
found role as the global “swing producer” for the world’s thirst
for crude oil supplies; and as such, how will the western states
energy economies manage present and future oil and natural gas
boom/bust cycles?
In the book, No Ordinary Disruption, the McKinsey Global
Institute authors introduce the four global trend-breaking forces:
(1) the age of urbanization, (2) accelerating technological
change, (3) challenges of an aging world, and (4) greater global
connections.3 These trends form a unified and cohesive dynamic
that is now playing a part in almost every industry around the
globe, not the least of which is energy. Urban growth has spurred
aggressive competition for land and water, both of which are
necessary in relatively high quantities to meet global energy
demands. Accelerating technological changes have introduced
unconventional methods of oil and gas extraction, such as
fracking and horizontal drilling that have been instrumental in
thrusting the west into the forefront of oil and gas production. The
challenges of greater global connections have forced the industry
to dynamically adapt to greater demand, greater supply chain
complexity and disruptions, and more competition and pricing
volatility.
Regarding aging challenges, few other industries face the
myriad of challenges presented by an aging work force than
those of the energy sector. In fact, the downturn of the mid-1980s
that resulted in the ultimate “bust” saw hundreds of thousands of
energy professionals leave the industry, never to return, and few
college entrants saw the logic of pursuing a career with little or no
job demand waiting for them upon graduation. This mass exodus
created a generational skip that is still being noticeably witnessed
today. As the baby boomers in management positions are retiring,
6
a huge vacuum will be felt unless companies have already
implemented active transition teams instituting knowledge
transference programs.
An important question has arisen from these new dynamics:
can municipalities and rural communities co-exist and resolve
urban sprawl and its associated problems, such as noise abate-
ment, traffic and pollution control, split estate legalities between
surface and mineral estate rights, and, finally, can and will all
denizens of the West be able to manage, leverage, and share the
region’s most precious and sparse water?
The dogma of the American West, with the individual set free
in wide open spaces with few rules and little government inter-
ference, inspired millions to migrate here. But the reality is that,
with each generation, we settle for substantially less wilderness,
less freedom, and far less space. Recreational spaces are becom-
ing as crowded as the cities that the people left to get away from
everyone else.
As in the West’s beginning in the 1800s, agriculture and natu-
ral resource extraction industries continue to contribute greatly to
public and private bottom lines. Public lands, just as in earlier
days, are now the key to survival of many adjoining communi-
ties as well as the long-term economic well-being of the entire
region. Public lands are required to be open and available not
only to its traditional beneficiaries—natural resource extraction
(oil and gas exploration and mining) and agriculture (timber har-
vesting, grazing, and farming)—but to water development, rec-
reation, hunting and fishing, skiing, and general tourism as well.4
Over time, the U.S. Bureau of Land Management (BLM) and nat-
ural resource enterprises have successfully found ways to work
within the regulatory framework while achieving common goals.
These challenges are becoming more difficult as decisions are
now scrutinized much more closely by many stakeholders than in
the past. And, of utmost importance to all—urban centers, recrea-
tion, agriculture, natural resource extraction, and development, to
name a few—is that access to adequate water sources is critical.
Unfortunately, we have paid far too little attention to resultant
7
population growth and now deal with the unplanned consequences
of water shortages. Droughts, fires, and floods are naturally re-
curring events in this very fragile region; everyone who lives or
operates in the West must contend with them in one way or an-
other. The western writer, Edward Abbey, once said, “there is no
lack of water here [West] unless you try and establish a city
where no city should be.” In other words, we probably have not
learned that much since the dust bowl era of the 1930s.
Energy boom times have fueled and been fueled by dramatic
population growth. They have generated tremendous economic
opportunities for Westerners and have paid for improvements in
infrastructure and services in remote rural Western towns. Boom
times also have confronted communities with pollution, traffic
congestion, crime, and noise, and have acutely taxed the civic
resources of small Western towns, not to mention the nerves and
patience of many of the locals and old-timers. While nature is
often indifferent to weather and rainfall, it is also indifferent to
user-friendly access when it distributed fossil fuel resources
across the West. Remote locations have posed a major burden for
energy development and help explain some of the most troubling
impacts of energy production on Western communities as local
agencies are tasked with maintaining aging and inferior infra-
structures.
Market forces, international events, government policies,
scientific discoveries, shifting social values, and technological
advances have all had a say in picking a particular region’s
energy resource du jour. For Western energy towns, decisions on
nearby Native American reservations or distant cities such as
Washington, D.C., or Riyadh, Saudi Arabia, can have swift and
sometimes devastating effects on a community and/or region.
8
Over the past several decades, much serious effort around the
globe has been focused on reducing the planet’s carbon footprint.
