Three Cheers for Fracking
Thanks to secure property rights, this technology has the power to resuscitate our lagging economy.
Americans should celebrate fracking. By unleashing production of unconventional hydrocarbons, fracking has catapulted the U.S. from being a has-been producer of oil to the world’s largest total supplier in 2013 when we include natural gas liquids, biofuels, and crude oil. The U.S. produced around an average of 12.1 million barrels a day of these liquids, 300,000 barrels a day more than Saudi Arabia and 1.6 million more than Russia, the previous leaders.
This increase in U.S. output has not been matched since 1940 when the country was blessed with flush new primary production from oil fields in Texas, New Mexico, Louisiana, and Oklahoma. Shale-gas production from the Bakken Formation in North Dakota, the Eagle Ford Formation in Texas, and the Marcellus Formation that crosses parts of West Virginia, Ohio, Pennsylvania, and New York now accounts for 44% of total U.S. natural gas output, and eventually could account for nearly 70%.
Photo credit: Maryland Sierra Club
The hydrocarbon boom in the U.S. is driven by fracking. Hydraulic fracking is a technique whereby water mixed typically with sand and chemicals is injected with high pressure into non-permeable hydrocarbon-bearing geologic formations to create small fractures that are held open with small grains of sand. These fissures allow otherwise-locked hydrocarbons to flow to the well. Horizontal drilling is used to access oil and gas deposits away from the main vertical well.
This combination of fracking and horizontal drilling accounts for vast new production of shale (tight) gas, shale (tight) oil, and coal-seam gas. It has been a game changer by releasing hydrocarbons from rock formations 5,000 to 20,000 below the earth’s surface where there is little permeability or reservoir pressure to allow hydrocarbons to flow to conventional wells. Absent fracking, these oil and gas deposits would not be economic, but with it, they have become sources of a new bonanza for the country and the world.
In the 1970s, there were predictions that the U.S. would run out of natural gas, and indeed, federal price controls were implemented in an attempt to shield consumers from higher gas prices. These policies, of course, did little to promote new exploration and discovery. Beginning in 1978, price controls were phased out, but there were still concerns about the future supply of natural gas. Moreover, U.S. oil production was declining, especially after output from the Prudhoe Bay field in Alaska tapered off.
Between the early 1990s and 2008, U.S. oil output fell gradually, fueling notions of “Peak Oil” and related doomsday predictions that natural resources were finite in supply and that the country would soon pay the price of consuming “unsustainably.” World oil prices rose; U.S. imports increased especially from politically-unstable countries, often led by unfriendly leaders in the Middle East, Africa, and South America; and there was a corresponding preoccupation among American political leaders in “energy independence.” The sharp economic downturn that began in 2007 was intensified by high energy prices and large trade imbalances. At the same time, the environmental community lobbied for subsidies for renewable fuels to move the U.S. away from dependence on fossil fuels and foreign sources of supply and to reduce greenhouse gas (GHG) emissions.
Fracking has upended all of this. It has provided the U.S. with energy independence, an elusive goal thus far with renewables; lowered overall energy prices and modulated natural gas price swings, even in the face of one-of the severest winters in recent memory; raised U.S. natural gas exports (oil exports are banned by federal law); drove U.S. imports of liquid natural gas (LNG) to zero, saving $100 billion annual in imports; tempered any rise in worldwide oil and gas prices to the benefit of most of the world’s populations and economies; shown the way for new natural gas and oil production in Europe, lessoning dependence on Russian sources and its monopoly Gazprom; lowered U.S. demand for Venezuelan oil upon which the country’s increasingly-autocratic rulers depend; directly boosted U.S. employment in oil and gas extraction by 28,000 jobs between 2007 and 2011 alone and indirectly by 45,000 in new employment in support industries; and stimulated broader job growth and GDP expansion.
In the fourth quarter 2013, GDP grew at a 3.2% annual rate, which would have been 1.3 percentage points lower were it not for an inflation-adjusted narrowing of the trade deficit by nearly 12%, driven by the fall in oil imports and increased exports. Manufacturing has expanded in the U.S. in light of lower and more certain energy costs relative to other countries and cheaper natural gas feed stocks in chemicals. Lower energy costs alone could raise annual GDP growth by between .09 and .19 percentage points through 2020. Between 2008 and 2035 shale gas and oil production could add an average of $475 billion a year to the American economy, about 3% of current GDP. In an otherwise anemic economy, fracking is truly a major bright spot.
