Fracking Revolution

The Dakotas continue to be in the news for something other than Al Swearengen’s vocabulary, as the hydraulic fracturing boom continues the dramatic expansion of natural gas and oil production.   In fact, the natural gas production has driven domestic prices so low that almost a third of all natural gas is simply burned off, called “flaring,” as the marginal cost of capturing and sending it to market is evidently higher than the market price.  Yes, you read that correctly, almost a third of all natural gas production is literally set on fire rather than captured and sold to consumers. Consequently, the bright lights of North Dakota can now be seen from space.

One of the reasons natural gas production is so abundant is that it is a co-product with the far more valuable shale oil down there, and the Energy Information Agency (EIA) estimates that the US will be the leading oil producer in the world by 2020, producing more than any single country in OPEC. That is hard to believe.

But back to the gas — doesn’t that seem rather silly, all that flaring?  Do economists really believe that this is the “efficient” use of a scarce resource.

Well, no, we don’t.

And one of the main reasons is that the “external” cost of the carbon dioxide remains unpriced.  Economist Ed Dolan discusses the basic economics of flaring and the potential effects of a carbon tax.  

Of course, my guess is that given the discrepancy between U.S. and world natural gas prices (or here), we should be seeing the opening up of more robust export markets some time in the future.  Or, one would expect that we would.

Another possibility is a move to natural gas in the transport sector.

Either way, the brown revolution is upon us.

For the past two years or so, I have been telling students that the proliferation of natural gas production is one of the most significant stories — and certainly environmental stories — of the past decade.  I give you further proof from the Energy Information Agency website on electricity generation:

[F]or the first time since EIA began collecting the data, generation from natural gas-fired plants is virtually equal to generation from coal-fired plants, with each fuel providing 32% of total generation.

The 32% number for coal is astoundingly low, as within the past decade the conventional wisdom was that coal was likely to provide the majority (>50%) of electricity generation.

The Washington Post included this graph in its blurb on the demise of US coal. 

This brief from a few months back shows previous data in the right-hand box, and breaks down trends in the share of net generation in the left-hand box.  The accompanying text provides some reasons for the decline:

What does it all mean?  Well, it means a lot.  One of the causes of the switch is the much, much lower price of natural gas over the past several years. The switch from coal to natural gas also significantly reduces carbon emissions per unit of electricity output.

Much more here.