One encouraging environmental trend has resulted in the carbon
dioxide emissions per unit of energy produced being diminished
significantly, thanks largely to the switch from high-carbon coal
to lower-carbon natural gas in electricity generation. This has
contributed immensely to the shale gas boom creating more com-
petitive natural gas prices than coal. Interestingly, over this period,
the overall volume of fossil-fuel consumption has increased dra-
matically. There is now a realistic assessment suggesting that, for
many more decades to come, we will continue to rely over-
whelmingly on the fossil fuels that, thus far, have contributed so
dramatically to the world’s prosperity and progress.
In 2013, about 87 percent of the energy that the world con-
sumed came from fossil fuels, a figure surprisingly unchanged
from 10 years before. As for transportation, in the past 40 years
the number of cars on the road has risen by 300 percent; the
number of aviation miles flown has risen by 700 percent; and,
the number of maritime shipments has risen threefold. 5 On a
global level, renewable energy sources such as wind and solar
have contributed hardly at all to the drop in carbon emissions,
and their modest growth has merely made up for a decline in the
fortunes of zero-carbon nuclear energy. An argument for giving
up fossil fuels is that new rivals will shortly price them out of the
market. But this is not happening. The great hope has long been
nuclear energy but, even if there is a rush to build new nuclear
power stations over the next few years, most will simply replace
old ones due to close. The world’s nuclear output is down from 6
percent of world energy consumption in 2003 to 4 percent today
(2015). It is forecast to inch back up to just 6.7 percent by 2035,
according to the U.S. Energy Information Administration.
Nuclear’s disconcerting problem is cost. In meeting the safety
concerns of environmentalists, politicians, and regulators, there
are added requirements for extra concrete, steel and pipework, and
even more for extra lawyers, paperwork, and time. The effect has
been to turn nuclear plants into huge and lengthy regulatory and
9
construction boondoggles in the United States with little incen-
tive for competition or experimentation to drive down costs. As a
result, nuclear energy is now able to compete with fossil fuels
only when it is subsidized.
As for renewable energy, hydroelectric is unquestionably the
largest and cheapest supplier, but it has the least capacity for
expansion. Technologies that tap the energy of waves and tides
remain unaffordable and impractical and most experts think that
the cost impediments will not change rapidly. Geothermal is a
minor player for now. As for bioenergy sources, such as ethanol
made from corn or sugar cane or diesel made from palm oil, they
are proving to prompt ecological disasters. Their production
encourages deforestation, commodity volatility, supply-chain
disruptions, food-price hikes and shortages, and per-unit of
energy produced they create even more carbon dioxide than coal.
Wind power, for all the public money spent on its expansion,
has inched up to a mere 1 percent of world energy consumption
in 2013. Solar, for all the hype, has not even managed that. If we
round to the nearest whole number, it accounts for 0 percent of
the world energy consumption.
Both wind and solar are extremely reliant upon subsidies,
which have enabled them to achieve their current levels of eco-
nomic viability. The costs of renewable energy are coming
down, especially in the case of solar. But even if solar panels
were free, the power they produce would still struggle to com-
pete with fossil fuels—except in some very sunny locations—
because of capital equipment required to concentrate and deliver
the energy. This is to say nothing of the great expanses of land
on which solar facilities must be built and the cost of retaining
sufficient conventional generator capacity to guarantee supply on
dark and cloudy days.
Two of the fundamental problems that renewables face are that
they take up too much space and produce too little energy. To run
the U.S. economy entirely on wind would require a wind farm the
size of Texas, California, and New Mexico combined, while to
power it on wood would require a forest covering two-thirds of the
10
United States, heavily and continually harvested.6 A third and ar-
guably more serious fundamental problem facing renewables are
subsidies that they require and the associated realities of real-
world energy economics and resulting shifts in governmental poli-
cy. Today’s energy pricing environment is forcing even the most
clean-minded power companies to help their countries meet the
goals set in the landmark Paris climate accord reached by 195
countries in December 2015. Shifting from natural gas, coal, and
oil to renewable sources will be extremely difficult as renewable
subsidy costs rise and fossil fuel prices plummet.7
Electricity produced by fossil fuels has a major advantage
over wind and solar power in that it can be generated on demand
and utilized at any time. Even in the most wind-swept regions,
the wind does not always blow and the sun may not shine
through cloudy days. Until utilities can find a way of storing
large quantities of electricity, alternative energy sources, such as
wind and solar power, will always have to be supplemented by
other electricity-generating facilities.
Different fuels have different levels of energy content. The
higher the energy content, the higher the quality of the fuel,
which is inversely proportional to its chemical complexity. High
quality fuels are gases while low quality fuels are solids, with
liquids in between. The fuel that has the highest energy content
is hydrogen, which is also the simplest chemical component in
existence. Gasoline, which is derived from refining crude oil,
contains much more energy than coal (twice the lower grade bi-
tuminous) or wood (three times).
