Energy: America’s Future and Competitive Advantage

By SBE Council at 22 June, 2015, 10:34 am

Harvard Study Affirms the Key Role of U.S. Energy

by Raymond J. Keating-

Harvard Business and the Boston Consulting Group just published a new study titled “America’s Unconventional Energy Opportunity: A Win-Win Plan for the Economy, the Environment, and a Lower-Carbon, Cleaner-Energy Future.” It adds to the list of valuable contributions to understanding the meaning of the energy revolution well under way in the United States.

Authors Michael E. Porter, David S. Gee, and Gregory J. Pope offered a sober assessment of the overall economy: “The ability of the U.S. economy to improve the standard of living of the average citizen is weaker than it has been in generations. The deterioration began well before the Great Recession and is reflected by slow job growth and stagnating wages, especially for middle- and lower-middle-class Americans. While U.S.-based multinational businesses have outperformed those in other advanced economies, small businesses in the U.S. are registering eroding performance, and business failures have outnumbered new startups from 2009 through 2012—the last year of available data—for the first time since at least the 1970s. U.S. growth has exceeded that of Europe and Japan in recent years, but our growth is still the slowest in many decades.”

So, what did the authors say about energy within this context? Their important points came on the economic front. For example, the authors noted:

• “America’s abundant and low-cost unconventional gas and oil resources are a once-in-a-generation opportunity to change the nation’s economic and energy trajectory. The U.S. now has a global energy advantage, with wholesale natural gas prices averaging about one-third of those in most other industrial countries, and industrial electricity prices 30–50% lower than in other major export nations. That means major benefits for industry, households, governments, and communities…”

• “Though the recent decline in world oil prices has affected the short-term prospects of U.S. unconventionals, low prices are unlikely to significantly impact the fundamental U.S. competitive advantage over the next several decades.”

• “Unconventionals have already created major economic benefits for the U.S., adding more than $430 billion to annual GDP and supporting more than 2.7 million American jobs that pay, on average, two times the median U.S. salary. Fully 50% of the unconventionals production jobs are middle-skills jobs, accessible to the average citizen. The U.S. is still in the early stages of capitalizing on this economic opportunity, and current activity is concentrated in the upstream energy-production sector. With proper policies and actions by the industry and other stakeholders, this economic opportunity can further spread into downstream industries, such as petrochemicals and energy-intensive industries, and more broadly throughout the economy.”

While there are other points in the report that warrant debate, a key policy change is emphasized: “With abundant resources, restrictions on exports created in response to the 1970s’ energy crises are no longer needed, and exports would boost U.S. economic and job growth while benefitting friendly nations.”

It also must be noted that small businesses both play key roles in driving energy innovation and growth, and benefit as energy consumers. The authors pointed out, for example, “Unconventionals are not just regional phenomena. They are directly benefiting every consumer and small business, lowering power costs and improving income. In 2014 alone, American households were estimated to enjoy about $800 in annual savings from lower energy costs attributable to unconventional natural gas, and to reap additional savings from lower oil prices.”

As for the small business role in key energy sectors (latest Census Bureau employers data from 2012), consider:

90.7% of employer firms among oil and gas extraction businesses have less than 20 workers, and 98.5% less than 500 workers;

78.1% of firms among drilling oil and gas wells businesses have less than 20 workers, and 97.2% less than 500 workers;

81.5% of firms among support activities for oil and gas operations businesses have less than 20 workers, and 98.6% less than 500 workers;

60.5% of firms among oil and gas pipeline and related structures construction businesses have fewer than 20 workers, and 95.5% less than 500 workers;

54.7% of firms among oil and gas field machinery and equipment manufacturing businesses have less than 20 workers, and 91.4% less than 500 workers.

The energy revolution of recent years has been a huge, positive small business story, and if U.S. policymakers get the policies right – that is, opening up international markets to U.S. oil and natural gas exports, reining in costly, unnecessary regulations, and refraining from expanding regulatory burdens – then it will continue to be a huge, positive story for small businesses and the entire U.S. economy.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.