What the Frack?

By now, if you are reading this site, you probably know a little about the economy, energy, and the environment.  You might also know that the US is now one of the largest holders of natural gas in the world.  Recent technological developments have allowed us to access energy from areas that we thought were previously off-limits – shale gas.  The graph at right shows the projected increase in shale gas over the coming years – eventually contributing almost 50% of the US natural gas supply while gas from other sources decline.  While we have an abundance of shale gas, the process of getting to it has caused quite a controversy.  You have probably heard the term “Fracking” in the news.  Fracking is slang for Hydraulic Fracturing, or the process of releasing natural gas from fissures in the shale deep below the Earth’s surface.  Fracking entails pumping water, sand, and a cocktail of secret ingredients into a well in order to disturb the gas, capture it, and send it back to the surface.  Reasons of concern about fracking are:
1) It is extremely water intensive – thousands of gallons of water are pumped down the well.  Often, it takes hundreds of tankers to transport this water to the well resulting in increased traffic on country roads as well as the pollution aspects of this traffic.
2) Companies do not want to share the “secret ingredients” of their fracking fluid.  Reports suggest that many times there are harmful or cancerous chemicals that are used and are brought back to the surface along with the shale gas.
3) There are many reports of water contamination (see the film Gasland) resulting in residents being able to set their tap water on fire.  Other reports detail sickness in farm animals and people whose land the wells were drilled on. 
4) A new study revealed an increase in earthquakes in area with heavy fracking.  Yes, you heard that right – Fracking may cause earthquakes.

Now that you are utterly frightened, lets discuss why we must pay attention to this:  THE UNITED STATES HAS A LOT OF NATURAL GAS!

I mean a lot of gas.  And the good thing about natural gas is it is much less polluting than coal and it is located right in our back yard.  No more shipping dollars off to the Mideast and repressive regimes.  We can produce enough of this stuff to satisfy domestic consumption as well as export it.  Currently, nat gas makes up about 25% of our energy mix, but this should increase based on our supply.  I touted the environmental benefits, but Bloomberg Businessweek does a great job of explaining it in chart form below. 

So here is my conclusion – horizontal drilling and fracking have created a game-changer, if you will, in the natural gas sector.  Currently, shale gas is responsible for almost 30% of our nat gas total and that number is expected to increase in the coming years.  So abundant is this shale gas, that the price of nat gas has deceased dramatically and convinced some high-energy users such as steel mills, polymer, chemical, and plastic companies to relocate back to the US.  This means jobs for Americans.  We can also export this fuel to developing countries where we know there will be a demand, and solve our budget problem at the same time.  However, the environmental risks are also plentiful and serious.  So lets develop some rules that protect our resources while leading to economic benefit.  Designate certain areas “No Fracking Zones”.  Make the companies try out non-harmful fracking fluid substitutes.  Etc. Etc.  The bottom line is this natural gas boom can create bountiful economic benefits, but it can also have grave environmental consequences.  There are some big decisions to be made – let’s not frack this up!

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On the Right Track

For the first time in more than 60 years, the United States is now a net fuel exporter.  Yes, you heard that right, the US exported 27 million more barrels of petroleum products than it imported in 2011.  Compare that to 2005 when we imported almost 900 million more barrels than we exported.  Needless to say, this by no means declares us “energy independent”, but it does raise some interesting points that deserve mention.

For starters, growth in emerging countries is responsible for driving much of our export demand.  Countries such as Mexico, Argentina, Brazil, Singapore, and the Netherlands are now all net importers of US fuel.  Since 2006, Mexico’s demand for fuel has increased by 2/3 while Singapore’s demand has quadrupled.

Another reason for the shift is due to the recession and fragile recovery in America.  Simple truth is that with 8% unemployment, many drivers are no longer commuting to work everyday.  However, the bright spot here is that many Americans are now driving smaller, more efficient cars rather than the SUV’s that once roamed the freeways.  Add in the fact that automakers have increased the fuel efficiency of their engines from 21.9 MPG in 2000 to 23.8 MPG in 2009 and you begin to see a trend.

The biggest contributor to this turnaround however, is the increased production of petroleum products within the USA.  This includes fuels such as ethanol as well as natural gas.  Recently, it has been stated that the US is sitting on over 100 years worth of natural and shale gas supply.  So large is the supply, that the price of natural gas has plummeted 32% over the course of 2011 leading some companies to flare off the excess gas because their pipelines are full.  Natural gas is a fuel in itself, but also a by-product of drilling for oil. At $100 a barrel of oil, you can imagine how much drilling has been taking place.

What ever the reason, one thing is certain – the US is still a major user of petroleum.  No matter whether we are a net importer or exporter, consumers will still be getting hit hard at the pump due to rising demand from emerging economies.  As far as the glut of natural gas is concerned, approximated half of US households use nat gas for heating, but our industrial and commercial usage is rather limited.  While we might see lower heating bills, the US needs to begin building out a nat gas infrastructure for long haul trucking or even locomotives that are powered by the fuel.  There are several drawbacks to using natural gas that I will highlight in subsequent posts, but the point of this article is to show how recent discoveries and booming production changed an energy trend 6 decades in the making.  This abundant supply of cheap natural gas should add to our energy portfolio and help the US restore it’s economy and create jobs.  What it should not do is switch our demand from one single energy source to another.