Despite the promises that hydraulic fracturing holds in the achievement of energy independence, there remains a tension between the economics of fracking and environmental regulatory practices. Economic analysis of law suggests that the regulatory framework ought to maximize the value of resources. What this suggests is that regulatory practices in hydraulic fracturing should lead to a Pareto-efficient result.
As simple as this statement sounds, the regulation of hydraulic fracturing becomes a big issue because the wedge is driven by the competing economics of energy and economics of capital investment pitched against environmental interests. Against this backdrop, the goal of this paper is to discuss hydraulic fracturing and explore measures to consider in the design of coherent environmental regulatory practices to govern fracking.
As a reaction to the economic potential of hydraulic fracturing, there have been increased investments in the energy sector. Thus, the first part of this paper contextualizes this study by offering an overview of hydraulic fracturing. At the same time, this section provides a framework for establishing the relationship between energy economics energy and the economics of capital investment.
Whether hydraulic fracturing is regulated by the government or is self-regulated, the environmental implications of mining cannot be ignored. But not only is the question relating to economic rationale for hydraulic fracturing poignant, but also the scope of environmental regulation in fracking remains unclear.
The long-term implication of the essential need to provide a clear-cut regulatory framework that integrates ecological concerns and economic objects of energy exploitation. The paper will thus give a special emphasis to the nexus between the economics of hydraulic fracturing and environmental regulation of the same.
Shalanda Helen Baker, writing on the risks inherent in fracking mentions that “Hydraulic fracturing, or fracking, involves the injection of a combination of water, chemicals, and sand into the earth to release natural gas.” (254). Thus, fracking involves the use of chemicals and sand to extract natural gas under high pressure from deep wells.
These wells only produce natural gas if they hit gas-bearing shales (Baker 254). If the shale contains natural gas, the injected fluid returns to the surface after which mining operations commence. Therefore, if the fracking liquid does not have gas deposits, such a well or hole becomes an environmental concern.
Whether the well produces natural gas or not, the whole process is risky. Neighboring risks include the seepage of gases like methane in nearby water or soil. Once water mixes with methane, it becomes unsafe for consumption. Also, the escape of these gases into the ground reduces the agricultural value of land.
The economics of fracking should be reviewed against a backdrop of the energy markets in the U.S. Given that the U.S. energy market is embracing a paradigm shift characterized by affordability and sustainability, natural gas as obtained from fracking holds a lot of potential to promote efficiency in the energy markets. Therefore, it is essential to examine the economics of fracking as informed by markets and consumer welfare.
Fracking of shales stands to increase energy security. Fracking or hydraulic fracturing presents a unique opportunity to transform the energy market and invigorate financial markets. Cementing the importance of natural gas in the US is the observation that the U.S. has been relying on imports to meet its energy needs. (Brown, Gabriel, and Egging 8-9). In large part, the US has mainly been an importer of oil and gas with the exploitation of shale allowing the US to become an exporter.
Data obtained from the US Energy Information Administration projects that shale gas production will average around 1 trillion cubic feet (Tcf) by 2040 (Mason, Muehlenbachs and Olmstead 270). Thus, the production of natural gas from fracking will undoubtedly reduce reliance on imports and create a market for natural gas produced in the U.S.
Pricing of oil enables consumers to derive economic benefits from natural gas extraction in fracking. Because fracking increases production and availability of natural gas, economic principles of supply and demand dictate that prices are subject to decrease (Hausman and Kellogg 72).
According to Mason et al. (271), the increase in natural gas and its price leads to lower costs in the generation and sale of electricity. The reduction in electricity costs lowers production costs in industrial processes (Brown et al. 13). Also, it decreases the costs of electric consumption in households. Another spillover is seen in the agricultural industry where gas surplus lowers prices of fertilizers (Hausman and Kellogg 75). Consequently, farmers incur fewer costs thus maximizing returns from agriculture. Therefore, the spillover effects of fracking are felt across multiple sectors of industrial production
Hydraulic fracturing does rejuvenate markets. Despite the collapse of the real market and subsequent cautionary approach to investments in real property, oil increases the monetary worth of land. On itself, land is a valuable commodity. Thus, oil and gas resources as evidenced by hydraulic fracturing accentuate the value of land.
For instance, if fracking operations lead to the discovery of gas on land, the surrounding land increases in value (Mason et al. 284). Thus, landowners benefit from an increase in the value of the land. At the same time, the viability of wells leads to the rise of other economic activities. Here, personnel involved in the fracking lead to the increase in rents, development of new housing and amenities to meet the needs of workers in the fracturing companies.