Finally, the shift to low-cost natural gas from coal in energy generation has contributed to the decline in U.S. GHG emissions. Natural gas-fired power plants emit about half as much CO2 as comparable coal-fired ones. As a result, the U.S. is lowering GHG emissions more rapidly and at lower cost than the European Union which has relied far more on subsidizing costly renewable sources—solar and wind power, while as described below, blocking or discouraging use of fracking even in the face of very favorable geologic formations in some countries, such as France, Germany, and Bulgaria. Indeed, in Germany overall coal demand for energy production has grown over the past decade.
The Importance of Private Property Rights
New fracking and horizontal drilling technologies are dominantly developed and implemented in the U.S. Why is that? The answer is secure private property rights to subsurface minerals. These are the major reason why the American oil and natural gas industry has been so dynamic and innovative. Except for western Canada, throughout the world, subsurface mineral rights are held by governments, and indeed, the U.S. government also holds the rights to hydrocarbon deposits on federal lands. The incentives for and transaction costs of investing in and using new fracking, pumping, and drilling technologies are dramatically different between private and public ownership.
...
(use link for rest): http://www.hoover.org/publications/defining-ideas/article/170026
Why Are Mineral Rights Private in the U.S.?
Until the late nineteenth century, mineral rights were viewed as any other right to productive natural resources in America—they were to be private. When European settlement moved across the North American continent beginning in the late seventeenth century, there was never the sense that the government would own the land. Indeed, access to land was a major impetus for migrants to come to North America. Much of American history is one of movement of the frontier across the continent as individuals claimed land, created farms, and speculated in land holdings. Federal land laws were designed to facilitate the rapid transfer of title to land from the federal government to private claimants. Land ownership and market exchange was the primary means by which wealth was acquired through the nineteenth century. The Jeffersonian notion of a nation of small farmers as the basis for social and economic stability and progress was not a myth.
...(use link for the rest): http://www.hoover.org/publications/defining-ideas/article/170026
Today, much of the new development of fracking and horizontal drilling occurs on private lands. Federal lands could play an increasingly important role given their location near existing productive formations. Whether this happens depends upon the enactment of supportive federal policies. But there are many who oppose such actions. If these groups are successful, federal lands will not produce to their potential in support of fracking and natural gas production that has been good for the economy, good for democracies worldwide, and good for the environment.
Americans should celebrate fracking. By unleashing production of unconventional hydrocarbons, fracking has catapulted the U.S. from being a has-been producer of oil to the world’s largest total supplier in 2013 when we include natural gas liquids, biofuels, and crude oil. The U.S. produced around an average of 12.1 million barrels a day of these liquids, 300,000 barrels a day more than Saudi Arabia and 1.6 million more than Russia, the previous leaders.
This increase in U.S. output has not been matched since 1940 when the country was blessed with flush new primary production from oil fields in Texas, New Mexico, Louisiana, and Oklahoma. Shale-gas production from the Bakken Formation in North Dakota, the Eagle Ford Formation in Texas, and the Marcellus Formation that crosses parts of West Virginia, Ohio, Pennsylvania, and New York now accounts for 44% of total U.S. natural gas output, and eventually could account for nearly 70%.
Photo credit: Maryland Sierra Club
This combination of fracking and horizontal drilling accounts for vast new production of shale (tight) gas, shale (tight) oil, and coal-seam gas. It has been a game changer by releasing hydrocarbons from rock formations 5,000 to 20,000 below the earth’s surface where there is little permeability or reservoir pressure to allow hydrocarbons to flow to conventional wells. Absent fracking, these oil and gas deposits would not be economic, but with it, they have become sources of a new bonanza for the country and the world.
In the 1970s, there were predictions that the U.S. would run out of natural gas, and indeed, federal price controls were implemented in an attempt to shield consumers from higher gas prices. These policies, of course, did little to promote new exploration and discovery. Beginning in 1978, price controls were phased out, but there were still concerns about the future supply of natural gas. Moreover, U.S. oil production was declining, especially after output from the Prudhoe Bay field in Alaska tapered off.
Between the early 1990s and 2008, U.S. oil output fell gradually, fueling notions of “Peak Oil” and related doomsday predictions that natural resources were finite in supply and that the country would soon pay the price of consuming “unsustainably.” World oil prices rose; U.S. imports increased especially from politically-unstable countries, often led by unfriendly leaders in the Middle East, Africa, and South America; and there was a corresponding preoccupation among American political leaders in “energy independence.” The sharp economic downturn that began in 2007 was intensified by high energy prices and large trade imbalances. At the same time, the environmental community lobbied for subsidies for renewable fuels to move the U.S. away from dependence on fossil fuels and foreign sources of supply and to reduce greenhouse gas (GHG) emissions.
