The Value of U.S. Energy Innovation and Policies Supporting the Shale Revolution

Dec 02, 2019 2:56 PM

White House Council of Economic Advisors | October 2019

The classic effects of innovation are improvements in productivity, which lower costs and prices and increase production. Energy innovations—and the policies that support them—have similar effects and ultimately reduce prices for American households and businesses. This CEA report describes the causes and consequences of growth in oil and natural gas extraction from shale and similar geologic formations, with a focus on effects on consumers. We first discuss the dramatic rise in productivity and its effects on cost, production, and price. Second, we estimate the consumer savings brought by shale-driven declines in energy prices. Third, we assess total and shale-related changes in emissions in the United States. Lastly, we consider the effects of contrasting approaches to energy policy taken by U.S. States.

From 2007 to 2019, innovation in shale production brought an eight-fold increase in extraction productivity for natural gas and a nineteen-fold increase for oil. These productivity gains have reduced costs and spurred production to record-breaking levels. As a result, the United States has become the world’s largest producer of both commodities, surpassing Russia in 2011 (for natural gas) and Saudi Arabia and Russia in 2018 (for oil). CEA estimates that greater productivity has reduced the domestic price of natural gas by 63 percent as of 2018 and led to a 45 percent decrease in the wholesale price of electricity. Shale production has also reduced the global price of oil by 10 percent as of 2019.

By lowering energy prices, we estimate that the shale revolution saves U.S. consumers $203 billion annually, or $2,500 for a family of four. Nearly 80 percent of the total savings stem from a substantially lower price for natural gas, of which more than half comes from lower electricity prices. Oil accounts for the other roughly 20 percent of the savings, most of which are transportation sector savings on fuel costs. Because low-income households spend a larger share of their income on energy bills, lower energy prices disproportionately benefit them: shale-driven savings represent 6.8 percent of income for the poorest fifth of households compared to 1.3 percent for the richest fifth of households. These consumer savings are in addition to economic benefits linked to greater employment in the sector.

The shale revolution has also reduced energy-related Greenhouse Gas (GHG) and particulate emissions through changes in the composition of electricity generation sources. We estimate that from 2005 to 2017, the shale revolution lowered energy-related GHG emissions by 527 million metric tons per year, or 9 percent of GHG emissions in 2005. This contributed to a greater decline in GHG and particulate emissions (relative to the size of the economy) in the United States than in the European Union over that period.

The Trump Administration’s deregulatory energy policy follows earlier Federal deregulatory policies that helped to spur the shale revolution. By limiting unnecessary constraints on private innovation and investment, the Administration’s policy supports further unleashing of the country’s abundant human and energy resources. It contrasts with policies that expand government control and restrictions on productivity and innovation, which some States have adopted. New York, for example, has banned shale production and stymied new pipeline construction. New York’s policies have led to falling natural gas production in the State, greater reliance on energy produced elsewhere, and higher energy prices. New York’s failure to approve new pipelines causes consumers in New York and New England to pay an estimated $2 billion more in energy costs each year, or $233 for a family of four. Moreover, New York’s rate of GHG emissions reduction has been less than the rate in the neighboring State of Pennsylvania, which has allowed shale production to flourish and now produces more than twice the energy that it consumes.

Read More: https://www.whitehouse.gov/wp-content/uploads/2019/10/The-Value-of-U.S.-Energy-Innovation-and-Policies-Supporting-the-Shale-Revolution.pdf