Energy density drives the planet’s energy use. The density of
energy is salient because future energy sources need to be cheap
and scalable. The denser the energy source, the cheaper and more
scalable it becomes. Manhattan Institute senior fellow Robert
Bryce looks at this idea in his City Journal article entitled “Get
Dense,” in which he argues that it is time to stop wasting land
and resources in the name of environmentalism. 8 Fossil fuels
lead the way as the densest form of energy and they are among
the most efficient.
11
There is always the argument that fossil fuels are finite. The
buffalo of the American West were infinite, in the sense that they
could breed, yet they came close to extinction. It is an ironic
truth that no nonrenewable resource has ever run dry, while re-
newable resources—whales, cod, forests, passenger pigeons—
have frequently done so.
The miniscule amount of energy that human beings managed
to extract from wind, water, and wood before the Industrial Rev-
olution placed a great limit on development and progress. The
incessant toil of farm laborers generated so little surplus energy
in the form of food for men and draft animals that the accumula-
tion of capital, such as machinery, was painfully slow. Even as
late as the 18th century, this energy-deprived economy was suf-
ficient to enrich daily life for only a fraction of the population.
Certain laws of physics state that the more energy you have,
the more intricate, powerful, and complex you eventually make a
system. Just as human bodies need energy to be ordered and
functional, so do societies. In that sense, fossil fuels were a
unique advance because they allowed human beings to create
extraordinary patterns of order and complexity through machines
and buildings with which to improve their lives. Today, there
should be little question as to the enormous benefits that modern
industrialized societies have realized through fossil-fuel power.
Still, more than a billion people on the planet have yet to get
access to electricity and to experience the leap in living standards
that abundant and affordable energy brings. Energy demand is
expected to increase over the next 25 years and more base-load
power supply will be needed to fill this demand. ExxonMobil, for
example, believes global energy demand will rise by 35 percent by
the year 2040. 9 The International Energy Agency believes con-
sumption will rise by 37 percent in the same time frame.
Today, we often overlook the many ways in which fossil fuels
have contributed to preserving the planet. As the American author
and fossil-fuels advocate Alex Epstein points out in a bravely un-
fashionable book, “The Moral Case for Fossil Fuels,” the use of
coal halted and then reversed the deforestation of Europe and
12
North America.10 The turn to oil eliminated the need to continu-
ously harvest the world’s whales and seals for their blubber. Fer-
tilizer manufactured with natural gas halved the amount of land
needed to produce a given amount of food, thus feeding a growing
population while sparing land for wild nature and recreation.
To thoughtlessly throw away these immense economic,
environmental, and moral benefits, you would have to have a
very good reason, or a large number of them. The one most often
invoked today is that we are wrecking the planet’s climate.
Climate change is a topic where everyone has an opinion and a
plethora of facts supporting their case and refuting the opposing
side’s argument. It will be very interesting to see the conclusive
source that finally reveals the irrefutable evidence, for or against
adverse global climate change, which will be unconditionally
accepted by both sides. Until that time, the embittered debate
will rage on.
From a prudent global stewardship perspective, there should
be little disagreement that we should encourage the continued
switch from coal to natural gas used in the generation of
electricity, provide meaningful incentives for increased energy
efficiency, guide responsible cost-effective nuclear power back
on track, and keep developing solar power and electricity
storage. These measures all make sense. Continuing on a course
of subsidized ventures to build low-density, low-output, capital-
intensive land-consuming renewable projects probably does not.
For fossil fuels, there are three principal categories of energy,
each with a different purpose: oil and its refined products are
used mainly for transport; natural gas is used for heating, elec-
tricity generation, and petrochemicals; and coal is used mostly
for electricity generation.
The argument that fossil fuels will soon run out is moot, at
least for a while. The collapse of the price of oil in the latter half
of 2014 and into 2015 is the result of abundance—an inevitable
consequence of the high oil prices of recent years, which stimu-
lated innovation in hydraulic fracturing, horizontal drilling,
seismology, and information technology. The United States—the
13
country with the oldest and most developed hydrocarbon
fields—has found itself once again, surprisingly, at the top of the
energy-producing nations, rivaling Saudi Arabia in oil and Rus-
sia in natural gas.
If the life of fossil-fuel use extends beyond the next half cen-
tury, then they more than likely will continue to be the major
global power source for some time to come or until the significant
gap between the costs of renewable and traditional energy sources
has narrowed substantially. The question will then become, once
all known fossil-fuel reserves have been fully utilized, will re-
newables then have their turn to power the planet?
In a post-fossil-fuel world powered by renewables, the West
will be very well positioned. The features of the landscape shape
the region’s resources in sun and wind. Western states are
blessed with a combination of mountain-enhanced winds and
empty obstacle-free prairie space. In several states, low pressure
systems routinely roll over the Front Range where they are
shaped by valleys and ridges before gusting down through the
eastern plains.
