A new technique being used to drill through a type of rock known as shale has led to a surge in domestic natural gas production over the last three years and enabled the United States to overtake Russia recently as the world's No. 1 producer of natural gas.
As a result, we are seeing a remarkable turnabout in energy geopolitics: as U.S. natural gas reserves have soared thanks to advanced drilling methods, Russia's goal of establishing a world gas cartel patterned on OPEC has collapsed.
How big of a development is this?
Think back to 2003, when America's demand for natural gas was outpacing supply. Production from gas wells on the Outer Continental Shelf had fallen by 50%, and there was no surplus capacity in the U.S.
Gas prices had doubled in less than a year, and scores of petrochemical companies, in need of cheaper gas, closed their U.S. plants and reopened abroad. Alan Greenspan, then-Federal Reserve chairman, warned that natural gas shortages could harm the U.S. economy.
To make matters worse, Russia began flexing its political muscle, using a dispute over gas prices with Ukraine as a pretext for curtailing natural gas shipments to Western Europe. And Russia, in cahoots with several other major gas-producing countries such as Iran and Algeria, opened a global office for natural gas.
U.S. experts saw the move as the first step toward creating an OPEC-like natural-gas cartel.
Now, fortunately for the U.S. and European countries that rely on Russia's natural gas, the situation has changed dramatically for the better.
Thanks to a breakthrough in drilling technology, involving the use of three-dimensional seismic imaging and hydraulic fracturing of shale rock, huge amounts of natural gas are being produced in New York, Pennsylvania, Texas, Louisiana and other states. Instead of declining, domestic natural gas production is booming to record-high levels (see chart).
If estimates hold up, energy experts say the shale gas that underlies large parts of the United States will be able meet our country's needs for the next 100 years. The Department of Energy expects shale gas to account for 50% of natural gas production by 2020 if not sooner.
What's more, the same drilling techniques for shale gas are now being used in several European countries, including France and Poland, to extract their own supplies. Both China and India have huge shale-gas resources. Geologists say shale gas is so plentiful in some parts of the world that it could meet global needs for several centuries.
One encouraging trend is the creation of tens of thousands of U.S. jobs in shale-gas production and the generation of revenue for local, state and federal governments.
Another positive trend is the rising use of low-carbon natural gas instead of coal for electricity production, raising hopes that the United States can satisfy growing energy demand without accelerating the damage being done to the environment.
And natural gas, along with renewable energy sources and nuclear power, could help return America to near energy self-sufficiency.
But these exciting energy developments may not last if natural gas companies are burdened by excessive regulation and heavy taxes. Environmental groups are lobbying Congress to shift regulation of hydraulic fracturing from state governments to the Environmental Protection Agency, claiming that the process poses a risk to groundwater supplies.
But the fact is, hydraulic fracturing is done about 1,000 feet below underground aquifers and separated from the water supply by thick rock.
The White House also wants to add $37 billion in taxes on U.S. oil and natural gas companies, rehashing a proposal to Congress that failed the first time around. History shows that once drilling costs jump due to higher taxes, investment starts to dry up.
Turbulent economic times call for a smart energy policy. By maintaining a focus on encouraging domestic natural gas production, we can make the U.S. more energy independent, minimize the environmental impact of producing energy and foster economic and job growth.
Or we can saddle the oil and gas companies with higher taxes and regulations and wait for investors to support shale-gas production overseas.
Which seems to make more sense?
Mark J. Perry is a professor of economics at the University of Michigan, Flint, and a visiting scholar at AEI.