The US Shale Oil and Gas Boom: What is the Economic Impact and What Happens if We Use Part of it to Reduce GHG Emissions?

Transcription

1 The US Shale Oil and Gas Boom: What is the Economic Impact and What Happens if We Use Part of it to Reduce GHG Emissions? Farzad Taheripour Research Assistant Professor Department of Agricultural Economics 403 West State Street West Lafayette, IN, Wallace E. Tyner Professor Department of Agricultural Economics 403 West State Street West Lafayette, IN, Selected Presentation prepared for the Northeastern Agricultural & Resource Economics Association s Post-Conference Workshop 2014 NAREA Annual Meeting, Morgantown, WV, June 1-4, 2014 Copyright 2014 by Farzad Taheripour and Wallace Tyner. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

2 The US Shale Oil and Gas Boom: What is the Economic Impact and What Happens if We Use Part of it to Reduce GHG Emissions? Farzad Taheripour Wallace E. Tyner Purdue University June 2014

3 Outline Background and literature review Some key figures, Literature review, Objectives of this paper, GTAP Modifications, Experiments, Simulation results, Conclusions. 2

4 Natural gas production by source (trillion cubic feet) 3

5 2013 Dry Shale Gas Production Model: Rice University, Medlock, 2012 Billion cubic feet per day Actual Rest of US Bakken (ND) Eagle Ford (TX) Marcellus (PA and WV) Haynesville (LA and TX) Woodford (OK) Fayetteville (AR) Barnett (TX) Antrim (MI, IM, and OH) TcF/Year Year Source: U.S. Energy Information Administration QAe2255

6 US domestic crude oil production (million barrels per day) 5

7 Some key figures (1) Energy reserves and production in 2012 (MTOE) Energy Sources USA World Reserve Production R/P Reserve Production R/P Conv. Crude oil Shale and tight oil Total Crude Conv. Natural Gas Shale and Tight Gas Total Gas Coal Nuclear Energy Hydro Energy Renewable New resources extend US oil and gas reserves by 232% and 527% New resources extend world oil and gas reserves by 21% and 115% New shale resources are mainly located outside the Middle East 6

8 Some key figures (2) World shale oil and gas reserves Resources: ARI, INC and DOE 7

9 Some key figures (3) In 2011 about $65.5 billion was invested in drilling about 10,173 shale oil and gas wells in US, about $6.4 million per well, Each shale well consumes significant amounts of water, ranging from 1 to 10 million gallons of water, Each shale well consumes significant amounts of chemicals, ranging from 1000 to 5000 gallons of chemicals, Each shale well returns significant amounts of contaminated water to the surface at the early stages of production, ranging from 0.15 to 5 million gallons. 8

10 Some key figures (4) Expansion in US oil and gas production Expected oil production Expected gas production Source: Energy Outlook 2013 (DOE) 9

11 Literature review Shale gas and environmental policies: Main conclusion: expansion in supply of natural gas in combination with appropriate carbon polices will help the US economy to achieve low-carbon standards in future [Brown et al. (2010), Paltsev (2011), Jacoby (2011)] Shale gas and gas exports: Gas export will benefit resource owners, negatively affect energy intensive industry, and increase domestic gas prices [NERA (2012); Deloitte (2011); Brooks (2012); Ditzel et al. (2013); Taheripour, Tyner, and Sarica (2013)] Shale gas and economic impacts: Shale gas will improve welfare, positively affect GDP, and generates job and investment opportunities [IHS Global Insight Inc (2011), Citi GPS (2012) and Arora (2013)] 10

12 Objectives of this paper Existing studies mainly concentered on expansion in shale gas and ignored the fact that the new extraction technologies will expand supplies of oil and gas jointly. They do not provide comprehensive economic and environmental analyses. This research also evaluates combinations of shale expansion and environmental policies aimed at reducing GHG emissions using a modified version of the GTAP-E model. 11

13 Modifications in GTAP-E Correct the GTAP data base for: Unaccounted values of gas sold to gas distribution, Undervalued gas consumed by households and commercial sectors, Modification in firm s demand for energy inputs, Introduce two groups of resources: Resources used in oil and gas industries, Resources used in other industries, Modifications in closure to expand endowments. 12

14 I-O Table and Data Issues The US I-O table is missing the value of gas transferred from gas to gdt for distribution. The same is true for other regions. The gas cost share in the gdt cost structure is negligible, and this is not credible. The GTAP data base underestimates gas values used by commercial firms and households, The gas and gdt sectors in GTAP do not properly represent the production and distribution of gas as they operate in world.

15 Corrections in Gas and Gdt Sectors Step 1: In this step we pooled the gas and gdt together and created a new sector which covers both production and distribution of gas. In addition, regions are aggregated to 19 categories following the GTAP-BIO model aggregation scheme. The FlexAgg program is used in this step. Step 2: Then we made the following adjustment in the data base with the pooled gas and gdt activities: The GTAP regional values of gas sold to commercial users (services) and households are corrected according and the available data. We used the GTAPAdjust program to introduce the corrected values in the data base and maintain its balances. The modified gas sector is divided into two sectors of Gas and Gas- D so that the former sells gas to industries, and the latter sells gas to services and households. The Split.com program is used to accomplish this task. The values of gas sold from Gas to Gas-D in each region are estimated and included in the data base, again using the GTAPAdjust program.

