Fracking: it's the greener alternative
Jeffrey Frankel says the extraction of shale gas is transforming the US economy.
Against all expectations, US emissions of carbon dioxide, having peaked in 2007, fell by 12 per cent as of last year, to 1995 levels. The main reason is "fracking", or horizontal drilling and hydraulic fracturing to recover deposits of shale gas.
No other factor offers a plausible explanation. Unlike the European Union, the US never ratified the Kyoto Protocol, which committed countries to cutting carbon dioxide emissions by roughly 5 per cent, relative to 1990 levels, by last year.
Nor is America's continued emissions reduction a side effect of lower economic activity: While the US economy peaked in late 2007, the same time as emissions, the recession ended in June 2009 and gross domestic product growth since then, though inadequate, has been higher than in Europe. Yet US emissions have continued to fall, while EU emissions began to rise again after 2009.
One can virtually prove shale gas has been the major influence driving the fall. Just 10 years ago, the natural gas industry was so sure domestic production was reaching its limit, it made large investments in terminals to import liquefied natural gas. Yet fracking has increased supply so rapidly these facilities are now being converted to export LNG.
Natural gas emits half as much carbon dioxide as coal, and occupies a rapidly increasing share of electricity generation - up 37 per cent since 2007, while coal's share has fallen by 25 per cent. Natural gas has drawn close to coal as the No.1 source of US power. Renewables still constitute only 5 per cent of power generation in the US - less than hydroelectric and far less than nuclear, let alone coal or gas.
Meanwhile, the share of coal - the dirtiest fuel - has been rising in the rest of the world's energy mix. Since 2010, coal dependence has risen even in Europe, where some countries are phasing out emission-free nuclear power and no natural gas boom has materialised (though carbon dioxide emissions remain far higher in the US than in Europe).
The advent of shale gas has had a variety of implications - more good than bad - for the US economy, national security, and the environment. Economic benefits include job creation in the short term, "re-shoring" of some manufacturing activities in the medium term, and, lower macro-economic vulnerability to global oil shocks in the long term.
America's reduction in net energy imports, which have already fallen by a half since 2007, means its foreign policy will be less constrained by events in the Middle East. In Europe, the new technology could similarly break Russia's politically troublesome stranglehold on natural gas supplies.
The net environmental effects of a growing reliance on shale gas also appear beneficial. The substitution of natural gas for coal has put the US on track to meet the Obama administration's commitment to reduce carbon dioxide emissions 17 per cent below 2005 levels by 2020. Gas is also better for local air quality, owing
to the absence of the sulphur dioxide, nitrous oxide, mercury and particulates emitted by burning coal.
Yet environmentalists are overwhelmingly opposed to fracking, evidently for three reasons. But none are persuasive.
First, fracking's opponents worry shale gas will displace renewable energy sources such as wind and solar power. But carbon dioxide emissions cannot be reduced without cutting coal use, and shale gas is already displacing coal in the US. This is not speculation; it is happening. Even if some cleaner source becomes viable later, we would still need natural gas as a bridge to get us from here to there.
If the world continues to build coal-fired power plants at the present rate, those plants will still be around in 2050, regardless of what other technologies become viable in the meantime. Solar power cannot stop those coal-fired plants from being built. Natural gas can.
Natural gas also heats buildings. It now accounts for 31 per cent of primary energy production, surpassing coal, at 26 per cent, while solar and wind combined account for just 2 per cent.
Second, environmentalists worry about local risks, especially to water supplies. There are fears of methane leaks and induced seismicity. Such concerns cannot be dismissed. It is not enough to proclaim fracking should be safe if operators are responsible and regulators do their job.
One must consider the likelihood that, in some under-regulated US state, someone will not act responsibly and a water supply will be contaminated. The industry should follow best practices, including making public the chemicals it uses. High-quality environmental and safety regulation - and vigorous enforcement - are essential. But in deciding whether to allow fracking (France has a ban and New York state has a moratorium), one must compare the risks to health, safety and the environment with those of the alternatives.
Even a serious fracking mishap would be unlikely to cause as much damage as the Deepwater Horizon oil spill in 2010, the Fukushima nuclear catastrophe in 2011, or coalmining tragedies that play out dramatically in frequent explosions and collapses (and more insidiously in the form of lung disease, water pollution, and soil erosion).
Finally, some, especially in Europe, fear new and unfamiliar technologies in general; adhering to what is sometimes called the "precautionary principle", they place the burden of proof on the innovation, rather than symmetrically on the status quo.
But while it is true a new technology poses risks that are unknown, that is no excuse for neglecting to weigh the known risks of the existing technology.
The precautionary principle is hard to dislodge. Is it really true new technologies are necessarily riskier? By this logic, men who worry about their virility should hesitate to try the unfamiliar new technology, Viagra, and instead stick with powdered rhino horn.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free