December 10, 2012
Fossil Fuel Prospects and Location
In mid-November, the International Energy Agency forecasted that “extraordinary growth in oil and natural gas output in the United States will mean that … the United States becomes a net exporter of natural gas by 2020 and is almost self-sufficient in energy, in net terms, by 2035.” Similarly, the U.S. Energy Information Administration recently revised its long-term outlook, and reported U.S. energy production growing faster than consumption through (at least) year 2040. This startling turnabout is due, in no small part, to recent advancements in U.S.-born technologies in the drilling and recovery of hydrocarbon fuels—natural gas, gas liquids, and petroleum. Already over the past several years, U.S. production of these fuels has boomed due to commercial development arising from these technologies.
In the past month, two experts on emerging developments in this area reported at conferences held by the Federal Reserve Bank of Chicago. At the recent Economic Outlook Symposium, Loren C. Scott discussed U.S. and global energy developments. He presented a sanguine view on U.S domestic production from natural gas and petroleum resources.
In fact, promising geological formations for gas and oil production can be found throughout the globe (See map). However, the U.S. has been far out in front in developing the technologies to extract these resources, as well as the commercial foundation that has enabled production enterprises to bring them to market.
On the production side, Scott argued that the recent development of these fuels has been aided by fortuitous conditions in the U.S.—conditions that will not soon be replicated elsewhere in the world. Not only were the technologies developed here, but necessary pre-conditions of development were in place. In particular, property rights for minerals located beneath privately held land belong to landowners here, and these can be readily sold and transferred to would-be developers. Such conditions do not hold in most other nations, where mineral rights may be ill-defined or owned by the government. Furthermore, opposition from environmental groups is far more vociferous in other nations, especially in many parts of Europe, which is also home to significant geological deposits.
The availability of a network of pipelines to transport natural gas is another pre-condition for development that has already been met in parts of the U.S. Owing to previous generations of energy exploration, development, and delivery of fossil fuels across the U.S., much of the pipeline infrastructure is already in place to transport gas from field to consumers.
On the demand side, Scott said that expanding supplies of natural gas will in turn expand market usage by 2–3 trillion cubic feet annually, or about 10% of recent domestic consumption. In particular, natural gas will find two ready markets, possibly three.
For one, domestic manufacturers—especially in several chemical sectors—stand ready to absorb available natural gas at favorable prices. In particular, producers of ammonia nitrate fertilizers use natural gas as a primary feedstock. Similarly, ethylene is derived from natural gas liquids, and is used for plastics and vinyl in a wide range of products from housewares and toys to vinyl pipes. Currently, ethylene is derived from petroleum products in Europe, which puts producers there at a serious price disadvantage relative to U.S. producers.
Natural gas will also easily become a more important boiler fuel in electric power generation. Scott forecasted that natural gas will displace increasing amounts of coal-fired generation, especially two to three years from now when environmental regulation of coal-fired facilities begins to tighten in earnest.
A third source of possible market expansion is U.S. exports. Currently, global trade in natural gas (in liquefied form) is very small compared with petroleum, for example. One reason for that is that extensive infrastructure is needed to liquefy, load, and transport natural gas. Even so, such investment may be motivated by the wide price differentials between the U.S.’s output and that of potential importing nations. For example, Scott cited spot market prices at $2–3 per million btu in the U.S., versus import prices of $11 in Europe and $16 in Japan. Despite these favorable price spreads, the development of exports from the U.S. will be challenged by both costly new infrastructure need for global shipment, and by resistance from domestic gas users, who will likely push for statutory trade restrictions on exports.
With regard to legal impediments to shale field production and sale, Scott argued that the widespread location of resources across the U.S. will likely keep federal regulation and restrictions contained. At a November 27 conference on Farmland Leasing, Ross H. Pifer of Penn State University reported on the leasing of mineral rights in the Marcellus shale region of New York, Pennsylvania, Ohio, and West Virginia. As the map shows, shale deposits are widespread across the nation, including some deposit locations in each of the Seventh District states. The Energy Information Administration reports “active plays,” involving development or pre-development in parts of the Antrim Basin in Michigan and in the New Albany Basin of southern Indiana (and northern Kentucky).
Across the U.S., several areas of shale have been producing natural gas in recent years, ranging from Texas to North Dakota to the Northeast states. Looking ahead, however, Pifer cited a 2009 assessment of the location of recoverable gas reserves that reported a high geographical concentration in the Marcellus shales. In that report, the EIA estimated that the Marcellus shales contained 410 trillion cubic feet of natural gas (tcf), representing 54.7% of the Lower 48’s “reserves.” In contrast, the Antrim deposits (Michigan) were estimated to contain approximately 20 tcf, and the New Albany deposits (Indiana) 11 tcf. To put these quantities in context, the U.S. consumed approximately 24 tcf of natural gas in 2011.
 One exception to this is the so-called Bakken Field located in western North Dakota, eastern Montana, and across the border in Canada. There, sufficient pipeline infrastructure to market is inadequate for carrying petroleum and other liquids to markets and refineries. (Return to text)
 Note that estimates of reserves can vary widely and with great uncertainty. Note also that these reserves report on natural gas reserves only, excluding petroleum. Several formations also contain significant petroleum reserves. (Return to text)
December 3, 2012
Seventh District Update
by Norman Wang and Scott Brave
A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:
• Overall conditions: Economic activity in the Seventh District continued to expand at a slow pace in October and early November.
• Consumer spending: The pace of consumer spending, while still moderate, increased slightly. Overall, retail sales surpassed expectations, which contacts attributed to promotions and generally improving consumer confidence.
• Business Spending: Growth in business spending moderated further. Inventory investment continued to slow along with capital spending on equipment and structures. Labor market conditions improved slightly from the previous reporting period.
• Construction and Real Estate: Construction activity continued to increase at a slow, but steady pace. For the first time in several years, homebuilders reported new land development projects were underway and contacts also noted some signs of improvement in commercial real estate conditions.
• Manufacturing: Manufacturing production decelerated. Capacity utilization in the steel industry decreased and specialty metal manufacturers also reported weaker orders. The heavy equipment and auto industries however, remained sources of strength.
• Banking and finance: Credit conditions continued to gradually ease. Credit spreads and financial market volatility remained low, and asset quality steadily improved. Banking contacts reported modest growth in small business loan demand.
• Prices and Costs: Cost pressures were little changed. Retail food prices eased, on balance, and retailers indicated that discounting and promotions for non-food items increased some. Wage pressures remained moderate, but nonwage costs increased as many contacts again cited higher healthcare costs.
• Agriculture: Much of the District reported higher yields than had been expected during the previous reporting period, reflecting in part timely local rains, later planting, and irrigation. Nonetheless, the drought still cut the District’s output of corn and soybeans substantially relative to last year.
Although the Midwest Economy Index (MEI) improved to –0.43 in October from –0.55 in September, it remained negative for the fourth consecutive month. The relative MEI decreased to –0.14 in October from –0.05 in September, primarily on account of declines in the Midwest’s manufacturing sector.
The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 1.2% in October, to a seasonally adjusted level of 92.1 (2007 = 100). Revised data show the index was down 0.6% in September. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved down 0.8% in October. Regional output rose 5.9% in October from a year earlier, and national output increased 2.0%.