While oil plays a marginal role in the U.S. electricity market today, natural gas makes up approximately 24 percent of electricity generation. This percentage is set to expand rapidly as stricter limits on emissions from coal-fired power plants change the cost calculation of coal and gas. Fracking shale gas comes with its own environmental risks, notably to ground water supplies, but is seen as a natural resource endowment that the U.S. cannot forgo in its energy resource mix. At the same time, despite the advantages of gas (problems with fracking aside), other challenges will emerge. While oil is a globalized commodity, natural gas is harder to transport and is therefore still sold primarily in regional markets with large differences in prices between the U.S. and Europe. As natural gas and electric vehicles are still niche markets, the current price of American natural gas is of little comfort to commuters in a country with comparatively lackluster pubic transport options. Further, there are other issues on the horizon: if and when the U.S. car market is able to move away from gasoline and diesel, it is likely that natural gas transport methods will have improved enough to change global market dynamics. Over the past ten years, the U.S. has joined the world in expanding the building of Liquefied Natural Gas (LNG) terminals. Originally, demand in the U.S. was expected to exceed domestic supply and terminals were thought necessary to import gas into the country; this is now changing. The world’s increased LNG capacity is contributing to the globalization of gas markets and with the new terminal infrastructure that the U.S. is continuing to build, it will all the more easily become a gas exporter. If and when the U.S. becomes a natural gas exporter, domestic prices will rise and another sector will be vulnerable to global price volatility.
In the meantime, while the expansion of shale gas production and of natural gas-driven electricity production capacity reduce prices of electricity in the short term, they also reduce the incentive to invest in renewable resources that become comparatively more expensive when faced with a cheap gas alternative. Without further policy intervention, the U.S. will become even more unlikely to sufficiently expand its renewable energy base, although that would be is the longer-term risk hedging solution.
While the expansion of renewable electricity sourcing in Germany is well complemented with natural gas electricity production that can ramped up to meet peak demand or to respond to cloudy or less windy times, in the U.S., cheap gas provides a barrier to renewable electricity expansion in the first place. In the same way that American policymakers have failed to insulate the U.S. from risk and price volatility in the global oil market, in the longer term, the U.S. will face similar challenges in the natural gas market as well and have foregone the opportunity to better hedge that risk. Oil production has consistently been the single largest recipient of U.S. government subsidies accounting for almost half of all energy subsidies. Clear safety rules and their implementation for fracking are still, if at all, in early development. While American strategic oil supplies are a short-term solution, continuing down the oil and gas road contributes to a further fossil fuel technology lock-in and maintains American exposure to global supply shocks, price volatility, climate change, and other environmental risks.