Fracking has upended all of this. It has provided the U.S. with energy independence, an elusive goal thus far with renewables; lowered overall energy prices and modulated natural gas price swings, even in the face of one-of the severest winters in recent memory; raised U.S. natural gas exports (oil exports are banned by federal law); drove U.S. imports of liquid natural gas (LNG) to zero, saving $100 billion annual in imports; tempered any rise in worldwide oil and gas prices to the benefit of most of the world’s populations and economies; shown the way for new natural gas and oil production in Europe, lessoning dependence on Russian sources and its monopoly Gazprom; lowered U.S. demand for Venezuelan oil upon which the country’s increasingly-autocratic rulers depend; directly boosted U.S. employment in oil and gas extraction by 28,000 jobs between 2007 and 2011 alone and indirectly by 45,000 in new employment in support industries; and stimulated broader job growth and GDP expansion.
In the fourth quarter 2013, GDP grew at a 3.2% annual rate, which would have been 1.3 percentage points lower were it not for an inflation-adjusted narrowing of the trade deficit by nearly 12%, driven by the fall in oil imports and increased exports. Manufacturing has expanded in the U.S. in light of lower and more certain energy costs relative to other countries and cheaper natural gas feed stocks in chemicals. Lower energy costs alone could raise annual GDP growth by between .09 and .19 percentage points through 2020. Between 2008 and 2035 shale gas and oil production could add an average of $475 billion a year to the American economy, about 3% of current GDP. In an otherwise anemic economy, fracking is truly a major bright spot.
Finally, the shift to low-cost natural gas from coal in energy generation has contributed to the decline in U.S. GHG emissions. Natural gas-fired power plants emit about half as much CO2 as comparable coal-fired ones. As a result, the U.S. is lowering GHG emissions more rapidly and at lower cost than the European Union which has relied far more on subsidizing costly renewable sources—solar and wind power, while as described below, blocking or discouraging use of fracking even in the face of very favorable geologic formations in some countries, such as France, Germany, and Bulgaria. Indeed, in Germany overall coal demand for energy production has grown over the past decade.
The Importance of Private Property Rights
New fracking and horizontal drilling technologies are dominantly developed and implemented in the U.S. Why is that? The answer is secure private property rights to subsurface minerals. These are the major reason why the American oil and natural gas industry has been so dynamic and innovative. Except for western Canada, throughout the world, subsurface mineral rights are held by governments, and indeed, the U.S. government also holds the rights to hydrocarbon deposits on federal lands. The incentives for and transaction costs of investing in and using new fracking, pumping, and drilling technologies are dramatically different between private and public ownership.
...
(use link for rest): http://www.hoover.org/publications/defining-ideas/article/170026
Why Are Mineral Rights Private in the U.S.?
Until the late nineteenth century, mineral rights were viewed as any other right to productive natural resources in America—they were to be private. When European settlement moved across the North American continent beginning in the late seventeenth century, there was never the sense that the government would own the land. Indeed, access to land was a major impetus for migrants to come to North America. Much of American history is one of movement of the frontier across the continent as individuals claimed land, created farms, and speculated in land holdings. Federal land laws were designed to facilitate the rapid transfer of title to land from the federal government to private claimants. Land ownership and market exchange was the primary means by which wealth was acquired through the nineteenth century. The Jeffersonian notion of a nation of small farmers as the basis for social and economic stability and progress was not a myth.
...(use link for the rest): http://www.hoover.org/publications/defining-ideas/article/170026
Today, much of the new development of fracking and horizontal drilling occurs on private lands. Federal lands could play an increasingly important role given their location near existing productive formations. Whether this happens depends upon the enactment of supportive federal policies. But there are many who oppose such actions. If these groups are successful, federal lands will not produce to their potential in support of fracking and natural gas production that has been good for the economy, good for democracies worldwide, and good for the environment.
Gary D. Libecap is a research fellow at the Hoover Institution as well as the Bren Professor of Corporate Environmental Policy, Donald R. Bren School of Environmental Science and Management and an economics professor at the University of California, Santa Barbara. An expert on natural resource and environmental economics, he specializes in property rights and markets. His current research examines the legal and regulatory transaction costs of water marketing in the western United States. He was the cochair of Hoover's Property Rights, Freedom, and Prosperity Task Force.
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