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Monday, August 12, 2013
Current Affairs ... Economics/Business ...

I’ve read more than one article over the past year or so talking about the great things that fracking and other “unconventional” hydrocarbon sources (such as tar sands, very deep sea oil, methane hydrates, etc.) are or will soon do for our country. As you probably know, fracking is a controversial method of drilling for natural gas and oil deposits that until recently could not be extracted in a cost-effective fashion. Fracking has greatly increased domestic natural gas production such that gas prices have reached and stayed at very low levels relative to the 1980’s and 90’s. It also ended the on-going decline of oil production in the US, and has greatly increased the supply of domestic light oil, which (as compared with Californian heavy oil and Canadian tar sand oil) can be cheaply processed in almost all American refineries, and can be utilized for a wide variety of purposes.

The cost of fracking has been on the environmental side; fracking needs great amounts of water and produces chemically polluted waste-water that is hard to dispose of properly. It also might cause minor earthquakes and in a small percentage of cases pollute local groundwater with gas or the “injection chemicals” needed to break open rock layers. Very importantly, it is said to cause a great deal of methane emissions, which are potent greenhouse gasses and can overshadow the climate-change benefits of using lower-carbon natural gas versus coal.

As to the claim by many environmental activists that fracking is an environmental disaster in the making (see the movies Gasland and Gasland 2, if interested), I would not go that far. The wastewater disposal problem can be quite serious, but methane emissions can be controlled with existing technology at a reasonable cost. Government regulation is definitely needed to keep the “fly by night” / “quick buck” drilling operators from doing real damage. But from what I’ve read, the truly serious environmental dangers from fracking can be controlled at a reasonable cost, so long as strong government sanctions are imposed on violators.

But back to the claim that fracking is about to unleash a cornucopia of economic benefits upon our nations, such as domestic energy independence, acceleration industrial economic growth, and stable or even lower energy prices . . . well, I myself am still awaiting the proof. Fracking has been going strong now for over 5 years. And yet our economy, which ended a steep contraction phase in 2009 following the financial disasters of 2007 and 2008, has not been able to accelerate back to the 3 – 3.5% growth range experienced through the 1960’s, and much of the 1980’s, 90’s and mid-00’s. It has averaged little better than 2% real yearly growth since mid-2009. There’s a new book out by a guy named Charles Morris called “Comeback: America’s New Economic Boom”. Morris argues that the natural gas boom and oil production turnaround will encourage investment in America’s infrastructure, increase productivity and create millions of middle-class jobs. I hope that he’s right; but as of late summer 2013, that boom seems a bit behind schedule.

As to the situation with oil . . . one could argue that increased domestic production from fracking has helped to control prices. Here is a chart of oil prices over the past decade or so:

Historical Crude Oil Prices - Crude Oil Price History Chart

One could argue that oil prices have been level since early 2011, despite the same pace of domestic growth before and since. Oil prices spiked up in 2007 thru early 2008, reaching about $140 a barrel briefly (this arguably helped to trigger the housing market crash and financial panic that ensued at that time). Prices then plummeted into mid-2009, then started climbing again until leveling off by mid-2011 (from around $45 by early 2009 to $110 in mid 2011; then bouncing between $100 and $120 since). This occurred despite continued if slightly muted economic growth. The US had an average real economic growth rate per annum of about 2.3% from mid-2009 to mid-2011, as oil prices climbed back to three digit. Growth continued at about 2.1% average from mid-2011 to mid-2013, while oil prices stopped growing. One does need to take into account the recent recession in Europe and the slowdown in China, but it still seems possible that increased American oil production helped to keep oil prices stable (if nonetheless rather high).

Lets not forget, however, that all this new oil needs to get to places where the transport infrastructure may not be ready. E.g., the Montreal, Maine and Atlantic Railway, a back-woods regional railway hoping to finally make a buck by moving crude oil shipments from North Dakota to refineries in eastern coastal Canada. 42 people had to die in Lac Megantic not long ago because small-railroad procedures and facilities were being used to handle large amounts of a heavy, dangerous commodity.

But for now — who knows how long this party is really going to last — fracking seems to be keeping gasoline prices, natural gas bills, and other energy costs from going thru the roof. But as to creating a new boom, a time of plentiful jobs and increased standards of living at all levels . . . I’m not holding my breath. And as to moving to a sustainable post-carbon economy powered by renewable green energy sources, don’t hold your breath on that one either. That vision is also way behind schedule here in the real world.

◊   posted by Jim G @ 9:57 pm      
 
 


  1. Jim, Here again is a topic I know little about. I must say that I had tho’t not too much about it, thinking that fracking, for both oil and gas, was far in the future, only to discover that it’s already a done deal and being used to a greater than lesser extent. Which shows how much I know.

    And I must say that I have been surprised at how much my gas bill has stayed steady and even gone down somewhat! (Whenever does the price of something go *down*?)

    Yet, with you I find myself wondering just exactly how fracking will affect nature, in so many ways, and the environment in general. I agree that we have yet to see the effect fracking will have on quite a few things that we may have no clue about at this point. My hunch would be that it will not be the utopian answer to all our problems but will bring with it problems that we have not even tho’t about yet.

    At this point, since fracking is already being used more than one would think, it seems to me that the best we can do at this point is wait until problems develop and then deal with them as they arise. Somewhat the same as we have had to do with the oil problems in the Gulf of Mexico. Not a pretty picture but one I think is likely inevitable as we seem unable to “undo” what is already being done. MCS

    Comment by Mary — August 13, 2013 @ 9:36 am

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