April 16, 2012
It’s seems wherever we go, we hear about natural gas. Low gas prices are making utilities rethink their options and alternative energy projects have a new bar to overcome. Fracking has become the oil and gas industry’s new go-to technology. As a result, we now have “more gas and oil than Saudi Arabia”; add that to “we are the Saudi Arabia of Coal” and “if only the government would get out of the way, we would have energy independence”. What’s going on?
The promise of fracking technology is certainly raising hopes for energy independence. It’s also a highly misleading hope. True, this technology can extract oil and gas from hitherto challenging—read uneconomic—environments. Fracking requires the price of oil and gas to remain high or, better yet, to go still higher. While the US is now an exporter of oil, its price is not going to come down—and, indeed, its price hasn’t come down.
The current low price for gas is a short-term phenomenon having to do with our inability to export it. Prior to the arrival of fracking, pipelines were used to pump imported oil from the southern-tier states to the northern ones. Now pipeline operators are rapidly reversing the flow of gas and oil from fracking fields in the northern states to New Orleans, so that the oil and gas can be exported. The approved portion of the XL pipeline is but one example of the rush to capitalize on these new-found riches. On the world market, natural gas is about seven times the US price. American oil is subject to world markets; that’s why we still pay $4 at the pump. So too will our newly fracked natural gas, once it hits the international market; we are all subject to world market prices. The irony is that becoming an oil and gas exporter—or even “energy independent”—does not mean that the price of oil and gas will be getting lower in America.
What we have here is runaway energy profits, not energy independence, and there is a profound difference. The oil and gas companies are giddy about fracking because it revalues their previously dwindling oil reserves, and reserves are an intrinsic part of an oil company’s valuation. The takeaway here is that fracking is great for the oil and gas industry but has nothing to do with prices at the pump or with energy independence; worse still, it could delay the onset of alternative energy.
All businesses seek profitability. Since markets decide, what’s wrong with healthy profits? The answer is that markets don’t decide by themselves; government policies play a vital role. The US DOE developed fracking technology. Additionally, for fracking to be effective, billions of gallons of cheap water must be used in the process. Once used in fracking, this water can never be used again. So the oil and gas industry received an exemption in 2005 to make sure that water used in fracking remains outside the purview of the Clean Water Act. After all, if the industry had to pay for the destruction of water—or, worse, was prevented from using it—fracking would be as uneconomic as some kinds of alternative energy are now.
We can have energy independence through fracking as long as the price of oil and gas is high, and we ignore the external costs—read subsidies—that are attendant on fracking. Alternatively, we would lose energy independence in oil and gas if prices dropped precipitously or if we decided to end the exemption of water used in fracking from the Clean Water Act. Both render fracking uneconomic—bringing on the age of alternative energy.
Ran Kohn is Executive Director of Cleantech Corridor