Freakonomics on Shale Gas
By David Henderson
Steve Sexton over at Freakonomics has an excellent piece on shale gas. It lays out some basic economics beautifully.
Before I continue, a disclosure: I have invested in a fracking operation in Colorado. I wish I hadn’t, but that’s another story.
Some key paragraphs:
A suite of technologies has brought vast supplies of previously unrecoverable shale gas within reach of humans, dramatically expanding natural gas reserves in the U.S. and around the world. Horizontal drilling and hydraulic fracturing have produced a fuel that can at once promote a cooler planet and an expanded economy, essentially eliminating the tradeoff between climate change mitigation and the pursuit of other public projects and, perhaps, economic growth. But unlike the iPhone, the productivity gain embodied in shale gas technologies doesn’t attract a cult following and its benefits get obscured.
Among some of the most ardent advocates of climate policy, the growth of shale gas extraction is lamented because, in addition to being 30-50% cleaner than coal (even accounting for escaped methane), it is also (gasp) cheaper than coal. And cheaper than wind. And cheaper than solar.
And that means shale gas not only postpones a day when renewables are competitive with fossil fuels, but also increases carbon emissions concomitant with the economic growth spurred by cheap energy. That’s why Mother Jones’s Kevin Drum recently wrote that the story of shale gas “gets a lot grimmer as you dig deeper.”
According to the International Energy Agency, the carbon emissions from expanded production are sufficient to wipe away nearly all the carbon emissions savings from substituting shale gas for coal. But consultancies estimate shale gas alone drives incremental GDP growth through 2020 and annually contributes between $100 billion and $230 billion to the U.S. economy by 2035. So at no cost to our global warming efforts, the average American household enjoys $2,000 higher annual income by 2035 with robust shale gas production. That is decidedly a good thing, right? Like the iPhone 5?
Not to some environmentalists who mistakenly conflate the high prices that induce energy conservation with high costs that reflect input requirements to produce energy. Low energy costs are good because they free resources for other production, including the production of environmental protection. Even if shale gas were only cheaper than coal, its widespread use would be a boon. But because it’s also cleaner, it becomes a win-win.
If a $100-200 billion larger economy were deemed unimportant, then policy could drive a wedge between the cost of shale gas production and the price paid by consumers. The difference would constitute a tax yielding revenues to the state with which to either reduce other taxes or undertake additional public projects, like clean energy investments. In other words, government could appropriate for its own uses the resources freed by the substitution of shale gas for coal. Carbon emissions would be lower, energy prices, and, therefore, the private economy would be at worst unchanged, and government would have new wealth with which to carry out policy.