Free Energy Entrepreneurs to Generate Prosperity

Free Energy Entrepreneurs to Generate Prosperity

President Obama recently signed a $1.15 trillion omnibus bill that included good, bad, and ugly items.

The good was ending the oil-export ban, a move that's likely to keep gasoline prices low and stimulate economic activity and job creation. The bad was more spending on many frivolous items that will increase an already bloated $18 trillion-plus national debt. The ugly included extending production tax credits for wind and solar energy projects.

Ending tax credits and other subsidies for all energy production would allow entrepreneurs to operate within competitive markets, which in turn would best allocate scarce resources to meet our desires rather than government's. The shale boom provides a lesson in what market forces can accomplish in the energy sector.

As the economist Julian Simon noted, energy is the master resource. The abundance of energy has transformed the world, particularly since the Industrial Revolution, helping to eradicate poverty.

The shale boom epitomizes this success. Not too long ago, the geophysicist Marion Hubbert argued that oil production would eventually peak, given the finite amount of oil underground, which became known as "Hubbert's peak theory." While there is, indeed, a finite amount of oil underground, this theory overlooks the human ingenuity by which energy entrepreneurs created new oil and natural-gas production techniques.

One entrepreneur is George Mitchell, the technological father of refined fracking techniques. In the 1990s, he unlocked the oil and natural gas in shale rock. Another is Jim Henry, who applied Mitchell's techniques to tap the vast oil reserves in the Permian Basin. Bud Brigham is another; he used a new drilling technique that expanded by leaps and bounds the output from horizontally fracked wells.

These entrepreneurs and others helped provide an environment conducive to the shale boom of more affordable, portable fossil fuels. However, many of the cutting-edge, expensive production techniques weren't profitable during much of the 1990s and early 2000s with low West Texas Intermediate (WTI) crude oil prices.

Things began to change during the mid-2000s, when the prices of oil and natural gas steadily rose to profitable levels; prices plummeted during the Great Recession but rebounded following the Arab Spring in 2011. From March 2011 until September 2015, oil production per day went up 68 percent, to 9.4 million barrels, which remains near the record high in late 1970 of 10 million barrels and the latest high of 9.6 million barrels in April 2015.

This is all in spite of the roughly 60 percent drop in the WTI price since the summer of 2014. To the surprise of the Organization of Petroleum Exporting Countries (OPEC) and Russia, U.S. oil producers have quickly refined their drilling technology, which has helped to drastically cut production costs, and continued to produce in the most productive areas.

This drilling activity has been a bright spot in an otherwise dismal national economic recovery. The U.S. unemployment rate of 5 percent remains near what some consider full employment, but this rate is misleading. The labor-force participation rate remains near 40-year lows, and the broader underutilization rate is closer to a more realistic 10 percent.

Texas, where oil production per day is up 156 percent to 3.4 million barrels since March 2011, has been a major contributor to this shale boom. The state accounts for 55 percent of the increase in U.S. oil production during this period. And Texas has contributed to 48 percent of all new civilian jobs in the last eight years. Of course, these have not all been oil-and-gas jobs, as Texas is a highly diversified economy with less than 3 percent of the labor force employed directly by that sector.

The solution for a more prosperous nation is to facilitate the ingenuity of entrepreneurs. That, after all, is what led to the shale boom.

Vance Ginn is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at vginn@texaspolicy.com. On January 7, 2016, the foundation will host its annual Policy Orientation in Austin, Texas, where Ginn will moderate a panel called "Advancing the Texas Model: Will a Simple Tax System Drive Prosperity?"

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