The West’s mountain ranges also explain the many hours of
sunshine. When air moves in from the Pacific and Gulf of Mexi-
co, the Sierra Nevada and Rocky Mountains force it to drop
much of its moisture. By the time the air reaches the other side of
either of these ranges, little moisture remains; as a result, precipi-
tation and sun-blocking clouds are minimal. The sun has always
been especially generous in its attentions to the West.11
14
price environment drives out some high-cost oil producers, in the
North Sea, Canada, Russia, Iran, and offshore, as well as in the
United States, shale drillers can step back in whenever the price
rebounds and favors their economic parameters. U.S. shale oil
production is one of the biggest conundrums for OPEC. In spite of
a sharply reduced rig count from last year, production has yet to
fall significantly in 2015. Ryan Lance, CEO of ConocoPhillips,
recently stated that the U.S. shale industry has already reduced
costs by 30 percent and expects to improve efficiency by up to
20 percent over the next five years. The new reality is that un-
conventional resource plays, such as shale production and the
new and evolving technologies used to produce them including
horizontal drilling and hydraulic fracturing, are here to stay. Not
only are they here to stay, but the new and emerging order that
they have created will place unprecedented pressure on all pro-
ducing countries and global supply/demand forecasts and market
volatility. Market share will be critically important for both pro-
ducing and consuming nations struggling to maintain a critical
equilibrium for their budgets, many of which are strained at best.
In an industry dominated by major oil companies and national
oil companies (NOCs), the United States is unique for its frag-
mentation. According to consulting firm Rystad Energy, it takes
77 companies to generate 75 percent of U.S. output of crude oil
and related liquids, the most among the world’s 20 largest pro-
ducers. Only Canada and the United Kingdom are similarly
fragmented. By contrast, the comparable figure in Russia is four,
three in China, and one in Brazil. In Saudi Arabia, Iran, Mexico,
and Kuwait, one state-controlled company accounts for nearly
100 percent of total output, all of which must account to the dic-
tates of a national policy.12 Thus, in the United States there is no
“Minister of Shale” to dictate policy, quotas, and price.
Even without a “Minister of Shale,” the shale producers are
currently experiencing their own version of Moore’s law, which
suggests that, with exponential growth, it is unlikely to continue
indefinitely. In the case of shale, a rapid fall in the cost and time
it takes to drill a well, along with a rapid rise in the volume of
15
hydrocarbons they are able to extract, creates pricing pressures
that may be unsustainable. Additionally, the shale revolution has
yet to go global. When it does, oil and gas found in tight rock
formations will supply the world with ample supplies of hydro-
carbons for decades, if not centuries, to come, thus making re-
newable and alternative energy sources even less competitive.
The United States was once, by far, the world’s largest oil
producer and exporter and its swing producer. The Texas Rail-
road Commission determined “allowable” levels of production
for Texas, the Saudi Arabia of the day. But by 1970, United
States oil output had reached its high point of 9.6 million barrels
per day and began to decline. The United States began to import
more and more oil. By 2008, its own oil production was down
almost 50 percent from its height. Oil prices reached $147 a bar-
rel, and fears that the world’s oil output had peaked and that we
were beginning to run out of oil had become pervasive.
Quietly, though, an unconventional oil and gas revolution was
beginning to pick up speed in the United States. It yoked togeth-
er two technologies: hydraulic fracturing and horizontal drilling.
The impact was measured first in the rapidly growing production
of shale gas, which now makes up about half of total U.S. gas.
This “shale gale” catapulted the United States ahead of Russia to
become the world’s number one gas producer.
Then around 2010, the same technologies started to be serious-
ly applied to the search for oil. The results were phenomenal. By
the end of 2014, oil production in the United States was 80 percent
higher than it had been in 2008. The increase of 4.1 million barrels
per day was greater than the output of every single OPEC country
with the exception of Saudi Arabia.
As of 2015, U.S. output is almost back to where it was in
1970. On top of that was a million-barrel-a-day gain since 2008
from the Canadian oil sands. The chimera of “energy independ-
ence” was beginning to look more tangible, at least for North
America. In 2015 the United States surpassed Saudi Arabia and
Russia as the largest oil producer in the world until drastically
16
increased production by OPEC and the resulting lower oil prices
stymied existing production and capex spending.
For decades, Saudi Arabia, backed by the Arabian Gulf emir-
ates, was described as the “swing producer.” With its immense
production capacity, it could raise or lower its output to help the
global market adjust to shortages or surpluses. But with the cur-
rent price decline, the decision to leave oil prices to the market
by Saudi Arabia and the Emirates signaled passing the responsibil-
ity as de facto swing producer to a country that hardly expected
it—the United States
As a result of the Saudi decision, U.S. tight oil from shale
formations has become the de facto swing producer in the global
market. Low prices are driving out high-cost producers, a text
book case of markets at work. Low prices are culling the herd.
This allows the system as a whole to operate more efficiently by
high-grading and developing the highest potential prospects first.
After its peak in the early 1970s, U.S. oil output experienced
three decades of decline and energy grew to account for half of
the nation’s trade deficit in goods. As recently as five years ago,
there was little evidence that this trend could be reversed.
