U.S. shale boom is changing energy economics, adviser tells Kansas City audience

The U.S. “shale revolution” has reshaped world energy markets and appears to be here to stay despite Saudi efforts to undercut it, an energy industry adviser told a Kansas City gathering Wednesday morning.

The speaker, James Clad, senior adviser to the CNA Corp. consulting firm and a former Defense Department assistant secretary for Asia, was the keynote speaker at “Fueling the World: Geopolitical Economy of Oil,” a forum presented by the International Relations Council and the International Trade Council of Greater Kansas City.

Clad offered several points of analysis and information:

▪ Efforts by the Saudis and other OPEC members to keep oil prices down are unlikely to torpedo North American shale production. Many production costs have already been “sunk,” from land to rigs, he said, and others have dropped as innovation and efficiency have increased, so producers are in it for the long haul. Production is up sharply in the past few years, so concern about the number of fracking rigs being down is misplaced.

▪ Five or six years ago, shale was derided as “trash rock” that would be too expensive to tap. And the talk was of building U.S. port facilities to receive liquefied natural gas imports. Now the port facilities will be built to export natural gas.

▪ Natural gas is costly to ship overseas because the infrastructure to liquefy natural gas requires a lot of capital. But pressure to get gas-exporting facilities built will remain high because Europe’s natural gas costs are running three times those of the U.S., and gas costs in Asia can be eight to 10 times those in the U.S.

▪ The U.S. needs better energy infrastructure, including oil and gas pipelines. Shipping oil by rail, he said, is more hazardous and much less efficient than by pipeline.

▪ Lower oil prices overall have helped the U.S. economy and consumers, along with some emerging nations that import most of their energy.

▪ The new shale supplies of affordable oil and natural gas in North America could fuel a reindustrialization in the U.S. in such industries as cement and steel. Being close to supplies of natural gas, in particular, is a big advantage in such industries.

▪ Though gasoline and other energy prices are impossible to predict, several factors point to them going back up at least some: the risk of political upheaval overseas, reserves dropping and the likelihood of reindustrialization in the U.S.

▪ The multitude of state and federal regulatory jurisdictions probably has helped, rather than hindered, fracking by providing flexibility and innovation in rules.

After he spoke, Clad fielded questions and then joined three others on a panel: David Anderson, a retired Marine Corps officer who now is professor of strategic studies at the Army Command and General Staff College at Fort Leavenworth; Kara Tan Bhala, a former managing director and senior portfolio manager at Merrill Lynch who founded the Seven Pillars Institute for Global Finance and Ethics; and Roger Furrer, managing partner and chief operating officer at Bannockburn Global Forex, which is based in Cincinnati.

Tan Bhala moderated and the other panelists took questions, some on the global implications of the U.S. energy boom.

The panelists noted that the big drop in oil prices had deeply hurt Russia and Iran, along with African nations such as Nigeria and Algeria that are energy producers. Those exporting countries often have national budgets that were drawn up based on oil selling for $100 a barrel or more, so $50 or $60 oil throws their finances into disarray. And if the economic pain in some of those countries leads to upheaval, Clad noted, that could end up pushing oil prices back up.

This story was originally published May 6, 2015 at 12:25 PM with the headline "U.S. shale boom is changing energy economics, adviser tells Kansas City audience."