…. Five years ago, we were talking about the consequences of becoming dependent on imported natural gas. Now we’re talking about whether we should export natural gas. Oil consumption, which seemed like it would go up forever, has fallen steadily over the last seven years. And renewable energy production has doubled at the same time, in part because of government support but in part because of some pretty radical declines in cost that people didn’t anticipate ….
Michael Levi is CFR’s senior fellow for energy and the environment, and he directs the Program on Energy Security and Climate Change and is author of the new book “The Power Surge: Energy, Opportunity and the
Battle for America’s Future.”
Peter Orszag is vice chairman of global banking at Citigroup and former director of the Office of Management and Budget and a CFR adjunct senior fellow.
“… Peter, from an economist’s perspective, can you talk a little bit about the economic impact of the shale revolution?
PETER ORSZAG: Sure, and this is one of the themes that Michael highlights in his excellent book. But let me just give a little bit more specificity to it.
The question is, what would the, you know, potentially dramatic new production, especially as it spreads to tight oil from shale formations, have on the economy? We’ve already seen significant effects from the dramatic decline in natural gas prices, but as this revolution spreads to the oil market also, what will the impact be?
My colleague, Ed Morse, has put out a report that tries to quantify some of these things, so let me just give you some flavor, because the effects are quite significant.
New production plausibly could amount to something like 7 percent of additional — of global production by, say, 2020. A reasonable estimate from that additional production is that the additional supply, along with the reaction to the price reduction that is associated with the additional supply overall would reduce prices, oil prices by something like 16 percent in 2020, which is a quite significant impact.
And then the question is what does that price reduction and the new production itself do to GDP, and the answer is that it — you know, a reasonable approach suggests that it would raise real GDP in 2020 by something like 2 (percentage points) to 3 percentage points, which is the equivalent of approximately 300 (billion dollars) to $600 billion a year.
Just to kind of walk through that very quickly. The first impact is when you’ve got a lot of new oil and gas production, that adds to real GDP directly because of the value of the new output, if you will, and a reasonable estimate there is that that accounts for about half of the total impact on the economy.
But in addition to that, you then have a kind of multiplier effect from that new production, as there are secondary effects. You can imagine, for example, the reduction in natural gas prices lead — stimulates activity in petrochemicals and steel and, you know, other very energy intensive sectors. And when — so that’s one kind of indirect effect.
And then the second indirect effect is on consumers because, as energy prices decline, they’ve got more disposable income to spend. You can think of that component as basically being a tax cut. And in fact, the price reductions, the — kind of of the order of magnitude that I mentioned would amount to almost $100 billion a year in new economic activity that’s being driven by the lower prices and freeing up disposable income in household budgets. So you can imagine — you can think of that almost as if it’s a — basically $100 billion a year tax cut.
So these are pretty big effects. I mean, one way of thinking about a 2 (percent) to 3 percent increase — percentage point increase in GDP by 2020 is if that were spread evenly between now and today so that you get to the extra 2 (percent) to 3 percent by 2020, that’s, you know, 30, 40 basis points a year. And to put that in context, that would be the equivalent of moving GDP growth from, say, 2 (percent) to almost 2 1/2 percent a year, which is, in today’s economy, quite a noticeable effect. So this is a pretty big deal, and it’s important that we — that we — well, it would be — it would be very beneficial if we were to actually experience those kinds of gains…“