In reference to fracking, the economics of capital investment is best understood by reviewing the cost of human capital and investment into production. Although fracking creates new employment opportunities, it also promotes siphoning of labor.
Fracking promotes mobility of labor, and most unemployed people are wont to leave their states to seek employment in fracking companies ([email protected] par. 1). While this reallocation of labor promotes economic development, it has a grave impact on the agricultural sector. Here, fracking reduces the labor pool available for agricultural activities and production of food in farms.
Consequently, this poses a risk to food security and the sustainability of agriculture in the country. Concerning capital for investment, fracking companies are emerging as an attractive investment ([email protected] par. 1). However, there are fears that the high appetite for risk in the capital extensive fracking industry might trigger a financial crisis. Hydraulic fracturing is built on debt funding where most capital in fracturing companies comes from private equity firms and tends to be unsecured.
Capital costs include leasing, labor costs, and operational costs (Sovacool 255). Further, drilling of wells is an expensive exercise with depth and hardness of rocks increasing the costs of fracking. At the same time, the increasing volumes of supply reduce the prices of energy. This reduction in prices reduces the margin of profits obtained from fracking investments.
In discussions on energy markets, the environmental discourse oscillates between liability and costs. Liability, a market principle that requires firms to absorb regulatory costs associated with pollution, is designed to mitigate adverse environmental effects. The use of liability rules to internalize market externalities proceeds from the premise that regulation should maximize welfare. Thus, this section highlights uses an integrated approach to address both economic and environmental concerns associated with fracking.
Hydraulic fracturing poses a high environmental risk as evidenced by water pollution and a decrease in the level of water table. In reference to the water table, Baker makes the sad observation that the “rate of water consumption required to sustain fracking operations outpaces the natural rate of replenishment” (263). Gradual decline in the water table levels leads to desertification. Given that the decrease or loss of water table is irreversible, it follows that the effects of fracking on water have both economic and environmental implications.
From both a sociological and economic perspective, fracking affects access to water hence disrupting the agricultural industry. States like California and Texas have witnessed a growth in fracking activities. The high volume of water used in fracking increases the risk of a water crisis (Mason et al. 271).
At the same time, it leads to unhealthy competition for water resources. For instance, companies that supply water to fracking wells outbid farmers in water auctions. While fracking contributes to energy security and development of the domestic market, the reduction in agricultural activities and o
utput after companies outbid farmers reduces food security and profitability of agriculture. More worrying, the chemicals used in the fracking act as contaminants. Also, fracking contaminates groundwater leading to unsafe water which once used in agricultural activities kills plant life and animals. As a result, water used in fracking harms the ecology.
The main environmental concern of fracking is air pollution. The energy sector emits pollutants such as reactive hydrocarbons and naturally occurring radioactive substances (Sovacool 256-258).
These hydrocarbons lead to air pollution with methane being the leading gas contributing to the greenhouse effect and subsequent global warming. Further, these pollutants increase the rate of the depletion of the ozone layer. The depletion of ozone layer and greenhouse effects associated with fracking suggests that there is a trade-off between environmental integrity and economic progress.
In the context of intergenerational equity, humans must promote the protection of the ozone layer. Therefore, there is a need for properly designed carbon pricing to reduce carbon emissions and curtail release of other greenhouse gases.
The energy craze associated with hydraulic fracturing has impeded the development of clean energy. Sovacool (259) contends that the generation of cheap natural gas has affected the use of wind in electricity generation. Further, it has slowed the exploitation of solar energy. This is a negative externality that borders on a resource curse in the sense that wind and solar power are clean, unlike natural gas which emits carbon. Specifically, investment in fracking reduces capital investment in alternative green energy. The effect of this is reduction in coal mining and green energy, and subsequent increase in natural gas.
The primary challenge in the energy market is the achievement of a strategy that promotes energy security and sustainability. The imposition of carbon taxes has been floated as a possible panacea to the problem of increasing sustainability and security. As an economic strategy to decarbonize the energy sector, carbon pricing seeks to reduce the level of carbon emissions. On the one hand, carbon taxes lessen the attractiveness of coal (Cullen and Mansur 8-9). On the other hand, carbon taxes penalize gas production in favor of renewable energy. Hence, the challenge in reducing carbon emissions arises in the design of a strategy that minimizes transactional costs passed to the consumer while still increasing the attractiveness of natural gas consumption.
Using a framework of economic analysis of the law, allocation of mining rights in fracking should promote efficacy. The literature on the effectiveness of allocation rights suggests that the government should introduce regulations that absorb costs. An ex-ante/ex-post approach to the management of oil and gas mining suggests that legal rules should be designed to pre-empt pollution and increase the liability of companies that are highly involved in pollution.
