The partnership that spurred an energy revolution

At a moment when good economic news is in short supply, yesterday’s observance of World Energy Day provided a chance to celebrate some positive news – positive, at least, from the viewpoint of the world’s developed economies, which have lately been struggling to recover from prolonged stagnation.

A major factor informing the World Energy Day forum on “The Green Side of Energy Security,” convened in Washington by the European Union Delegation to the United States, was the recent plunge in global energy prices. The falling cost of energy, thanks to vast increases in oil and natural-gas supplies, is now poised to give advanced economies a much-needed additional stimulus.

Moreover, the current global glut of oil and natural gas also offers a chance to underscore an example of a successful innovation program that has helped strengthen economic competitiveness. The success of the long-term U.S. program to create new and better methods of oil and natural-gas production – a success that has transformed the global energy sector – epitomizes the creativity that public-private cooperation can unleash whengovernments and industries, working together, patiently invest to strengthen productivity in specifically targeted industries and sectors.

The worldwide price of the crude oil has fallen about 25 percent – from more than $110 a barrel in midsummer to about $80 a barrel this week – thanks to a combination of reduced demand (due to sluggish economic activity in many industrialized countries) and vastly increased oil and natural-gas production. Despite the geopolitical tensions now afflicting several major oil-producing regions, large supplies of oil and natural gas are projected to continue arriving on the market, maintaining downward pressure on energy prices.

Much of the increased supply has its origin in North America – where “the revolution in American shale gas and ‘tight oil’ is real,” according to energy-policy scholar and historian Daniel Yergin. Writing in the Financial Times this week, Yergin noted that “U.S. crude-oil output is up almost 80 percent since 2008, supplying an extra 3.9 million barrels a day. . . . Canadian oil sands have added another 1 million barrels a day to North American supply over the same period.”

The falling price of energy supplies is helping ease some of the gloom that pervaded the recent Annual Meetings of the World Bank Group and International Monetary Fund. The energy revolution is poised to deliver a powerful, positive economic impact: As industries and consumers pay less for oil and natural gas, they’ll receive the equivalent of a tax cut – with Yergin estimating its benefit at about $160 billion a year, just for the U.S. economy. Such a stimulus, if it helps buoy economic activitry in Europe as well, will boost economies that have been mired in what threatens to become long-term “secular stagnation.”

For long-suffering Western motorists who are now paying less at the gasoline pump – and for home-heating-oil and natural-gas consumers who are awaiting their first chilly-season heating bills – the oil-price plunge and natural-gas glut may seem like an economic deus ex machina.

So it’s worth recalling: What inspired the arrival of these new energy supplies? New techniques – “hydraulic fracturing” and “horizontal drilling” – have helped coax once-hard-to-reach oil and natural-gas deposits out of underground rock formations.

And how were those techniques developed? Through well-targeted innovation programs that were initially funded by the U.S. government and that were then applied by innovators in the energy industry.

Connect the dots: This revolution was brought to you by far-sighted, government-inspired investment initiatives to promote competitive industries and innovation.

Launched during the Ford and Carter Administrations – when repeated oil shocks were raising fears that the industrialized world would be threatened by oil-rich countries’ production cuts and price increases – pragmatic R&D efforts on alternative oil-production methods were steadily pursued by the U.S. Department of Energy (DOE) and the U.S. Bureau of Mines, drawing on crucial technological insights from the taxpayer-supported network of national research laboratories.

Once that initial government-funded research had laid the foundation for new technologies and techniques, the private sector stepped in and played its indispensable part. A public-private partnership through the Gas Research Institute helped perfect the new techniques, while pro-innovation tax policies granted favorable federal tax treatment for investors’ R&D commitment to the energy sector. A champion of the new technologies, George P. Mitchell, evangelized for hydraulic fracturing and horizontal drilling, even when skeptics scoffed. Researchers at the Breakthrough Institute assert: “Where Mitchell proved invaluable was [in] engaging the work of government researchers and piecing together different federally-developed technologies to develop a commercial product.”

Mitchell’s determined experimentation with the new technologies built atop the crucial government investment in R&D. His entrepreneurial zeal was even more remarkable considering the opposition of many free-market absolutists on Capitol Hill, who disdained any type of public-private partnership that tolerated an active government role. Mitchell’s team gives credit where credit is due: “DOE started it, and other people took the ball and ran with it,” according to Mitchell’s former vice president and lead geologist. “You cannot diminish DOE’s involvement.”

Indeed, the impact of lower oil and natural-gas prices is so dramatic that some energy-policy scholars, as today’s European Union event explored, understandably worry that lower energy prices may lull governments and consumers into a false sense of security: Lower energy costs may remove a price-conscious spur to continued investment in cleaner, more sustainable alternative energy sources. That concern surely poses a genuine challenge for long-term clean-energy and anti-climate-change strategy. Avoiding such an outcome will require pro-innovation initiatives, and perhaps tax-policy adjustments, that promote investment in sustainable energy sources and that impose disincentives on the use of fossil fuels that intensify greenhouse-gas emissions. Such steps would help diversify the mix of energy sources in ways that, over the long term, steadily reduce reliance on all forms of fossil fuels and speed the transition to renewable sources.

Looking back on the history of today’s lower oil and natural-gas prices, one is tempted to say: Well-targeted industrial policy – or, if you’d prefer to use the modernized lingo,competitiveness strategies – inspired today’s revolution in energy policy. It’s the latest proof that competitiveness strategies, with the public sector and the private sector both playing constructive roles, can contribute to positive economic change.

So the next time a dogmatic advocate of laissez-faire passivity tries to tell you that government should always keep its hands completely off the economy – or scoffs that all forms of competitiveness strategy are merely doomed attempts at “picking winners and losers” – remind that laissez-faire fatalist about the positive economic impact of thegovernment-and-industry partnership that triggered the shale-gas and tight-oil revolution. That government-led, private-sector-driven success provides dollars-and-cents evidence thatactivist strategies, promoting research and investment in high-priority sectors of the economy, can deliver a dramatic payoff in improved productivity.

Published in collaboration with The World Bank

Author: Christopher Colford is a Communications Officer at The World Bank, in its Financial and Private Sector Development Network. 

Image: A natural gas flare is seen outside of Williston, North Dakota March 12, 2013.  REUTERS/Shannon Stapleton