In 2015, the picture is changing rapidly, driven by technologi-
cal advances in horizontal drilling and hydraulic fracturing. This
process has unlocked large deposits of both natural gas and oil
trapped in shale—resources once considered too difficult or costly
to extract. From 2007 to 2012, North American shale gas produc-
tion grew by more than 50 percent annually, lowering the price
by two-thirds. Today, output of so-called light tight oil is grow-
ing even faster.
If the United States fully comprehends this exceptional oppor-
tunity, shale energy could revitalize the oil and gas industry, have
significant downstream benefits for energy-intensive manufac-
turing, and send tsunamic effects across the global economy. It is
a given that it has a positive impact to annual gross domestic
product (GDP) and permanent jobs growth. Many shale-
producing regions, such as the Williston and Permian Basins, have
proved that it is an important source of high-wage employment for
17
workers without requiring college degrees, generating economic
activity in remote parts of the country that have seen little in-
vestment in recent decades. In fact, many of these “blue-collar”
jobs in these rural areas paid more than a number of positions in
urban areas requiring college or advanced degrees.
Until the 2014-2015 price decline, the impact already was
being felt in the energy sector and far beyond. The increased
hydrocarbon production boosted annual GDP within the energy
sector itself. It also drove growth in manufacturing industries
that rely heavily on natural gas as a fuel or feedstock. These
include petrochemicals, fertilizer, and synthetic resins; iron and
steel; and glass, paper and pulp, and plastics packaging.
Increased drilling activity and production require support from
other industries, such as professional services, construction,
transport, and trade. Real estate values in active basins
appreciated significantly during boom times and, as a result of
the recent loss of shale revenue to producing regions, have
declined just as rapidly, creating numerous unforeseen shocks to
those areas’ economies reaching far beyond just the energy
industry.
Building the required infrastructure to support the shale boom
also provides short-term stimulus to local and regional econo-
mies. The estimated investment required to complete the neces-
sary pipelines, rail networks, and drilling and gathering
infrastructure could easily run into the trillions of dollars. This
could generate significant temporary jobs during the build-out,
mainly in the construction sector. Historically, these investment
booms have been financed by private capital and not through
public funding.
Beyond the increase in output and jobs, the implications are
significant. The surge in shale gas production has driven down
the price of U.S. natural gas from nearly $13 per million British
thermal units (MMBtu) in 2008 to approximately $2 per MMBtu
in 2016—sharply lower than prices elsewhere around the world
and a level at which some wells are being shut-in as producers
cannot recoup their investment and operate profitably. Combining
18
potential LNG exports with reduced demand for imports of crude
oil, the United States now has the potential to reduce or eliminate
net energy imports in the very near future and become a net
energy exporter. One might ask, would it not be better for the
United States to sell the Chinese crude oil and natural gas than
have them buy U.S. government debt?
“Lord, give me one more oil boom and I promise not to piss it
away this time.”
1980s bumper sticker
19
import levels of 9.859 million barrels per day.14 Should any of the
above events occur, what would happen next for the U.S. econo-
my and security? Can we continue to expect crude oil or refined
products from old trading partners or will they need the crude for
their own internal consumption? How will our closest allies func-
tion with the lost lifeblood of crude oil? Who would they turn to
for supply? What will be the national security implications?
A recent report noted that over half of the world’s traded oil is
stolen goods sold by rogue entities and is a significant funding
source of global crises and terrorist activities. These ongoing
egregious thefts violate two major global human-rights treaties,
both of which declare, “All peoples may, for their own ends,
freely dispose of their natural wealth and resources.”15
Oil in the North Sea is running out. Production has been declin-
ing since 1999 and, while experts estimate that it has billions of
barrels of oil remaining, producing them into the future is going to
become even more costly. The International Monetary Fund (IMF)
estimates that U.K. producers have the highest operating costs in
the world at around $40 a barrel and by comparison operating
costs in Saudi Arabia and Kuwait are around $5 a barrel.
Also, many countries, such as Russia, have old producing
fields, old equipment, old technology, and limited financial re-
sources for upgrading or expansion. For these countries, immedi-
ate survival is extremely difficult, not to mention meeting future
domestic needs as well as competing for global market share.
Additionally, plunging oil prices have left many crude-
exporting countries with budgets that simply cannot and will not
balance. The Kingdom’s decision in late 2014 to maintain and
eventually raise its production levels to defend and increase mar-
ket share and place pricing pressure on high-cost, low-margin pro-
ducers began a long painful period of dropping prices that has
wreaked havoc on global oil markets. For many of the biggest
producers—places like Saudi Arabia, Venezuela, and Algeria—oil
accounts for the majority of the country’s exports and gross do-
mestic product. Recent collapsing prices have meant dramatic
declines in government revenue at a time when many political
20
leaders are striving to maintain social stability through liberal
spending programs. Saudi Arabia, the most influential of OPEC’s
12 member countries, needs oil above $100 a barrel in order to
break even after the costs of its generous welfare programs and
energy subsidies. Oil has been around $35 a barrel, and futures
contracts don’t project it much higher over the next few years. The
vast assets that the Kingdom stocked away during better times will
allow it to withstand a government deficit of greater than $100
billion for several years, but poorer countries have been forced to
dramatically cut programs and still have massive projected short-
falls. Unsurprisingly, this increased borrowing on behalf of OPEC
members is also expected to significantly pull down the levels of
savings the countries are putting back into their sovereign funds.
