Trillion Dollar Economists

Chapter 10Economists and the Oil and Gas Revolution

Modern economies wouldn’t be modern without the availability of various forms of energy—electricity, gasoline, diesel fuel, and natural gas. Except for the blending of gasoline with supplements like ethanol, the entire automotive and trucking transportation sector depends on crude oil. Natural gas, meanwhile, once thought to be a low-value fuel and confined to some manufacturing uses and fuel for running electric generators in peak periods, has become the hottest source of energy because it is turning out to be plentiful and is much cleaner to burn than oil or coal.

Even as late as the beginning of the Great Recession and in the early years of the recovery, however, there was deep pessimism among policy makers and the public about the prospect of continued dependence on foreign oil, especially from countries with less than friendly relations with the United States. This pessimism now seems like ancient history. In a few short years, the combination of hydraulic fracturing (fracking) and horizontal drilling has unleashed a massive increase in oil and gas production, by unlocking these fuels from shale formations throughout the continental United States. As a result, the dependence of the United States on foreign oil has dropped sharply and is widely projected to continue declining. Likewise, the price of natural gas, which is set more in domestic than global markets because it is less transportable, has also declined (though ...