The fracking boom is ending with a bust

Source: Business Insider.

Business booms are followed by busts—the interaction of overconfidence, oversupply and diminishing returns.

That’s not just a law of the free-market system, it’s a law of human nature.

As the chart above indicates, hydraulic fracturing for natural gas is an industry entering the bust part of its cycle.

The glut of natural gas probably will continue for some time.   Gas companies would continue to pump gas even if they’re losing money.

They’ve already paid for the drilling equipment, and they’d lose less money by continuing to pump than by walking away from their sunk costs.

It’s good that New York state didn’t jump into fracking just now.   We’d have had all the problems associated with fracking and none of the benefits the come with getting in on the ground floor.

The wise thing to do just from a business point of view, aside from all environmental and climate considerations, is to keep natural gas in the ground as long as we can.  If there comes a time when we desperately need it, it will be there.

LINKS

Fracking has collapsed by Wolf Richter of Wolf Street for Business Insider.

Keystone XL, Cold War 2.0 and the GOP Vision for 2016 by Michael T. Klare for TomDispatch.  Fracking is a factor in geopolitics.

Update 2/28/15

As Bill Harvey pointed out in his comment, a decline in the number of rigs doesn’t mean a decline in production—that is, not right away.

Oil rigs and oil production in the United States

Methane hydrate and the future of fossil fuels

The word may be on the brink of a new era of cheap natural gas, made possible by hydraulic fracturing and development of a new fuel methane hydrate, according to Charles C. Mann in this month’s issue of The Atlantic Monthly.  Methane hydrate is a product of organic decay trapped in ice crystals, and is found in potentially enormous quantities in the ocean’s depths.  View the video for a better explanation.  Click on What If We Never Run Out of Oil? to read Mann’s article, which I highly recommend.

What Mann reported is interesting and significant, and his prediction may be correct.  But then again, maybe not.

“Never run out” means something different to economists from what it means to me and probably to you.  In a free-market, capitalistic economy, you never run out of anything.  What happens is that the scarce resource becomes increasingly more expensive, people use less of it, and eventually a substitute is found.   The question is just what that substitute is—an equivalent resource, a more expensive resource or acceptance of doing without.

I long thought that the rising price of fossil fuels would result in a transition to solar, wind and other renewable sources of energy.   Over time, I reasoned, the cost of nonrenewable resources are goes up, while the cost of technology goes down.  Sooner or later, I believed, these two lines must cross.

I still believe that this will happen someday. but in the short run, just the opposite is happening.  The petroleum industry has found ways to extract fossil fuels that never were dreamed of when King Hubbert made his predictions about peak oil.   Methane hydrate may or may not emerge as an important energy source.   I wouldn’t bet against it.  But even if it doesn’t, hydraulic fracturing has already transformed the world market for natural gas.  Melting of the polar ice cap will open the Arctic to oil exploration and development.   Someday these sources, too, may peak but not anytime soon.

The question about hydraulic fracturing is how low it will last.  Oil wells in Texas and Saudi Arabia produced oil for decades.  How long will the hydrofracking wells produce?  My guess is that their usefulness will be relatively short-lived, while leaving behind a long-term mess for local communities to clean up.

Experts quoted by Mann say that methane hydrate could provide fuel to keep our industrial civilization going for centuries and perhaps indefinitely.   These predictions usually come with a footnote, which says “at current rates of use.”  No matter how abundant a resource is, it will be quickly exhausted if you use it up at a steadily increasing rate.  I don’t see energy use stabilizing until the world’s population stabilizes, and a majority of the world’s population are not in poverty.   What is poverty?  At a minimum, it is having enough to sustain life and health and, beyond that, it is whatever people think it is.

Then there is the question of global climate change.   Natural gas (methane) is a clean-burning fuel, but in its natural state is a worse greenhouse gas than carbon dioxide.  In theory, natural gas can be extracted in such a way that it is not released into the atmosphere.  In practice, it might not be.

The more fossil fuels we burn up, the more fragile our civilization becomes.  We depend on increasingly complex systems that are increasingly vulnerable to failure.   I realize this every time there is a severe ice storm that causes electric power failures here in Rochester.  As I sit in the dark, I wonder what I would do if the failure were universal rather than local, and lasted indefinitely rather than a few days or weeks.

Back in 1954, Harrison S. Brown wrote in The Challenge of Man’s Future about how our industrialization was made possible by the availability of coal and oil, and of metal ores that were easy to process.   If for some reason industrial civilization should collapse, it would not be possible to rebuild it using the methods by which the original industrial civilization was created.  The resources would not be there.   That is still true, and the more nonrenewable resources we use up, the more true it becomes.

Hydrofracking: toxic costs for a clean, cheap fuel

Double click to enlarge

This chart from a New York Times article last year shows one of the costs of hydraulic fracturing, a technique for extracting natural gas tightly locked in shale strata by means of fracturing the shale and forcing out the gas with a mixture of water, chemicals and sand.   Even when this is done properly, there remains the problem of disposing of the waste water, which contains not only the hydrofracking chemicals but sometimes underground toxic metals and radioactive elements.

Some benefits of hydrofracking are shown in the charts below.  The technique increases the supply of natural gas, which drives down the price, and the increased use of clean-burning natural gas lessens greenhouse gas emissions.  Hydrofracking isn’t the sole reason for either lower prices or lower carbon emissions, but it is a big contributor.

