On the Global Implications of Shale: The global economy

You have not heard from me for a while. In part, because we are busy preparing a new Energy Outlook, this time out to 2035 (and to be launched on January 15, 2014). But to some extent it was also because we are trying to get our heads around the potential global implications of what we are seeing in global shale oil and gas developments, based on last year’s Energy Outlook.

The result was a somewhat lengthy write-up.

To make this more digestible, I will publish it in instalments. There is a first part, setting the scene, and then five parts dealing with five likely global implications: (i) on global oil and gas markets; (ii) on a new role for local policy; (iii) on the geopolitics of energy; (iv) on the global economy; and, last but by no means least, (v) on the environment.

From the geopolitics of energy, we reach the fourth implication; global economic impact.

Good news for the global economy - at least at first sight

So far, the public discourse around the economic implications of shale oil and gas is dominated by the question whether cheaper energy prices will give the US a competitive advantage and may even trigger its industrial revival. In the grand scheme of things, this will turn out to be a peripheral issue.

More important are the global capital flows associated with the new production centres of oil and gas. In case you asked, most economists over the last few years would have probably answered that one of the most persistent threats to global economic stability lies in what has come to be known as global imbalances: The term refers (mostly) to the need to finance a persistent US external and public sector deficit with capital inflows from countries that have an external surplus.

The most prominent example, of course, is China. But the US also imports capital from the Middle East and other export oriented economies. The risk associated with this situation is that rolling over these financing requirements may eventually prove unsustainable. Global instability could result.

The energy imbalances discussed yesterday carry the potential to alleviate these Balance of Payment imbalances. Today, energy imports still account for ~50% of the external US deficit in goods and services. At first sight, the trend toward self-sufficiency in energy will diminish this deficit (it will also help the fiscal situation). By the same token, rising energy imports will lower the Chinese trade surplus. Should lower oil prices materialize, this would leave a dent in the current account surplus of Middle Eastern oil producers as well.

All of a sudden, a force for good seems to have emerged and from an unexpected angle – from energy markets, going some way to support a rebalancing of the global economy.

One has to be careful, of course. The US could decide to import more of something else instead of energy. Complicated exchange rate effects will have to be evaluated before contingent conclusions can be drawn. As of today, no one has drawn up such a detailed assessment of the macroeconomic impact of shale oil and gas.

One point is obvious, however. Even under our moderate production profile, the scale of this global impact promises to be huge – large enough to make such an assessment urgent. In the end, it seems a fair bet that the Balance of Payment effect will dwarf the current dispute about energy prices and US competitiveness.

Shale oil and gas production is likely to leave a considerable footprint on the global macroeconomic landscape. And at first sight at least, this looks like good news for the global economy.

Continue reading: On the Global Implications of Shale: The environment

(Photo by epSos.de, Flickr)