Lessons from the Shale Revolution

Introduction

The ability to economically extract natural gas and oil from shale is one of the biggest events in energy since the 1973 OPEC oil embargo. After developing the combination of technologies to cheaply fracture, map, and directionally drill shale between 1976 and 2000, the United States has become the world’s largest oil and gas producer. Oil production and gas production have increased 60 percent and 35 percent, respectively, between 2007 and 2014, contributing more than $100 billion annually to the US economy. Chemical manufacturing is returning to the United States, and facilities originally planned to liquefy natural gas for import are being re-engineered as export facilities.

Since 2011, Breakthrough Institute has sought to understand the origins of the shale revolution, primarily for environmental reasons. Cheap shale gas has allowed the US power sector to move away from coal, which has in turn reduced US carbon emissions by more than 10 percent between 2005 and 2013. What lessons could the shale revolution have for future energy transitions, whether to solar, nuclear power, electric cars, or fuel cells? How can public and private energy innovation efforts achieve future technological breakthroughs that are similarly disruptive?

In January 2015, Breakthrough hosted a workshop to explore the history of the shale revolution, convening the people who created it and some of the world’s leading innovation economists and scholars. The goal of the two-day-long workshop was to interrogate the shale case and ask how it could inform future scholarship on economics, innovation, energy, and the environment.

In many ways, the conference demonstrated the uniqueness of the shale revolution and the difficulty of pinning down exactly what “lessons” can be gleaned. Not only are there unique historical circumstances to consider — such as the 1973 oil embargo and the brutal winter of 1976 — but also some factors that aided the development of shale gas that in other domains are considered impediments to innovation — such as the low staff turnover at Mitchell Energy.

Nevertheless, there are broad lessons within the shale case that are consistent with an array of recent scholarship. At the top of that list is the fact that the transition from coal to natural gas in the United States was made possible by a technological revolution that allowed for a cheaper and cleaner alternative to replace the older and dirtier one.

This is the same dynamic that underlies all past energy transitions, whether from whale oil to petroleum, or wood to coal. By drawing attention to these kinds of parallels, the shale case study can help deepen our view of energy innovation and the role of policy. Here are six lessons that we think we can learn from the shale revolution.

Lesson 1: The shale revolution benefited from well-established, stable institutions.

Lesson 2: Since success is difficult to predict and define, governments must continue to invest in technological long shots.

Lesson 3: Radical innovation often occurs when innovators face a combination of pressures.

Lesson 4: Pork barrel spending can be productive.

Lesson 5: A culture of trust and cooperation allows greater knowledge spillover and faster innovation.

Lesson 6: Radical innovation takes decades.

Read the full report Lessons from the Shale Revolution here.

Download a transcript of the conference proceedings here.

Download a shale fracking innovation timeline here.

Read interviews with shale pioneers here.