Sunday, November 2, 2014

Where do falling gas prices leave the hydraulic fracturing industry?

Although filling up your tank for less than $20 is not in the foreseeable future, gas prices have been falling in a dramatic fashion this fall. Gas prices are at their lowest in early 4 years, under $3.00 a gallon in much of California and under $3 across most of the United States Crude oil was selling for just above $80 a barrel at the close of market this past Thursday. This is the lowest that oil prices have been since December 2012 and is down from a year high of about $100. Worse news for oil producers is that the price is projected to stay around this level for the remainder of 2014.

The decrease in the domestic gas price is likely attributable to several factors, the most important being the implementation of alternative energy and shale oil resources in the United States and Canada.

Shale oil is derived from the ground by a process known as hydraulic fracking, or simply ‘fracking’. Fracking entails forcing a mixture of chemicals, sand and water into the ground to force apart shale rocks and release gas. U.S. drilling companies have become so adept at fracking that the United States is forecasted to be energy independent as early as 2020.

Key natural gas sources for fracking are situated beneath rural and historically poorer areas, like the Marcellus-Utica shale formation, which spans parts New York, Pennsylvania, Ohio and West Virginia. The fracking explosion has transformed many of these rural communities. Some living in fracking territory have benefited from jobs or the sale of mineral leases and drilling rights. However, the recent drop in oil price may compromise these benefits. 

According to a recent report by Goldman Sachs Group Inc., a price of $80 a barrel would cause many hydraulic-fracturing projects to become uneconomical due to costs associated with fracking. The Wall Street Journal writes: “[w]hile fracking costs run the gamut, producers often break even around $80 to $85.”

The price will likely continue to fall this November. At OPEC’s upcoming November meeting, it is anticipated that OPEC will not reduce their output to adjust for the decline in price.

Perhaps this forecasting sheds light on the rationale behind Chesapeake Energy Corporation's recent sale of their Utica and Marcellus shale positions. The company said earlier this month that it was set to sell these shale assets to rival Southwestern Energy Co. for more than $5 billion.

So where does this leave rural America?

While the future of fracking cost effectiveness is in question, the future of rural America is not. Even if fracking positions are liquidated, the negative environmental and social impacts associated with fracking will likely persist. Further, the negative associated with the short-term economic gains will begin to surface.

These negative economic costs are assessed by Mark Partridge, the C. William Swank Chair of Rural-Urban Policy at Ohio State University and a professor in the Agricultural, Environment, and Development Economics Department. He writes:
Many impact studies also fail to account for possible offsetting negative effects from energy development that may offset the positive effects such as any crowding out of other economic activity that would have occurred otherwise (e.g., entrepreneurs outside of energy may try other locations with more stable labor markets). Higher prices (especially for housing) may also offset some of the benefits of higher wages potentially negatively affecting quality of life in the area. In addition, many of the benefits may trickle away to other areas due to commuting workers, purchases outside the region, and absentee landowners receiving the lease payments. Finally, perceived or real environmental degradation may frighten some current residents and potential residents away— especially in the long-run. The take-away is that communities should be wary of industry funded economic impact studies (regardless of the industry) and should try to verify economic impact estimates with independent experts.
He concludes:

[t]he general lesson is that short-term energy booms do not necessarily translate into long-term economic prosperity.

In short, rural America may actual be in a worse position now --both economically and environmentally--than prior to the early '90s shale ventures.


Tiffanie said...

I think this post points out that the debate about fracking just became much more difficult.

I personally have been torn about whether fracking is more beneficial than harmful. There have been studies that show the many benefits of fracking, some of which you have pointed out: the United States may be able to become energy independent in the new future (which as both economic and political benefits for the U.S.), the use of natural oil releases fewer carbon emissions than coal, and increased fracking has provided much needed jobs. However, there are also cons to fracking: the chemicals that are pumped into the ground could pollute groundwater, companies are often not required to disclose the chemicals they use when fracking, and transportation of water used for fracking in rural areas could potentially turn rural areas into busy highways.

With many of the pros of fracking being economic, and with the effects of the falling gas prices you pointed out in your post, I wonder if more people will begin to see fracking more negatively than before. I know this post compelled me to question the long term benefits of fracking more critically.

Enrique Fernandez said...

Fascinating post, Kate. Today, I read an article regarding falling oil prices in the Wall Street Journal. It looks as though a lot of big transnational oil companies are not only cutting back on the shale drilling projects, but they are also cutting back on drilling projects, in general.

From 2007 to 2013 investments on oil and gas projects shot up 80%; however, production output fell 6.5% over that period. Apparently, despite the increase in growth of oil and gas drilling projects, the profitability of projects also decreased. The article concludes that the grow in oil and gas production projects was the result of oil companies trying to appease stockholders by constantly growing. So, these companies have stretched themselves too thin and are now retracting a large number of these projects, a lot of which are in remote (rural) locations and will likely impact the economies of those communities.

Here's the link to the article I'm referring to:

David Gomez said...

Kate, great explanation of fracking in two sentences! I wrote about fracking last week, but I didn’t even attempt explaining how it works. I tend to agree that these energy companies are going to do whatever it takes to make money. Even if it means closing up shop and leaving a disaster (both economic and environmental) behind. I was surprised to learn that the break-even cost of these operations is $80-85 per barrel. I naively assumed it was much less.