Natural gas prices in inflation-adjusted dollars are the lowest since 1976.  Carbon dioxide emissions are the lowest since 1994.  But before we in upstate New York join in the hydrofracking boom, we should ask ourselves—which will be more permanent, the benefits or the costs?   It seems to me that we will still be dealing with the costs long after the boom is over.

Click on Regulation Lax as Gas Wells’ Tainted Water Hits Rivers for the New York Times article.

Click on Why US natural gas prices are so low for analysis of the economics of natural gas.

Click on U.S. Carbon Emissions Fall to Lowest Levels Since 1994 for more about the benefits of clean-burning natural gas.

Click on The record is clear: Obama delivers on clean energy for comment on President Obama’s support for hydrofracking.

Click on A Mysterious Patch of Light Shows Up in the North Dakota Dark for a report on North Dakota’s natural gas boom.

Click on Future Bakken Production and Hydrofracking for a report on the temporary nature of North Dakota’s boom.

Hydrofracking and the world balance of power

Two countries without shale gas reserves: Russia and Iran

All my life I’ve held that if you have a finite resource, such as oil or natural gas, and you use it at an ever-increasing rate, someday you will run out.   As a matter of logic, this is an irrefutable truth.  But all my life, the oil and gas industry has been rendering this truth irrelevant, by discovering new sources of oil and gas and new ways to get at it.

The latest discovery is the hydraulic fracturing technique for extracting natural gas, which, together with oil drilling in the warming Arctic, is creating a new energy era.

Because of hydrofracking, Americans are burning less coal and oil, and more clean-burning natural gas.  Carbon emissions are at their lowest level in nearly 20 years.   Increased use of renewable energy and better conservation methods contribute to the improvement, but hydrofracking is a key factor.

Because of hydrofracking, the world balance of power is changing in favor of the United States.   The world has less need to import oil from the Persian Gulf.  Europe has less need to import gas from the Russian Federation.   Here’s how Der Spiegel, the German newsmagazine, sees things.

The future of the American energy supply was looking grim until recently. With its own resources waning, the United States was dependent on Arab oil sheiks and erratic dictators. Rising energy costs were hitting a vital nerve in the country’s industrial sector.

But the situation has fundamentally changed since American drilling experts began using a method called “fracking,” with which oil and gas molecules can be extracted from dense shale rock formations.  The International Energy Agency (IEA) estimates that the United States will replace Russia as the world’s largest producer of natural gas in only two years.  The Americans could also become the world’s top petroleum producers by 2017.

Low natural gas prices — the price of natural gas in the United States is only a quarter of what it was in 2008 — could fuel a comeback of American industry. *** ***  

The outlines of a changed world order are already emerging in the simulations of geo-strategists.  They show that the United States will benefit the most from the development of shale gas and oil resources.  A study by Germany’s foreign intelligence agency, the BND, concludes that Washington’s discretionary power in foreign and security policy will increase substantially as a result of the country’s new energy riches.

According to the BND study, the political threat potential of oil producers like Iran will decline. Optimists assume that, in about 15 years, the United States will no longer have to send any aircraft carriers to the Persian Gulf to guarantee that oil tankers can pass unhindered through the Strait of Hormuz, still the most important energy bottleneck in the world.

The Russians could be on the losing end of the stick.   The power of President Vladimir Putin is based primarily on oil and gas revenues.  If energy prices decline in the long term, bringing down Russian revenues from the energy sector, Putin’s grip on power could begin to falter.  The Americans’ sudden oil and gas riches are also not very good news for authoritarian regimes in the Middle East.

I’m of course glad that natural gas prices are falling, and that I am paying less to heat my house than I did a few years ago.  I acknowledge that hydrofracking has contributed to my well-being.  I don’t think it would benefit anyone if I were to switch to fuel oil, or if it would be possible to return to the coal furnaces of my boyhood.

My friend Michael thinks cheap gas from hydrofracking will tide us over during the transition to renewable energy.  I doubt it will work this way.  So long as the price of the supposed transitional energy supply is falling, there will be little economic incentive to make the transition.  That will have to wait until the price of fossil fuels starts to rise again.

I know that I can’t predict the future.  I won’t try to predict how long the hydrofracking boom will last.  I would be happy of the supply of cheap gas lasts my lifetime.  Since I’m 76, it just might.  But I don’t think it will last the lifetime of my niece and nephew, or of their infants and toddlers.  I read a report on The Oil Drum site that hydrofracked gas wells are being depleted more quickly than expected, and I link to that report at the end of this post.

I still think the smart thing for we upstate New Yorkers to do is to hold back on hydrofracking until the price of natural gas starts going up again.   The question is not whether hydrofracking is a good thing overall or not, but rather whether adding our little increment to the world supply will be worth the cost.

Click on Full Throttle Ahead: US Tips Global Power Scales With Fracking for the full Der Spiegel article.

Click on Future Bakken Production and Hydrofracking for the full article on The Oil Drum.

Click on U.S. Carbon Emissions Fall to Lowest Level Since 1994 for a report on the benefit of clean-burning natural gas.

Click on Gazprom Gas Giant Is Running Into Trouble and Stepping on the Gas: New Drilling Technologies Shake Up Global Market for more from Der Spiegel on natural gas and world power.