Globalist Analysis

The Downside to America’s Fracking Frenzy

The boom in shale gas is postponing the peaking of conventional fossil fuels. But who bears the burden?

Credit: Bestweb/Shutterstock.com

Takeaways


  • Dependence on natural gas gives China further time to build an unassailable competitive lead in the new energy industries.
  • Shale gas carries huge environmental burdens for the communities that are fracked, triggering earthquakes and fouling groundwater with volatile chemicals.
  • Shale gas postpones the day when the "real

The 1956 movie Giant introduced a young English actress named Elizabeth Taylor to the American public. It also propelled the young James Dean, who was killed in a car accident before the movie was released, to celebrity status. But what was the film about? It is actually a story that turns on the divisions created by the oil industry amongst ranching families, and the creation of a wealthy elite.

A family in Texas that has raised cattle for generations is thrown into conflict with a newly enriched oil entrepreneur (played by James Dean) who founds an oil company — but cannot control his bitterness over his early treatment on the ranch. Conflicts over land rights, and the way that oil companies take what they want from the land, propel the story.

Not all that much has changed. Today it is no longer evil oil companies riding roughshod over ranchers in Texas, but shale gas prospectors riding over communities’ rights wherever they drill — in the Antrim shale (Michigan), the Barnett shale (Texas), the Marcellus shale (New York) and elsewhere.

They frack and drill horizontally deep under the land — triggering earthquakes and destroying the communities’ water. And while their activities are attracting strong support from the U.S. government, which is promoting the diffusion of “fracking” across the country and beyond, there are as yet no national minimum standards or insurance standards to protect the communities’ rights.

Hydraulic fracture, better known as “fracking,” has emerged as a major technological breakthrough that facilitates extraction of natural gas from previously inaccessible shale gas seams. These shale gas “plays” are based on one of the technological/industrial breakthroughs that are changing the geopolitics of fossil fuels, along with extracting oil from tar sands in Canada and securing oil from pre-salt deepwater rigs off the coast of Brazil. These technological breakthroughs, with their massive costs, are postponing the peaking of conventional fossil fuels. But who bears the burden?

Fracking and tar sands oil operate at much higher costs than conventional oil and gas drilling. There has recently been a steep rise in costs for oil and gas drilling in the United States, which reflects the recent enthusiasm for shale gas from fracking. That seems to be implausible given all the current news stories about the very attractive price for natural gas in the United States.

However, the data indicate that drilling and prospecting now incur costs that total as much as 85% of revenues. That means that exploitation would have to continue at full stretch for decades in order to recover the investments. In other words, there is a shale gas “bubble” emerging in the United States — an all-too-familiar story.

Shale gas carries huge environmental burdens for the communities that are fracked, triggering earthquakes and fouling groundwater with volatile chemicals used as treatments in the fracking fluid (including the carcinogens benzene, toluene, ethylbenzene and xylene). Shale gas is currently benefiting from hidden subsidies — such as U.S. federal government R&D that developed massive hydraulic fracture (MHF) in the first place, as well as horizontal drilling techniques and earth imaging.

The gifts from the federal government to the shale gas producers just keep on giving. One of the last acts of the Bush Administration was to weaken SEC oversight, and allow shale gas companies to inflate their estimates of reserves (“overbooking”) — thereby enabling them to reduce apparent costs and make themselves look more profitable than they really are. Another gift was to exempt shale gas companies from the requirements of the Clean Water Act. Most of the early years of the industry were heavily subsidized through tax credits, no doubt courtesy of Vice President Dick Cheney offering a helping hand to his former industry colleagues.

All this is justified in the name of oil geopolitics. The shale gas phenomenon is actively promoted in the United States as a deliverance from oil dependence on Saudi Arabia. The United States could well be transformed from a fuels importer to an exporter. For example, Daniel Yergin, author of the recent book The Quest, argues that shale gas and oil create a new “hemispheric” oil politics, meaning that the center of gravity of fossil fuels is shifting from the Middle East to the American hemisphere.

The only problem with this argument is that shale gas, with all its vast demands on water and its wrecking of water tables for whole communities, simply extends the life of the fossil fuel economy. It thereby postpones the day when the “real” energy economy, based on renewables, finally comes into its own. It is here that energy geopolitics really enters the picture. For while the United States promotes shale gas, consistent with its existing patterns of energy use and fossil fuel subsidies, China is going along a very different route.

The U.S. Congress, meanwhile, continues to fudge the issues. It engages in pointless debate over global warming, while frustrating any policy to promote renewables. It continues to subsidize fossil fuel industries, even when they don’t need it. And it is now pushing massive (hidden) subsidies towards the new shale gas industry.

But with each such decision, the United States simply postpones the passage to a renewable energy future. And, hard though it may be to believe, it gives China further time to build an unassailable competitive lead in the new energy industries. This is the real cost for America of the fracking frenzy.

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About John Mathews

John Mathews holds the Chair of Strategy at the Macquarie Graduate School of Management at Macquarie University, Sydney.

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