The American Interest
Analysis by Walter Russell Mead & Staff
Could the Shale Boom Go Bust?

Analysts are warning of major obstacles ahead for America’s ongoing energy revolution. Fracking has successfully opened up vast new reserves of oil and gas, but investors are concerned that ill-conceived regulations and stunted U.S. transportation infrastructure are threatening to slow the arrival of the energy boom. The Financial Times reports:

Once the oil is extracted from wells in the country’s midsection, it often faces a long and complicated journey to refineries, many of which are located on the coasts. Transportation bottlenecks are one of the main reasons US crude trades at a discount to international benchmarks. [...]

If this disconnect in prices were to continue, it could threaten the economic viability of these new supplies, potentially stopping the boom in its tracks.

Pipeline bottlenecks are becoming more common as new plays are opened up. The U.S. has the most extensive pipeline network in the world, but it wasn’t built with shale energy sources in mind.

Policy problems compound the logistical snafus. Exports of commodities deemed to be in short supply, crude historically being one such commodity, are restricted by a 1979 law, so companies have to refine the oil before shipping it off. This creates another bottleneck, as refineries struggle to keep up with the growing supply of oil coming out of the Midwest.

The President will have a new energy and environment team for his second term. The Energy Secretary, Interior Secretary, and the chief of the EPA are all stepping down. The Obama administration has a clear task ahead: expand the country’s pipeline network and replace our current energy laws, informed by scarcity, with an export policy that reflects the bounty coming our way. As the FT says, “some of the bigger challenges facing the energy industry lurk not below ground but above.”

While there are still some questions about how quickly we can access unconventional oil and gas resources and some of the most optimistic projections need to be taken with a grain of salt, developing an appropriate policy framework for a new era of hydrocarbon abundance in North America is one of the most important questions facing not only American but also Canadian and Mexican officials.

Published on February 8, 2013 8:00 am