Tuesday, July 30, 2013

We Are the Children of the (Shale) Revolution - Why We Should Embrace the Shale

Although still unknown to many, the technologies of hydraulic fracturing (also known as fracking) and directional drilling are perhaps the two most important inventions of the recent years. In combination, they are bound to have an unprecedented impact on the world’s distribution of wealth and power in this century. By using a horizontal (directional) drill and injecting extremely hot, pressurized mix of water, chemicals and sand into the shale underneath, these technologies allow us to extract oil and natural gas from the rock itself. These “unconventional” methods of extraction have resulted in what is called the shale revolution, completely redrawing the world’s natural resource maps. Although there are clear positives to this so-called shale revolution, the extraction of shale oil and gas must be carefully managed if we are to reap all of its benefits.

This is how horizontal drilling and hydraulic fracturing work in practice.
© Geology.com
Most of the positives of these developments are reasonably self-evident: we will see a large increase in the world output of oil and gas, pushing down prices, uplifting employment, and generally moving the world economy in a positive direction. In the United States, the world’s foremost pioneer of fracking, these effects are already beginning to show. According to the US National Petroleum Council’s 2011 report, unconventional sources could result in more than doubling the oil and gas production in North America. Such an increase would make the United States a net oil exporter, leaving it to produce more petroleum than Saudi Arabia or Russia. Now the US is already fully self-sufficient in natural gas production, despite the fact that five years ago it started building a gas-importing infrastructure. Employment has also been positively affected. According to the latest report of the US Bureau of Labor Statistics, the unemployment rate in North Dakota, a state that sits atop the oil-rich Bakken Shale formation, is only 3.3%—the lowest in the country. As there are at least two more similar shale formations in the USA, it is likely that at least two other places in the USA will experience a similar revival. The price of gas in the US also dropped markedly in 2009, to about a third of its 2008 price. This will drive energy prices in the US down, further reviving the US economy. If the US chooses to export this gas abroad, world prices will also fall, bringing a more modest revival to other world economies.

The natural gas price dropped in the US with the new shale gas extraction technologies.
© Economist.com
In addition to causing an economic uplift, a transformation of the USA from a net importer to a net exporter of oil and gas will have an unprecedented impact on world geopolitics. First, it will doubtlessly increase the importance and (energy) independence of the USA, perhaps reversing its decline as the world’s hegemon. Other countries that discover the existence of similar deposits on their territory will experience a comparable rise in their wealth and geopolitical importance. Second, if indeed the current predictions are correct, the shale revolution will increase the known supply of fossil fuels so much that the world will not need to worry about running out of oil for most of this century, even if demand for it rises. The time thus gained, along with the financial profits from the shale revolution, could be used productively to search for new, cleaner, cheaper, and safer sources of energy after we reach peak oil (the point where we start producing less oil and gas than we need). If such research takes place and succeeds, the shale revolution could be seen as the turning point in the energy security of humankind.

While the positive impact of the shale revolution is unprecedented, we should not overlook the possible negative effects of these technologies. An environmentally-minded reader might rightfully object that an increase in the world’s supply of fossil fuels will result in more CO2 emissions and other environmental externalities, such as groundwater contamination and minor earthquakes, both of which have been associated with fracking. In addition, if the right policies are not implemented, the aforementioned research might not take place, thus in fact delaying the point when we start seriously researching cleaner and sustainable sources of energy. In this scenario, our reliance on fossil fuels would increase without having an exit strategy. This is a danger we cannot afford.

Because of such fears, some countries are opposed to joining the shale revolution and prohibit fracking in their territory. In the EU, these include France, Luxembourg  The Netherlands, Bulgaria, and the Czech Republic (where shale reserves are minimal). Despite their current opposition to fracking, these countries will start fracking sooner or later, when the economic benefits outweigh environmental concerns. As all of these countries could use the economic uplift associated with shale gas, and as it is in their interest to decrease their energy reliance on Russia, it will most likely not take too long for them to start issuing fracking permits. Their environmental fears may result in tighter regulations, which may slow down the progress of drilling but at the same time increase their citizens’ safety. Thus Europe will likely experience a revival of its own, though it may take longer than in the United States. The rest of the world will no doubt soon follow suit.

In conclusion, the shale revolution, if properly managed, will have a highly positive net impact on the world in the coming decades. Fossil fuel prices will fall and employment will rise, uplifting many economies from the lingering economic crisis. The increase in fossil fuel usage must, however, be accompanied by appropriate policies. It is essential that some of the proceeds from fracking be used to promote research of clean, sustainable technologies. Simultaneously, the negative environmental externalities of fracking must be mitigated by policies that increase its safety. Governments should encourage inventions that make fracking cleaner and enforce strict, loop-free regulations that reward compliance and punish disobedience. As the world’s conventional fossil fuel reserves dwindle, more and more countries will move toward “unconventional” shale sources. As a result, the shale revolution cannot and should not be stopped. It must only be properly managed.


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