Against this backdrop, the government should introduce a regulation that requires the private entities involved in fracking to disclose the chemicals used. However, this might be impractical or hard to implement. For instance, the oil and gas industry is not subject to the disclosure regime under the Emergency Planning and Community Right-to-Know Act. It is crucial to recognize that the companies involved in fracking use proprietary technologies.
The use of patented technologies by private companies impute that the companies concerned may use intellectual property rights to pre-empt or defeat requests to disclose the components of the fracking liquid or its effects on the environment.
Although energy companies are subject to environmental regulations on air and water, fracking companies exploit regulatory gaps to escape or minimize duties towards ecological conservation. At the center of regulating fracking, is the contestation as to whether federal or state governments should regulate fracking. Baker (256) notes that the oil and gas sector lobbied to be exempted from federal laws on the environment. Some of the rules from which the industry is exempted from include the Safe Drinking Water Act (Baker 257).
Other include the Emergency Planning and Community Right-to-Know Act and the Resource Conservation and Recovery Act (Baker 256). The Energy Policy Act which requires electric companies to mitigate pollution by reducing emissions of greenhouse gases does not apply to the fracking industry.
These federal laws should be extended to hydraulic fracturing. Requiring companies involved in fracking to comply with federal laws on environmental protection will significantly promote the conservation of the environment.
The emergence of fracking and its economic benefits have led to an explosion of hydraulic fracturing across American states. While this essay has not explored the density or distribution of natural gas wells, increased fracking heralds a significant reduction in CO2 emissions. The discussion on the economic benefits of fracking has revealed that surplus production has facilitated a decline in energy prices. Accordingly, there has been an increasing uptake of natural gas in industrial processes and generation of electricity. This increased use of natural gas corresponds with decreased use of coal energy thus lowering carbon emissions. Because of the lower energy prices, savings have improved both in households and industrial processes. An increase in household savings improves the purchasing power leading to higher living standards and economic vibrancy.
Despite these economic benefits, fracking may lead to the disruption of social or cultural life in an area. Where land has multiple values or uses, some neighbors may be opposed to fracking. For instance, the use of Indian lands for fracking deprives an area of its sociocultural importance. Also, the use of federal lands like national parks in oil and gas operations disrupts the ecology and may lead to loss of biodiversity. Therefore, fracking should be balanced against historical uses of land. A way of ensuring this would be conducting a social impact assessment to determine the effects of energy development on anthropogenic life and entire biodiversity.
Beyond the economic argument that hydraulic fracturing catalyzes economic growth and market development, the accentuation of fracking activities has grave implications on the environment. Consequently, the framework and efficacy of fracking regulation depend on the capacity of such regulations to promote the economics of energy and capital investment. Against this context, the legal rules must establish appropriate mechanisms to regulate and mitigate environmental risks. The risks should include both ecological and climate risks. Basic principles of environmental regulation such as the precautionary approach and polluter pays principle suggest that the laws should adopt an integrated approach towards environmental regulation and hydraulic fracturing. Overall, it is prudent to embrace a regulatory framework that preserves or protects the integrity of the environment.
Baker, Shalanda Helen. “Is fracking the next financial crisis: A development lens for understanding systemic risk and governance.” Temp. L. Rev. 87 (2014): 229.
Brown, Stephen PA, Steven A. Gabriel, and Ruud Egging. “Abundant shale gas resources: Some implications for energy policy.” Backgrounder. Washington, DC: Resources for the Future (2010).
Cullen, Joseph A., and Erin T. Mansur. “Inferring Carbon Abatement Costs in Electricity Markets: A Revealed Preference Approach using the Shale Revolution.” (2016).
Hausman, Catherine, and Ryan Kellogg. “Welfare and distributional implications of shale gas.” Brookings Papers on Economic Activity (2015).
[email protected] Could fracking debt set off big financial tremors? [email protected], 21 Sep. 2018, http://knowledge.wharton.upenn.edu/article/will-fracking-industry-debts-set-off-financial-tremors/. Accessed 21 Dec. 2018.
Mason, Charles F., Lucija A. Muehlenbachs, and Sheila M. Olmstead. “The economics of shale gas development.” Annu. Rev. Resour. Econ. 7.1 (2015): 269-289.
Sovacool, Benjamin K. “Cornucopia or curse? Reviewing the costs and benefits of shale gas hydraulic fracturing (fracking).” Renewable and Sustainable Energy Reviews 37 (2014): 249-264.