America’s new oil boom is reshaping the global energy dynamic, and the U.S would be wise to heed lessons from Canada and Australia.
You will hear it out of many a national politician’s mouth: the US will become energy independent under his or her ambitious plan. It is an alluring idea: stop bankrolling politically unstable regimes and instead keep the money at home.
Up until now, those have been empty words. But the fracking boom has made that idea a bit more realistic, despite major protest from environmental groups. The US Energy Information Administration’s latest projections held a glimmer of hope that the US could stop importing oil by 2037, but that is just one scenario projecting out over 20 years. Consider it a long-shot.
Complete oil independence aside, the fracking boom is changing oil politics. For one thing, oil-producing states make up seven of the ten states with the fastest job growth rates. Perhaps nowhere illustrates the wildness of the boom as well as North Dakota.
The Bakken Oil Field is profitable for drilling only when fracking technology is used. Seizing the opportunity, workers cannot get to the remote town of Williston fast enough. A one bedroom apartment there costs as much as it would in central London, and McDonald’s pays its employees $10/hour more than minimum wage. Since the recession, the state’s economy has grown by 35%. That is a boom.
It is not just North Dakota. Since 2003, the US has increased oil production by more than 30%. Such a huge shift, if sustained, is going to have far-reaching impacts on the American economy and on American politics. That said, oil makes up just a small part of the US economy. Nonetheless, insight can be gained from examining how resource booms changed Australia and Canada.
(Source: US EIA)
Rising dollar, crippling manufacturing?
Australia’s resource boom has been well documented. Over half its exports are coal and minerals, mostly headed to fuel China’s building boom. The surge in investment in mining infrastructure helped Australia completely avoid the Great Recession – though now that most of the infrastructure is in place, the boom is tempering.
The huge uptick in exports turned Australia’s trade deficit into a surplus. A net current account balance led to the Australian Dollar appreciating against the US Dollar by 80% between 2008 and 2011.
A rising dollar would have mixed effects on the US economy, but these would be nowhere near as large as the shifts that have occurred in Australia. On one hand, imports would be relatively less expensive. Since the US imports a lot, families could buy more goods than they can now.
But this would hurt exports, and in turn, slow down the recovery of the American manufacturing sector. Any potential renaissance in the manufacturing sector would be dealt a blow. This was Australia’s experience, and now that the Australian Dollar is becoming weaker, other sectors are becoming more competitive on international markets.
Changing industries, changing politics
The oil sands benefiting North Dakota also stretch into Canada, which some are calling the newest rogue petro-state. Government revenue is being bolstered in a big way by oil money, and the ruling Conservative Party is using that cash to pay for its priorities in a big way.
Prime Minister Stephen Harper draws his support from the center of the oil boom in Alberta. The influence of the oil industry is growing in Canada, and its interests are growing powerful. Many of the nation’s conservation laws have been altered to promote fracking. For a country associated with strong conservation, this is a big change.
In the US, the political effects will be smaller than in Canada. But if the oil boom continues, it will change the path of the political conversation. The major oil states are all under Republican control, and increasing populations could guide more Congressional seats to them when redistricting occurs following the 2020 Census.
In the short term, the debate over fracking will continue to be loud and polarizing. Next door to North Dakota, efforts to start fracking in Minnesota have been put on hold because of public concern about environmental impacts (although Minnesota has always been a true-blue Democratic stronghold, just the opposite of North Dakota).
With this debate unfolding and with all the wealth coming from natural resources in North Dakota and Texas, money spent on lobbying for fracking will continue to increase.
Another battle being waged just under the radar in the national and international media is over railway usage in North Dakota. The oil boom has strained the traditionally agricultural area’s infrastructure and made it hard for farmers to ship their crops. Shipping oil on the railways is more profitable, and corn and wheat are getting left out. Grain elevators are reported to have stopped accepting corn from farmers last fall because they were already full. Nor was there room for corn on the trains going out of the state.
The oil boom in places like North Dakota and Texas may be small compared to the booms seen in Canada and Australia, but they are already having a big impact on US political economy. Ten years ago, no one would have guessed that energy independence would be a reality by 2037 (even though some of the changes have come from energy-saving, not just increased domestic production).
But those impacts cut both ways. They could also put the brakes on other parts of the economy and spark a contentious political debate.
