Will US Shale Mean a Dose of Dutch Disease?

Will US Shale Mean a Dose of Dutch Disease?

One of many reasons why economics will always be the dismal science is that, by its tenets, virtually nothing is ever an unalloyed good thing.

Take the probability that shale exploitation will make the U.S. the world's number one oil producer by 2020. In a world desperate for both U.S. economic leadership, and more hydrocarbons to toss into the growth furnaces, this still-astonishing prognosis, made by the International Energy Agency last November, ought to be a flat-out winner, surely?

Well, almost but not quite. Trust the dismal science to come up with a problem, and it does. It's called the Dutch Disease. That's what economists call the tendency of a country's overall manufacturing and industrial sector to wither in the face of currency appreciation, usually but not always associated with a sudden resource boom.

The term was minted by The Economist newspaper in the late 1970s to describe Dutch manufacturing's decline after the large-scale discovery of natural gas in 1959. But there have been other alleged examples throughout modern history, from the Australian gold rushes of the 19th century through to the effects of North Sea oil bonanzas in Norway and the U.K. The Philippines saw strong currency inflows in the 2000s which led to a rising peso and a loss of competitiveness.

So, is U.S. manufacturing doomed to wither in the glare of burning shale oil? Well, it seems, not necessarily.

Deutsche Bank's analysts have been mulling the chances and they think they've spotted a bit of U.S. exceptionalism which might save the day.

For one thing, they reckon the energy-price advantage producers will glean from home-produced oil will more than offset any baleful effects from a stronger dollar in what is, in any event, an industrial sector relatively well insulated from foreign-exchange swings.

Even better, the stronger dollar which is likely to accompany a shale bonanza will also serve U.S. industry well by making its own import prices much cheaper, especially those of the intermediate goods shipped in by the container load.

The upshot here, Deutsche Bank thinks, is that the U.S. can pull off the rare trick of having a resource boom, with all its attendant investment and foreign inflows, without turning significantly Dutch.


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