16 CES Production function and demands for inputs in GTAP model 15

17 New CES Production function and demands for inputs in GTAP model 16

18 Closures Expansion in shale oil and gas outputs according to DOE projections induced by technology shocks in natural resources used by the oil and gas sectors, Restriction on exports of oil/gas from USA to other regions, Emission reduction target imposed by a carbon tax equivalent (targets are taken from Tyner and Kemal (2012)) Supplies of labor and capital are endogenous variables for US. Expansion in labor is taken from IHS Global Insight Inc, (2011). 17

19 Shale Oil and Gas Plus GHG Reduction Case 1 only expansion of shale oil and gas Case 2 shale expansion plus a carbon tax that reduces GHG emissions 26.5% below 2007 level. Case 3 shale expansion plus the same level of emission reduction but focused entirely on electricity and transportation This is close to current US policy CAFE standard for autos Electricity standard for power plants Case 4 shale expansion plus the same level of emission reduction but focused entirely on electricity (may pull back on CAFE) 18

20 Shale Oil and Gas Impacts The shale oil and gas boom is having a major impact on the US economy. During the time period from 2008 through 2035 the US GDP on average would be 2.2% higher than its 2007 level with the expansion in shale resources, The welfare gain from availability of the shale oil and gas technology averages $302 billion per year over this period. One important question is do we use this gain just to produce and purchase more goods and services, or do we use part of it to help reduce GHG emissions. 19

21 Changes in Output, Prices, and Trade Balance due to Shale Oil and Gas Expansion Sector Output Prices Trade Balance % % EV- mil$ Crops Livestock Forestry Fishing Food Coal Oil Gas Gas Distribution Oil Products Biodiesel Ethanol Electricity Chemical industry Other energy intensive industry Other industry Transport Services

22 Welfare and GDP Changes Induced by the US Shale Oil and Gas Expansion EV change mil$ GDP chg % Country or Region 1 USA EU BRAZIL CAN JAPAN CHIHKG INDIA C_C_Amer S_o_Amer E_Asia Mala_Indo R_SE_Asia R_S_Asia Russia Oth_CEE_CIS Oth_Europe MEAS_NAfr S_S_AFR Oceania Total

23 Shale Oil and Gas Expansion along with a Carbon Tax The welfare gain falls from $302 to $178 billion, a drop of 41%. The GDP level increase drops from 2.2 to 1.2%. 41% of the shale gain is lost, but substantial reduction in GHG emissions has been achieved. Another way to interpret these results is that we can at the same time increase fossil energy availability and achieve substantial economic gains, while also reducing GHG emissions 27% from the 2007 base.

24 Other Important Differences Coal output fell 1.4% in case 1, and it falls 35.1% in the carbon tax case. This result is consistent with prior research on the carbon tax, using a completely different modeling framework. Electricity output increased 2.4% in case 1, but falls 4.6% with the carbon tax. While all the industrial sectors grew in the shale expansion case, they all contract a bit in the carbon tax case. Coal price was relatively flat in the shale expansion case but falls 4.7% with the carbon tax. Electricity price fell 1.3% in case 1 but increases 9% with the carbon tax. The industrial trade balance improves relative to the shale expansion case because incomes are not rising as much.

25 Regulations on electricity and transport sector emissions This policy concentrates all the emission reduction in the two sectors that together represent 71% of all GHG emissions. The welfare gain falls from $302 billion in case 1 and $178 billion in case 2 to $148 billion. The welfare gain is less than half the original gain from shale expansion. By refusing to go with the more efficient economy-wide carbon tax and instead using regulatory measures to achieve the same objective, the welfare cost to the economy is about $30 billion/year.

26 Other Results Coal output falls even further to -39%. This difference is to be expected since more of the emission reduction is forced on the electricity sector. All the fossil energy prices fall significantly. Electricity price goes up 12.5% compared with 9% in the carbon tax case. All the industrial prices go up more than in the carbon tax case. The industrial trade balance improves a bit compared with the carbon tax case.

27 Electricity Sector Emission Reduction Only There is only a small difference between cases 3 and 4. The welfare increase goes up from $148 to $151 billion. The GDP change rounded is the same 1%. Coal output falls further by 42.6% of the base case. Coal price actually falls less at 7.8%. Electricity output falls more as would be expected, down 9.6%, while electricity price jumps by 15.7%.

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30 Changes in EV with respect to changes in emissions reduction target Description Emission reduction target for 2035 Emissions reduction target for 2035 (%) Average annual EV in billion $ at 2007 prices Change in EV for 15% increments in emission reduction Target Clearly, if the shale dividend is viewed as a windfall, it could pay for substantial emissions reduction.

31 Shale Oil and Gas Conclusions Clearly, the shale gas boom has significant economic implications for our economy. We have the opportunity to use part of the shale dividend to reduce GHG emissions. It is an important decision for the US. We can pay forward to lower GHG emissions using part of the shale oil and gas gain.

32 Thanks very much! Questions and comments.