New shale extraction technology is ushering in an era of lower energy costs in the US that will have an impact around the world.
Lower energy costs mean downward pressure on inflation and manufacturing costs, which will mean more money left over for consumption and investment in the US and overseas. Policymakers and investors who dismiss technologies like shale extraction as niche developments need to consider their longer-term implications.
Extracting oil and gas from shale rock through hydraulic fracturing or fracking has already transformed the US energy landscape. Along with enhanced energy storage and innovations in alternative energy, shale extraction is holding energy costs down. The strong shale supply has helped keep US West Texas Intermediate oil prices lower than non-US Brent prices since late 2010, according to the US Energy Information Administration. Since 2004, WTI had typically traded at a premium of $1 to $3 a barrel.
The impact of lower energy costs on US economic growth is not some one-off that has already been fully priced into the equity market. Over the longer term, the multiplier effects could be even greater. Lower energy costs mean US manufacturing becomes cheaper and the US becomes more attractive as an investment destination. This will become an even more significant factor if US non-financial corporations invest even a fraction of their vast $1.8 trillion cash reserves and start employing more US workers. Higher employment also means higher consumption and potentially more employment. Shale can contribute to a virtuous circle of self-reinforcing recovery in the US.
Overall, we estimate that shale could add 0.5 percentage points a year to US gross domestic product (GDP) growth over the next 10 years. Official figures put US annual GDP at $17.1 trillion in the final quarter of 2013, meaning that if the shale boom were to add 0.5 percentage points to GDP in 2014, it would create an $85 billion economy from scratch.
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