Unconventional Energy Meets Conventional Politics: Which Will Win?

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I vividly recall a conversation about seven years ago with someone in the oil and gas exploration business whom I assumed was ramping up oil drilling because of the rising price of crude. But the answer surprised me.

"No, we're not doing oil. We're putting all of our chips on shale gas and coal-bed methane."

To which I responded: "What's that?"

Nowadays everybody knows about shale gas (coal-bed methane is an easier variation of the same), and how it has revolutionized our energy outlook in the political equivalent of the blink of an eye. This is an important point: the shale gas revolution occurred mostly on private and state land, away from the greedy grasp of Washington and the attention of the major news media. If the political class had known this was going on, surely Washington would have done something to slow it up, tax it more, or stop it altogether. Witness how environmental groups, having touted natural gas as a "bridge fuel" when it was expensive and scarce, are pivoting to attack "fracking" now that natural gas is cheap and abundant, while the EPA scrambles to find some opening to regulate it.

Cheap natural gas is upending the entire energy outlook. It has scrambled the outlook for coal-fired energy-new gas-fired electricity is now cheaper than coal-more than any prospective cap and trade program or punitive EPA regulation could ever do. But it also renders most renewables such as wind and solar even less competitive with fossil fuels. Meanwhile, the price of natural gas has fallen so far that the industry is desperately trying to figure out how fast it can become an export industry to sell it overseas where the market price is higher than here, just as premium beef producers in the Midwest try to sell their best steaks in Manhattan for a better price than in Davenport.

The natural gas story appears to be merely a prelude to a full-scale renaissance for domestic oil production. The same techniques that have spurred the extraordinary surge in domestic gas-precise directional drilling and "fracking"-are contributing to the soaring production of oil in North Dakota and Texas. Two aspects of the gas story need to be kept in mind. First, most of the expanded production has occurred on private land, and second, shale gas and coal bed methane are considered "unconventional" gas, though with so much coming online this designation hardly seems sensible any more. What was once "unconventional" is now normal, sort of like gay marriages.

A similar story is starting to unfold with oil. Last week, Anu Mittal, the director of natural resources and environment for the Government Accountability Office, delivered a bombshell testimony to the House Committee on Science, Space and Technology about the amount of "unconventional" oil resources in the United States, chiefly oil shale in the Rocky Mountains. Mittal reiterated what has previously been disclosed in government surveys: there are about 3 trillion barrels of oil equivalent in the shale formations in the western U.S. About half of it, according to Mittal's testimony, is thought by public and private analysts to be recoverable. With droll understatement, Mittal concluded: "This is an amount about equal to the entire world's proven oil reserves."

Read that over again slowly: "This is an amount about equal to the entire world's proven oil reserves."

Think of it this way: Saudi Arabia is the America of oil reserves-except they only have half as much oil as we do. Why wasn't this above-the-fold news in every newspaper last week? Simple: doesn't fit the liberal narrative that the U.S. has "only 2 percent" of "proven" world oil reserves. Any liberal who now persists with this tired talking point should be labeled an anti-science ignoramus. (That would include the current President of United States.)

We've known about these oil shale formations for decades, and gave them a hard look around the time of the first oil price shocks in the 1970s. But with the cost of producing oil shale running about $30 - 50 a barrel, for most of the last 30 years oil shale appeared to be a highly uneconomic proposition. With world oil demand rising, however, and oil prices seemingly at a new plateau of $75 or better, suddenly oil shale looks very attractive. Like shale gas and Canadian oils sands, the distinction between "conventional" and "unconventional" hydrocarbons will diminish and finally disappear as the technology advances and production costs inevitably fall. The number of high-paying jobs-and tax revenues from royalties-would be substantial. Just take a look at North Dakota right now.

What won't disappear in the next chapter of unconventional hydrocarbons is conventional politics and regulation. The real obstacle to a shale oil revolution that can match the shale gas revolution is political rather than technological. Most shale oil, unlike shale gas, is located on federal land. Cue federal permit application hell. We'll also need to build some new pipelines to get the oil to refiners. Cue environmental lawsuit hell. If you think the Keystone battle has been protracted, wait until you see how the greens and the Hollywood glitterati will rend their hemp garments over this. After all, Sundance Film Festival-goers will be able to see some of the Utah shale projects from the windows of their Gulfstreams on approach to the Sundance airport. The Robert Redford direct-mail letter practically writes itself.

So the nation faces a test of its seriousness. Those who decry the lack of a coherent energy policy and in the same breath bemoan our dependence on foreign oil no longer have the excuse of domestic scarcity. Legitimate environmental concerns-water use and groundwater contamination-are solvable problems. Unlocking "unconventional" energy requires unconventional politics, and that's one resource that is genuinely scarce among today's backwards-looking bureaucrats and green interest groups.


Steven F. Hayward is the F.K. Weyerhaeuser Fellow at the American Enterprise Institute, co-author of AEI's Energy & Environmental Outlook series, and author of American.com's "Energy Fact of the Week" feature.

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