Fracking: Boom or Bust?

Presidio Graduate School’s Macroeconomics course for Spring 2012, is authoring a series of articles. The articles on this “micro-blog” reflect reactions and thoughts on news items, economic theory, and other issues as they pertain to the concept of sustainability.  Follow along here.

Image c/o Forbes - click for full size

By Cristina Soeiro

Moral hazard or modern miracle? Natural gas prices have fallen due to increased supply driven by hydraulic well fracturing (“fracking”). The U.S. stands to capitalize significantly from the sale of fracturing additives and predictive geo-mechanical modeling systems. Recent projections estimate U.S. hydraulic fracturing technology and ripple sales could add 1% per year to U.S. growth.

Natural gas is now competing with coal, which has implications for U.S. economic growth and foreign direct investment in the U.S. If hydraulic fracturing were eliminated from the U.S. economy, by 2014 the U.S. could see real GDP decrease by $374 billion and employment decrease by 2.9 million. This year, BHP Billiton invested $5 billion in Arkansas and Shell signed China’s first shale gas production with US technology.

Increased supply comes from unconventional sources where gas and oil stocks are held captive in deep impermeable formations such as shale. Well fracturing increases productivity from those formerly uneconomic stocks. Per fracture, apressurized mix of sand, 4.5 million gallons of freshwater and over 10,000 gallons of 500+ chemical additives are explosively injected into impermeable rock formations 5,000 to 20,000 feet deep. Fractures are created, held open by sands, and wastewater flows back up mixed with gas/oil.

Fracturing was first commercialized in the US in 1949, with an exclusive exploration license issued to Halliburton. In the early 1990s the Department of Energy subsidized the first US horizontal drilling, making shale gas profitable. The result was increased gas supply in the US, from 162 trillion cubic feet in 1994 to 245 trillion cubic feet in 2009. In 2005 the US Energy Policy Act exempted the extractive industry from regulation under the Safe Drinking Water Act.

The Marcellus shale exploration is a current example impacting West Virginia, Pennsylvania, Ohio and New York. There are an estimated 84 trillion cubic feet of gas to extract and 800 wells have been drilled since 2005. Exploration is expected to generate 300,000 new jobs, $6 billion in tax revenue and $25 billion in added value to the US economy by 2020. Norway’s Statoil is heavily invested in the Marcellus shale gas extraction.
Hydraulic well fracturing has high eco-social costs that are increasingly publicized:

  • Air quality reductions from fracturing have caused some US states to fail their federal air quality requirements. Emissions from hydraulic fracturing include methane, volatile organic compounds, and known carcinogens. Due to loopholes in the Clean Air Act, wells are not subject to restrictions on hazardous air pollutants.
  • Freshwater supply is needed to preserve the properties of the chemical additives that facilitate the gas/oil flow. For comparison, the water used in one hydraulic fracture would supply 52 households with water for 1 year.
  • Freshwater contamination is due to wastewater leaking from well construction, holding ponds, and reinjection into disposal wells. The wastewater has several times the salinity of seawater and contains known carcinogens. A Fracturing Responsibility and Awareness of Chemicals Act was proposed this year to repeal the extractive industry’s exemption from the Safe Drinking Water Act.
  • Seismic activity from fracturing has been shown by the Seismological Society of America to be due to the reinjection of waste fluids in some of the 150,000 permanent US disposal wells. In Arkansas for instance, 900 recent quakes were within 4 miles of injection wells and earthquakes ceased when injections were halted.
  • Soil erosion is accelerated in the 15 square mile radius per well, from access roads, pipelines, and 5,000 gallon capacity trucks transporting water and chemical additives. This disturbs topsoil, causes forest fragmentation and massive sedimentation, often in formerly public land leases.
  • Exporting U.S. well fracturing to emerging economies exacerbates existing market failures such as preferential tax treatment for exploration but not for pollution control, political price setting and undue royalties extracted. The foreign investment of capital flows from extractive industries was one of the causes of the Latin American debt crisis in the 1970s and that scenario could repeat itself for Argentina, South Africa and others.

In conclusion, hydraulic fracturing creates complements for fossil fuels, reducing the pressure to find substitutes. Shale gas exploration is an example of inefficient market allocations of water and gas, demanding stricter regulation. The extractive industry’s position is that economic recovery will increase the demand for fossil fuels, driving inflation above the Fed’s current 2% target rate. The position of the US government is that the way to deal with that, without raising prices, is to increase production. The current US administration has thus embraced increased demand for natural gas from well fracturing, ostensibly as part of the way to a low carbon economy.

Current shale gas exploration from fracturing wells echoes economic bubbles going back to the 17th century. What makes it unique is a move towards greater transparency on how natural resource limits and lack of substitutes play a key role in U.S. economic growth and energy policy. This month the EPA stated that it will delay requiring green technology for completion of hydraulic fractured natural gas wells until 2015 – stay tuned.

Image credit: Forbes