The Negative Impacts of Restricting Fracking

Mark Green
Posted November 3, 2016

Let’s follow up on a post earlier this week on the energy stakes in next week’s election with some recent analysis by Adam Sieminski, who heads the U.S. Energy Information Administration (EIA). Speaking at a Natural Gas Roundtable event, Sieminski said that constraints on hydraulic fracturing, reducing its use, could have significant price impacts. E&E News reported:

Sieminski said if opposition to hydraulic fracturing were translated into a dramatic reduction in use of the technique, the price impacts would be sharp. About half the oil and 60 percent of the natural gas produced in the United States today is surfaced using hydraulic fracturing, he said, so “if you were to put really serious constraints on that, you're going to have a reaction in the marketplace.” Grabbing two dinner knives from a place setting, Sieminski illustrated the classic textbook supply-demand curves crossing in a wide “X.” “When you have elasticities that look like that" — he scissored the blades sharply together into a tight “X” — “all it takes is a small increase in demand to drive the price around like crazy.”

In other words restricting energy development using fracking – the technology engine of the U.S. energy renaissance – will prompt a big marketplace response. It’s supply and demand: restricted supply plus demand (or demand increases) equals price impact.

The possibility that hydraulic fracturing could get buried in the regulatory avalanche currently aimed at the oil and natural gas industry by the Obama administration was discussed in an API conference call this week. Upstream Group Director Erik Milito said fracking is a key to U.S. economic and energy growth:

“The advanced engineering technology of hydraulic fracturing has proven to be done safely throughout the U.S. There is enormous potential for new jobs and economic stimulus from shale development. The country is better off today because of hydraulic fracturing, and the future can be even brighter if we follow the facts and science.”

The facts and science say fracking is safe, already well-regulated and that it has not led to “widespread, systemic impacts on drinking water resources” – language from an EPA draft study. Yet, some continue to push for additional regulatory layers – leading us back to Sieminski’s observation that new constraints on fracking could have market impacts, affecting consumers, business and industries.

Let’s start with consumers. We know that U.S. motorists have benefited from lower gasoline prices – AAA estimates that drivers saved, on average, more than $550 in 2015 on transportation fuel costs – which have occurred with the surge in domestic energy production, developed with hydraulic fracturing. As well, average U.S. disposable household income was $1,337 higher in 2015, given lower home energy costs as well as other savings that have resulted from the fracking-led U.S. energy revolution.

Look at electricity prices. EIA tells us that during the first six months of the year, residential consumers across the country paid on average 12.4 cents per kilowatthour or 0.7 percent lower than the same period in 2015. If the trend is sustained for the rest of 2016, EIA says, we would see the first decline in annual average residential electricity prices since 2002.

This is largely attributable to abundant, affordable natural gas that is now the leading fuel for generating electricity in this country. New constraints on the hydraulic fracturing that is producing record volumes of natural gas could constrain supplies, affecting power generation costs and then consumer costs.

Similarly, new constraints on hydraulic fracturing could affect the U.S. manufacturing sector, which has been revitalized by affordable natural gas – powering manufacturing operations and serving as a feedstock for a number of manufactured products. In a recent report, the president’s National Economic Council linked plentiful, affordable energy from shale to America’s manufacturing resurgence:

[F]or the roughly one-fifth of U.S. manufacturing that is energy-intensive, low-cost reliable energy is important to continued competitiveness. U.S.-based manufacturers currently enjoy a competitive advantage from affordable natural gas. … The surge in American natural gas production has lowered energy costs for manufacturers and driven job growth, with U.S. natural gas costs one-half that of Europe and one-third that of Asia. Recent analysis estimates that industrial sector consumers of natural gas were better off by about $22 billion between 2007 and 2013 due to abundant, inexpensive shale gas. That is an important part of why companies have announced tens of billions in new capital commitments in energy intensive manufacturing facilities that will come on line in the years ahead.

Imposing new constraints on hydraulic fracturing could affect the availability and affordability of natural gas, impacting costs to manufacturers and potentially making their operations more expensive and less competitive.

Finally, there are the environmental benefits of fracking. Increased use of cleaner-burning natural gas is the chief reason that from January through June this year, U.S. energy-related carbon dioxide emissions were at the lowest level for the first six months of a year since 1991. EIA projects that energy-related CO2 emissions this year will be the lowest annual total since 1992.

Thanks to hydraulic fracturing, the United States is the world’s leading producer of oil and natural gas. We’re stronger economically and more secure in the world because of the domestic energy renaissance propelled by fracking. Natural gas developed with fracking is letting the U.S. lead the world in reducing energy-related carbon emissions. The environmental benefits of fracking are even being noticed by environmentalists.

Potentially jeopardizing all of these benefits by imposing new layers of regulation would be an unforced error – which is why U.S. voters should consider energy as they make choices up and down the ballot next week. Kyle Isakower, API vice president for regulatory and economic policy:

“U.S. energy policy that supports oil and natural gas can help the U.S. meet national energy, economic and climate goals. We encourage all officials to be aware of and reexamine the avalanche of new regulations now under consideration.”