Behravesh: Shale Oil And Gas Has Led Industry, Economy To Prosperity

For the first time in decades, U.S. chemical manufacturers are spending tens of billions of dollars to build and expand facilities.

Darren Barbee, Hart Energy

For the first time in decades, U.S. chemical manufacturers are spending tens of billions of dollars to build and expand facilities.

The economy has seen 1.7 million jobs added to the workforce. Investments from foreign companies are flowing into the United States. Even the trade deficit is ebbing.

The success of the shale oil and gas revolution has reached far beyond its creators, said Nariman Behravesh, chief economist, IHS Global Insight, at the Winter NAPE conference on Feb. 6.

Behravesh said energy producers’ successes have created a manufacturing renaissance and economic resurgence in the United States.

Not all is rosy. Over time, Behravesh expects commodities prices to fall, including oil. While prices face upward pressure mainly due to geopolitical considerations in regions such as North Africa and the Middle East, the North American boom is potent.

“People talk about the fact that the U.S. could end up being, if not the largest, one of the top two or three largest oil producers in the world,” he said.

Production on that scale could ultimately sink oil prices. “Our view on oil prices is you’ll actually see them drift downward over the next three or four years on a Brent basis down to the low $80s,” he said.

At current costs, the energy revolution has brought lower electricity and feedstock prices for industries such as chemical companies.

“These kinds of factors are creating a competitive stimulus. This is a big shot in the arm” for many companies, he said.
Chemical companies, for instance, are pouring in money in anticipation for exports. Behravesh said the IHS has “identified somewhere on the magnitude of $95 billion of new investments in the chemicals industry over the next 10 years.”

Most of that will be focused on ethylene production. Ethylene is a petrochemical building block and a much sought after chemical for the production of polyethylene, which is used in a wide variety of non-durable goods applications such as packaging materials, according to IHS.

Exports of Liquefied Natural Gas (LNG) pit the energy industry against chemical companies and other downstream industries that want cheap feedstocks,

But Behravesh said LNG exports will happen. Market forces are too strong for Washington to prevent them going forward, he said.

“The differentials between gas prices here and in Europe, and especially Asia, are so huge it’s almost irresistible,” Behravesh said.

The availability of cheap energy is also starting to attract attention and money from other parts of the world. Giant state-owned and private-sector companies in Europe, Latin America, Asia and the Middle East are considering or have already committed investments in the United States.

Investments aren’t coming just to the energy sector, but “also in a lot of the downstream sectors like petrochemicals,” he said. “And just as important, a lot of U.S. companies, instead of offshoring, instead of going overseas, are actually staying at home.”

The unconventional oil and gas revolution has also altered the economy

“Our view is the stage is set for 2 .5% growth in the first half of the year,” he said. “We could get all the way up to 3% by the end of the year. All those dynamics are in place.”

A lot of good news has recently shown up in GDP reports. Consumer spending has accelerated, housing has picked up speed and business spending on capital goods, which was negative in the third quarter, was a double-digit positive in the fourth quarter, Behravesh said.

The game-changer, however, has been energy.

The energy boom has generated about 1.7 million jobs and could create up to 3 million by 2020.

Supply companies have also benefited, and “people earning more income are out there spending,” he said.

State, local and federal governments have also reaped $62 billion in additional revenues. By 2020, revenues could reach $100 billion or even $120 billion, Behravesh said.

Behravesh said the country’s trade imbalance could also ease as domestic energy continues its surge.

“For the longest time we worried in the U.S. about our trade deficit and our current account deficit, which is the broadest measure of our balance and payments,” Behravesh said. “I don’t know how many people know this, but about half of that is energy.”

In 2005, the United States imported roughly 60% of its oil from overseas. Today, imports are 42% and continuing to fall.

“This reduction in our oil dependence … it’s going to get reduced quite dramatically in the coming years. This will go a long way in essentially removing the trade deficit as one of our big problems,” Behravesh said.

Behravesh, author of Spin-Free Economics: A No-Nonsense, Nonpartisan Guide to Today's Global Economic Debates, said that left to its own devices the economy is doing fairly well.

The trouble down the road may be the country’s dysfunctional political system.

“It could still get in the way,” he said, adding that many of the recent crises in Washington, such as the fiscal cliff, are manufactured.

“This is not something outside world or the markets are imposing,” he said. “There’s become a lot of reckless brinksmanship with what result? We have very, very little to show for this sort of storm and drama in Washington. It’s a very bizarre way of governing.”