Recently, it has been estimated that Saudi Arabia’s debt levels
could reach as high as 50 percent of the country’s gross domestic
product (GDP) within the next five years (figures 1 and 2).
Wait, what if the United States became self-sufficient and no
longer had to rely of foreign sources of crude from unstable re-
gions and governments? Maybe the American West does matter.
The recent oil boom should serve as an excellent example of
how private enterprise and the market system can and does work
for the benefit of the total U.S. economy. It created a surge in em-
ployment, business investment, property values, tax revenue, and
ultimately, the GDP. The benefits of the boom were so blatantly
obvious that most objective people would question debilitating pu-
nitive regulations and measures that would diminish the many posi-
tive effects that already have accrued for communities and states.
We should have self-sufficiency in natural gas for many decades to
come. We enjoy a two or threefold competitive price advantage
over Europe and Asia resulting in a revival of in-sourced manufac-
turing with natural gas and liquids as fuel and feedstock. The boom
served to greatly diminish the importance of the Arabian/Persian
Gulf and reliance on OPEC member states, as well as spotlighting
the Russian energy challenges with its European consumers.
The inherent market competition of the American West, led
mainly by independent oil and gas operators of all size from mid-
21
cap to large-cap companies, has resulted in an efficiency among
operators that is the new standard of the world and still improving.
Some of the largest western energy producers possess market caps
that rival those of the national oil companies, but with employee
bases, one of the largest of any corporation’s expenses, that pale in
comparison. Figure 3 illustrates the total market caps of two
NOCs and two non-nationalized majors, while figure 4 shows the
same companies, broken down to market cap per employee. The
comparison efficiency of the NOCs is seemingly not even on the
same playing field as that of the non-nationalized majors.
Figure 1
THE ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES
(OPEC): FISCAL BREAK-EVEN PRICES AND DEFICITS, 2015
Sources: IMF Regional Economic Outlook: Middle East and Central Asia,
October 2015 (fiscal break-even price and fiscal deficit for Algeria, Iran, Iraq,
Kuwait, Libya, Qatar, Saudi Arabia, and United Arab Emirates); Deutsche
Bank Research Report, October 2014 (fiscal break-even price for Nigeria and
Venezuela); Standard Chartered via FT, February 2015 (fiscal break-even price
for Angola); International Energy Agency Oil Market Report, November 2015
(“effective” spare capacity, calculated as sustainable production capacity within
22
90 days minus YTD average crude supply, percentage of capacity; million bar-
rels per day for October 2015); IMF Article IV Consultation Reports for 2015
(fiscal deficit for Angola, Ecuador, and Nigeria); and IMF via Moody’s Analyt-
ics (fiscal deficit for Venezuela).
Figure 2
THE ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES
(OPEC): ECONOMIC AND FINANCIAL INDICATORS, 2015
Source: EnerCom Consulting, Oil and Gas 360, November 11, 2015.
23
Figure 3
TOTAL MARKET CAPITALIZATION, 2015a
(in billions of U.S. dollars)
$450
$394
$400
$350 $311
$300
$250 $213
$200
$150 $111
$100
$50
$0
ExxonMobil Shell Petrochina Sinopec
a
Data compiled by authors using The Companies: FactSet and Wall Street
Journal for February 17, 2015. Market capitalizations are for stocks listed on
the New York Stock Exchange (NYSE) as of February 17, 2015 and, when
dollar conversion was necessary, the exchange rate for that same day was used.
Shell profit is attributable to shareholders from continuing operations.
Figure 4
TOTAL MARKET CAPITALIZATION PER EMPLOYEE, 2015a
(in millions of U.S. dollars)
$6.00
$5.25
$5.00
$4.00
$3.00
$2.32
$2.00
$1.00 $0.57
$0.30
$0.00
ExxonMobil Shell Petrochina Sinopec
24
a
Data compiled by authors using The Companies: FactSet and Wall Street
Journal for February 17, 2015. Market capitalizations are for stocks listed on
the New York Stock Exchange (NYSE) as of February 17, 2015 and, when
dollar conversion was necessary, the exchange rate for that same day was used.
Shell profit is attributable to shareholders from continuing operations.
25
producers will have an incentive to increase output as greater
volumes will earn greater revenues at any given price level.
