Another fracking boom to beget another fracking bust; or will it?

Another fracking boom to beget another fracking bust; or will it?
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Employers and community leaders in Midland, Texas are in a scramble to keep essential services operating as restaurant workers and school bus drivers are leaving their jobs for much more lucrative work in the oil patch.

It’s another fracking boom reminiscent of the 2013 boom in South Texas’ Eagle Ford Shale. Such is life in the oil industry, characterized by boom-bust cycles ever since Edwin Drake discovered oil in western Pennsylvania in 1859. So why this latest oil and gas boom? 

Most people know that hydraulic fracturing (fracking) has stimulated steady growth in domestic oil and gas production (and exports). But fossil fuel consumption has been growing as well.

Indeed, natural gas and coal still dominate the electric generation mix nationally and retain large market shares in places like New England (49 percent) and New York (29 percent) that seem to want to decarbonize. 

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Economic factors drive energy consumption decisions. While coal is losing market share because it can’t compete on price, oil and gas still can. Oil and gas frequently beat their competitors on price in the transportation and electric generation sectors, respectively, notwithstanding growing demand for electric cars and newly inexpensive wind and solar power. 

 

This boom has all the earmarks of past oil and gas booms: rapid and drastic increases in salaries and prices in host communities and concerns about the ability of local communities to manage the consequent social and economic disruptions, truck traffic, environmental impacts, etc.

For every boom, there comes a bust. But some hypothesize that this boom might be different — longer lasting, because of the enormous size of the resource and international geopolitical factors that could keep the price of oil higher for longer.

West Texas shale formations dwarf other formations in size, and they are conveniently located near skilled workers, pipelines and rail lines. Growth in the world economy, declining crude oil inventories, and potential supply disruptions in the Middle East could extend this latest American fracking boom.

Oil prices will determine the length of the boom, and predicting energy prices is notoriously tricky. Competition between fuels, companies and countries is fierce, creative and dynamic. Demand patterns change, and geopolitical conditions change even more quickly and unpredictably. 

Already, production in West Texas is exceeding available transportation capacity to get the oil to market, depressing the price of oil in west Texas by as much as 15 percent. Constructing new pipelines to alleviate the bottleneck will take a long time. By then, conditions on the world market may have changed. 

Many of my colleagues are energy policy wonks like me who think a lot about “decarbonizing” the economy. We focus on how policies might reduce emissions, and encourage cleaner energy systems. Within that bubble, one can almost forget that the American oil and gas industry is booming.

In progressive political circles, particularly outside oil and gas producing states, it is accepted that a fracking boom is an unmitigated environmental disaster, but others see a more complicated and nuanced picture.

For their part, most Texas towns tend to see the boom as a mixed blessing.

Many locals will capture some of the economic benefits of the boom in the form of higher prices for their labor, property or services. Others will miss out and will experience higher prices for goods and services, noise, crowded roads, etc.

Some worry about the potential for pollution from drilling and fracking operations or degradation of the unspoiled desert landscape. Still others (including those at the McDonald Observatory) are concerned about light pollution from flaring of natural gas or lights on drilling rigs.

Like most states, Texas gives municipal governments only limited leverage over fracking companies, and so local governments must rely on state regulators to ensure that the environmental, health and safety risks of fracking are minimized.

Some local governments have been able to persuade oil and gas producers to make lasting investments in their communities — new health centers, educational programs and other infrastructure. These are some of the ways the boom’s winners can compensate the losers. 

Meanwhile, we will learn from this latest boom, and perhaps we will make better decisions and policies in anticipation of the next boom. Many of us hope that conditions over time will lead consumers to prefer forms of energy other than oil and gas.

We shall see. But until that day, the more than 150-year oil and gas boom-and-bust cycle will continue. 

David Spence is professor of law, politics & regulation at the University of Texas at Austin, where he teaches in both the McCombs School of Business and the School of Law. Professor Spence is co-author of the leading energy law casebook, "Energy, Economics and the Environment," (Foundation Press).