The Natural Gas Boom: Cheap Energy, but at What Cost?

The outlook for the U.S. energy market has improved dramatically in the last several years, with the country importing 90% less light sweet crude than it did a decade ago and cheap natural gas being produced in abundance. The change is due almost exclusively to advances in hydraulic fracturing, or fracking, the controversial practice of using water under high pressure to extract hydrocarbons from the earth.

Almost 90% of the wells being dug in the U.S. today are fracked, and the “shale revolution” has brought jobs and economic vitality to areas rich with shale. While some producers bemoan the low cost of natural gas, low-cost fuel has benefits for many other industries, and could help spur a manufacturing revival in the U.S. Yet fracking remains controversial because of concerns about the environment, particularly the possibility of water supplies being contaminated below ground.  

Participants on the energy panel at the recent Wharton’s Economic Summit 2013 in New York City agreed that the industry needs to strike a delicate balance between reaping the benefits of fracking while safeguarding the environment and addressing the needs and concerns of the communities affected by fracking.

The shale revolution’s impact on the energy industry amounts to what William Klesse, CEO and chairman of Valero Energy Corp., calls a “huge opportunity for the U.S. in all the energy manufacturing businesses.” He believes it already has had more impact on the industry than anything else in recent memory, including price controls and embargos.

Janet Clark, executive vice president and chief financial officer of Marathon Oil Corp., framed the issue not as a matter of “to frack or not to frack,” but “how to do it responsibly in terms of impact on the community as well as impact on the environment, both air emissions as well as broad quality.”

There are states that have opted not to frack, either banning it outright or putting a moratorium on it, pointed out Ann Harrison, a Wharton management professor, who moderated the panel. Klesse stated that communities have the right to know about the risks but must weigh them against the benefits. “New York [which has put a moratorium on fracking] is making a huge mistake,” he said. “In Pennsylvania there are 100,000 jobs [that would otherwise not be there]. The oil and refining businesses are hiring people, generating jobs, paying taxes. This is a windfall for the U.S.”

John Deutch, an MIT professor and former head of the CIA, pointed out that for all the concern about drinking water contamination, the real environmental risk is not below ground but on the ground and above it. “There’s no question that unconventional oil and gas production involves very serious environmental impacts on air quality, water quality, community and land use,” he said. “When 16 wells are being drilled simultaneously [there] are legitimate questions that have to be addressed, especially if the country is going to have the benefits of hundreds of thousands of these wells in operation across all of the U.S.”  

He said the regulatory structure for private lands was inadequate, with mixed federal and state responsibility. “It’s simply not going all that well,” he said. “I am a great advocate of seeing the industry do more and stepping out ahead of this problem, and trying to convince the public that the right balance is being struck.” He recommended a three-pronged approach: measuring the environmental impact; reporting those measurements publicly; and making the commitment to reduce those impacts over time.

Clark spoke of some of the actions Marathon has been taking. “We, as an industry, have to do what we can to lessen the negative impact on the community,” she said. “We do try to do a lot of things — making donations to the local hospitals so that they can expand, and being a good community partner in terms of lots of not-for-profit opportunities.” Like Klesse, she stressed the economic benefits, talking about how towns have been completely revitalized. “There is no question this boom is driving great economic growth at a time where our country could really use a bit of a jumpstart,” she said.

Evidence of Degradation

 

Harrison asked about actual evidence on possible health or environmental effects, raising the possibility that there may be none at all.

There are at least one or two documented cases of fracking fluid finding its way into the water, according to Deutch, who chairs a group for the Department of Energy that is looking at environmental impacts. He said a much greater problem is poor well completion. “There are many such instances of those bad completions,” he said. “That’s where the attention needs to move, towards the companies that are doing it.” Clark added that cases of water contamination from oil and gas drilling, regardless of whether there is fracking, are typically related to well design.

The potential benefits of the shale revolution go beyond economics. Harrison quoted a report from McKinsey noting that fracturing technology has the potential to make the U.S. a net exporter of not only natural gas, but also crude, by 2025. “The U.S. can become completely energy independent if this technology is used more extensively,” she said.

Anas Alhajji, chief economist at NGP Energy Capital Management, said people must be careful not to confuse being a net exporter with being energy independent. It’s possible that North America could become energy independent, but that goal will be hard to meet because the quality of the crude doesn’t match the current refining abilities. To become energy independent, new infrastructure is needed that will support the refinement of the crude being produced into a higher quality, and regulations restricting natural gas exports should be amended.

Alhajji said that in the next year or two, there will be such a surplus of natural gas and crude oil that “we won’t know what to do with it. We have to remember that we cannot export crude oil by law.” Manufacturers, who of course can export what they are able to produce with cheap labor, will be the primary beneficiaries of cheap gas prices unless the laws change. “We are going to have serious problems, and we are hoping that the administration will allow crude oil exports, at least to Mexico, because that’s going to relieve some of the pressure on the market,” he said.

The role of the government in the shale revolution has been overstated, he believes. “This did not result from government policy to start thinking about energy independence,” he said. This revolution was caused by independent small- and mid-sized companies, and everyone else came in late to the game.” Government’s role in the shale revolution going forward was discussed, with agreement on the need for free trade and less time-consuming permit procedures.

A Delay for Green Energy?

The notion that the shale gas revolution will delay the shift to a green energy future, which Deutch has written about, was dismissed by several other panelists. Clark pointed out that natural gas, which has a lower carbon footprint, is displacing coal in the electrical power industry. “I see that as a positive,” she said. “Natural gas can be an important transportation fuel, but that’s going to take a little bit longer because of the infrastructure that’s required and the consumer acceptance of it.” She said a number of companies and municipalities that have central facilities for refueling are moving in that direction, displacing the more carbon-intensive oil and diesel.

Renewable energy sources, specifically solar and wind, are already benefiting from gas in several ways, according to Alhajji. Both solar and wind are intermittent fuel sources, and gas can be used as backup power when necessary.

The idea of moving entirely away from all fossil-fuel consumption is not practical, according to Clark. “How much additional cost can our economy absorb today to subsidize carbon-free fuels?” she asked. “We won’t leave the hydrocarbon age because we ran out of oil and gas; we’ll leave it when we have a better fuel that is scalable, that’s secure and that is economically affordable.”

“There is no question that climate change and global warming are issues, but you cannot ruin the economy to address them,” Kleese said. “We’re in these businesses and we are driven by economics. I can tell you that in my opinion all of these alternatives are not economic against natural gas.”

Deutch cautioned people to consider the long-term effect of delaying green energy and said he stood by his previous statement. “As we all get excited and congratulate ourselves about natural gas you have to remember there is a climate issue out there that is going to hit this world,” he said. “Not during our lifetime, but we have to worry about how we’re going to deal with that, or how our children and grandchildren are going to deal with that.”

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