Every extra barrel produced by a low-cost producer displaces a
high-end barrel or else adds to the market glut and continues to
place downward pressure on prices. This assumes that low-cost
producers will have the economic, technical, infrastructure, and
organization resources to continue to exploit their proven oil
reserves and maintain market share.
When it comes to energy investment concerns, the United
States still has a significant competitive advantage over the rest
of the world and here are some of the reasons why: robust, liquid
capital markets available for energy investment; an abundance of
proven and probable reserves; privately owned mineral rights as
well as accessible public lands; large, safe, modern, efficient
domestic drilling fleet and service industry; skilled workforce
with experience and expertise; supporting road, utility, and other
infrastructures; well-established, predictable, and stable regulatory
and legal system; existing gathering, processing, pipeline, refining,
and storage capabilities; a liquid financial and physical energy
pricing market where producers and end-users can hedge present
and future pricing exposure and volatility; and the Producer-
Marketer-End-User value chain is one of the most vigorous,
liquid, and transparent market models in the world.
By contrast, here is a review of Europe’s energy realities and
challenges:16 Europe has the world’s most expensive electricity;
security of supply is deteriorating; emissions are increasing;
industrial competitiveness is weakening; unemployment is
persistently high, especially among youth; fuel poverty is a real
issue for low-income households; the EU Commission insist on
using less and greener energy; risk of power shortages in case of
an economic rebound; and policy assumes high oil and gas prices
to justify costly renewables.
And, what might the United States be facing if the
unconventional revolution had not happened? (1) The United
States would be importing 14 to 16 billion cubic feet per day
(Bcf/d) of natural gas at a cost of approximately $70 billion a
26
year and resulting in utility bills that would be two to three times
higher. (2) The United States would import more than 10.5
million barrels of oil equivalent per day (MMbo/d) at a cost of
approximately $127 billion a year and gasoline would cost
approximately $5 a gallon. (3) Some 2.1 million additional
Americans would not have jobs and the unemployment rate
could exceed 8 percent. (4) The average annual household
disposable income would be $1,200 less. (5) There could be a
loss of $2.4 trillion in oil and gas investment through 2025. (6)
The U.S. manufacturing renaissance (+ 3.9 percent to 2025)
could be very limited or none at all. (7) U.S. GDP over the
period of 2010 to 2020 could lose approximately $3.3 trillion. (8)
A 12-percent drop in 2012 U.S. greenhouse gas emissions would
not have occurred. (9) The United States would be in an
extended period of low or no economic growth.
Thanks to the recent and ongoing boom in U.S. production,
the West will have enough energy at reasonable prices without
having to rely on tainted oil and gas supplies from questionable,
unstable, and unreliable sources. So, not only does the U.S. West
matter in energy, it matters possibly more than ever before.
Conclusion
27
future. The advantages that can guarantee the West’s place as the
cornerstone of the energy marketplace are firmly established, but
in order to regain the ground that is being lost to other oil and
gas producers around the globe, the region’s resources must be
stewarded with calculated consideration for the country’s future.
Finding solutions for the environmental risks associated with
horizontal drilling and hydraulic fracturing—including
groundwater contamination, fugitive methane emissions, and
potential seismic effects—will be essential. The full extent of
these risks is debated, and the long-term cost of damage in a
worst-case scenario, should it occur, could be quite high. It is in
the interest of energy producers themselves to create
transparency on these risks, build public confidence, and adopt
rigorous operational standards (with special focus on the
soundness of well casings and best practices for the disposal of
wastewater). If they fail to do so, local and state governments
may prohibit hydraulic fracturing, as some states have done, or a
single disaster could turn public opinion sharply negative. While
policy makers will have to set clear standards on drilling, well
maintenance, and emissions, the industry would be well served
by proactively addressing these issues.17
There are additional challenges as well, including land-use
impacts on local communities and the intensity of water use for
drilling in drought-prone regions. But if local communities,
counties, and state governments can successfully manage these
issues, the shale boom could generate economic growth, high-
wage jobs, and a secure supply of affordable energy that
enhances U.S. competitiveness for decades to come. After all,
geography is permanent while boom and busts come and go.
All of these benefits are flowing from a U.S. oil boom that gov-
ernment did not predict and had almost nothing to do with. The
political class has proffered subsidies to renewable energy with
very little economic benefit. The new oil order is a reminder that
markets and American ingenuity are better economic pillars than
projects and policies of government planners. Investment follows
value and opportunity and money goes where it is treated best.
28
Even at prices well below $40 a barrel, U.S. shale oil produc-
ers will find ways to drive down costs and output will start rising
again. Even as companies have cut back on capital spending,
they are squeezing more out of what is spent by continuously
eking out new efficiencies. They are drilling multiple wells from
a single pad and more efficiently targeting well bores at the most
productive layers of formations. Reports of the demise of the
Great American Shale Boom have been greatly exaggerated.
The Boom is merely sleeping, not dead, although it is a very fit-
ful sleep for many.
