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No US Need For Imported LNG.

Just five years ago, experts were bracing for the US to become dependent on imported LNG, with uncertain geo-political implications such as increased reliance on Arab and Russian suppliers and entanglement in a global gas market where Moscow plays a role the West perceives as potentially troubling. That talk now seems like ancient history, as record gas production has spared the US the need for large-scale imports.

According to one only hyperbolic headline, "We've Fracked So Much Gas We've Got No Place to Put It". Some people claim that unleashing US shale resources would slash the price of crude oil. Many remember the cries of "Drill, Baby, Drill!" which filled the air-waves during the 2008 presidential campaign. Others insist that, because oil is priced on a global market, increased US output would not move the needle.

Even Douglas Holtz-Eakin, the top economist for Sen John McCain's 2008 presidential campaign, has written: "Domestic action to increase [oil] production will not lower gas[oline] prices set on a global market". The precise truth lies somewhere in between.

If US producers were able to massively ramp up oil output, the ultimate impact would mostly boil down to one big question: How would other big oil exporters such as Saudi Arabia and the rest of OPEC respond to a surge in US supplies?

To stop prices from falling, they could cut back their output in response to new US production, much as they have tried to in the past. That is essentially what happens in the much-cited projections by the EIA.

In one recent exercise, for example, the EIA looked at what would happen to gasoline prices if US oil production grew by about 1m b/d. The net impact was a mere 4 cents a gallon fall. Why? All but a sliver of the increase in US output was matched by cut-backs in the Middle East, leaving oil prices barely changed.

Given the growing demand for oil in China, India, and elsewhere, the safest bet is on continued crude prices above $50/b.

American economists say the US oil and gas boom has come at an auspicious time. With record numbers of Americans out of work, hydrocarbon production is helping create much-needed jobs in communities from Pennsylvania to North Dakota. Shale gas production alone accounted for an estimated 600,000 US jobs as of 2010, according to the consultancy IHS CERA.

It is much harder, though, to extrapolate into the future. In a deeply depressed economy, new development can put people to work without reducing employment elsewhere. That is why boom states have gained massively in recent years. The same is not true, though, in a more normal economy.

Unemployment rates are typically determined by fundamental factors such as the ease of hiring and firing and the match between skills which employers need and which workers have. The oil and gas boom will not change these much. That is why one should be sceptical about rosy projections of millions of new jobs.

Citigroup, for example, claims that the energy boom could deliver as many as 3.6m jobs by 2020. Unless the US economy remains deep in the doldrums for another decade, these will mostly come at the expense of jobs elsewhere. That hardly means all the new oil and gas coming on stream is worthless. In the near term, it can support hundreds of thousands of workers who would otherwise be unemployed. In the long term, it should deliver a boost to the overall US economy, raising GDP by as much as three percentage points, according to Citigroup's Daniel Ahn.
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Publication:APS Review Downstream Trends
Date:Jun 25, 2012
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