Cheaper prices merely postpones the date in which a well or
field will eventually be drilled. Oil’s current slide will slow the
growth in U.S. oil output. Stopping it altogether, however, will
take a protracted period of low prices. Even then, the techniques
and discoveries already made will simply pass to another set of
larger and better capitalized players. Just as electronic commerce
and broadband internet survived the collapse of the tech-stock
bubble, so will shale oil’s innovations survive the current slip in
prices. For many members of OPEC and other major oil produc-
ers, the world could possibly never look the same.
The United States will face many challenges in reaffirming it-
self as the global energy leader. Accommodating unprecedented
growth in the world’s most vital economic sector will require
acute awareness of issues not dealt with in the past. To truly un-
derstand and forecast what may be on the horizon for the energy
industry, we must explore its past and anticipated growth, mount-
ing environmental concerns, the role western shale will play in the
global oil and gas portfolio, and key distinctions of the American
West that will allow it to become the cornerstone in global supply.
So, just as the famous East Texas oil discovery that put Texas
and the United States on the global oil map in the 1930s, the
world’s new swing producer suddenly finds itself back in the
proverbial saddle and leading the herd. But, as Will Rogers once
said, “If you’re riding’ ahead of the herd, take a look back every
now and then to make sure it’s still there.”
29
NOTES
30
Acknowledgements: A special acknowledgement to StratCom Advisors team
members, Amanda Wynn Bidgood, Chance Snook, and Kerry Joannides. As
principal members of the StratCom Management Team, they bolster our
support in advocating energy’s critical mission in the coming decades as the
United States strives for energy independence while practicing and promoting
responsible resource development. We are extremely grateful for their
unwavering support and invaluable input in assisting us address the many
challenges and issues that this paper presented.
In memoriam: During the writing of this paper, the energy industry and
West lost a towering advocate with the death of Aubrey McClendon. He was
widely considered to be one the shale industry’s most prominent pioneers. Mr.
McClendon stands among the modern energy industry’s most active risk takers,
and risk always creates controversy. His legacy will go alongside the legendary
wildcatters that came before him. Often controversial but seldom in doubt, he
will remain an iconic figure of entrepreneurship to many in the West and the
energy industry.
1
P. Zeihan, The Accidental Superpower: The Next Generation of American
Preeminence and the Coming Global Disorder (New York: Hachette Book
Group, 2014).
2
M. Pasqualetti, “Saving the West from the Landscapes of Power,” in En-
ergy in the American West: What Every Westerner Should Know, eds. P. N.
Limerick, A. Hildner, C. Puska, and E. Skovsted (Boulder, Colorado: Center of
the American West, University of Colorado, 2003).
3
R. Dobbs, J. Manyika, and J. Woetzel, No Ordinary Disruption: The Four
Global Forces Breaking All Trends (New York: Public Affairs, 2015).
4
Colorado Business Review, vol. 80, no. 4 (Boulder, Colorado: Leeds
School of Business, University of Colorado at Boulder, 2014).
5
“Conventional Fuels Are a Must, and Will Be for Years to Come,” Daily
Oklahoma, February 16, 2016.
6
M. Ridley, “Fossil Fuels Will Save the World (Really),” Wall Street Jour-
nal, March 13, 2015.
7
“Clean Power Muddied by Cheap Fuel,” The New York Times, February
20, 2016.
31
8
R. Bryce, “Get Dense: It’s Time to Stop Wasting Land and Resources in
the Name of Environmentalism,” City Journal (winter 2012).
9
ExxonMobil, ExxonMobil 2015 Outlook for Energy: A View to 2040
(Irving, Texas: ExxonMobil, 2015).
10
A. Epstein, The Moral Case for Fossil Fuels (New York: Penguin Group,
2014).
11
J. DeBlieu, Wind: How the Flow of Air Has Shaped Life, Myth, and the
Land (New York: Counterpoint, 2006).
12
Greg Ip, “Shale Upends OPEC Block Party,” The Wall Street Journal,
June, 4, 2015.
13
Foreign Policy, “2014 Fragile State Index,” accessed July 19, 2015,
available at http://foreignpolicy.com/fragile-states-2014/.
14
U.S. Energy Information Administration (EIA), “U.S. Total Crude Oil
and Products Imports,” (Washington, D.C.: EIA, 2015).
15
“Just Say No to Stolen Oil,” New York Times, January 9-10, 2016.
16
Ø. Noreng, “Europe’s Natural Gas Dilemma and the Fallout of the
Ukraine Crisis,” 42nd International Energy Conference of the International
Research Center for Energy and Economic Development, Boulder, Colorado,
April 12–15, 2015.
17
S. Lund, J. Manyika, S. Nyquist, L. Mendonca, and S. Ramaswamy,
Game Changers: Five Opportunities for U.S. Growth and Renewal (New York:
McKinsey Global Institute, July 2013).
32