Attack on Fracking Betrays Shaky Understanding of Economics

I subscribe to New Scientist, a British weekly science publication because of a life long interest in the natural sciences. Unfortunately to enjoy stories on the Theory of Everything or excited baryons I have to put up with the magazine’s neo-Socialist bias. The publication regularly pillories anyone who questions the “settled science” of anthropogenic causes of global warming as “deniers” while attacking hydraulic fracturing (“fracking”) of rock deep in the earth’s crust to release oil and natural gas, even though there is little evidence that the process is environmentally harmful. The editors must feel that such unscientific and irrational attacks on fossil fuels are what their readership demands judging by the letters they publish.

From the May 9, 2012 issue, letters section.

The real danger from fracking is not the small earthquakes it can cause or even the disposal of the chemicals used in the process (28 January, p 8). It is that we may discover a glut of gas that will drive down the price of all fossil fuels. Natural gas will not replace coal, but will simply increase our use of what will have become a cheap energy source.

One of the problems I have with many people who claim to be “environmentalists” is their ignorance of basic market economics. A “glut” of natural gas will not “drive down the price of all fossil fuels;” an abundance of natural gas will force the price of natural gas down. It will not necessarily cause the prices of other fossil fuels to fall. A comparison of the historical prices of natural gas, coal and oil finds that there is some correlation in prices between oil and natural gas and oil and coal (correlation coefficients of .81 for oil and coal, .85 for oil and natural gas), but not between coal and natural gas (correlation coefficient of .46). For comparison, the correlation between the price of crude oil and the year was .79 reflecting the fact that prices generally go up over time.

Fossil Fuel Historical Price Comparison

Bill Powers, writing for Financial Sense, details the price relationship between natural gas, oil and coal. Historically natural gas traded at the “10-1 rule” against oil, meaning that the price of a million BTU of natural gas should be roughly 1/10th that of a barrel of oil. When looked at in terms of energy content, that relationship is “6-1”, or 1/6th the price of oil. Stephen Brown and Mine Yucel, two researchers at the Federal Reserve Bank of Dallas, have determined that during rising oil prices, the 6-1 relationship is more accurate while the 10-1 relationship is the norm when oil prices are falling. In terms of coal, Powers notes “With the price of Central Appalachian (CAPP) coal currently trading at $73 per ton, up from $60 per ton for much of last year, a recent study by Credit Suisse (CS) indicates that natural gas prices would need to rise to approximately $6.30 per mcf before coal and natural gas trade at parity for electricity generation.”

Today’s natural gas price is $2.25. With oil at $83 a barrel, natural gas is now trading against oil at a 36-1 ratio. Most utilities in the US have the capability to switch off coal fired generators and switch on natural gas powered generators, or vice versa, to use the cheapest fuel source available on the market. And they have switched. Coal is now responsible for 34% of US electrical generation, the lowest level since 1973 when statistics began and roughly on par with natural gas generation.

By the writer’s logic falling natural gas prices will somehow manage to lower the prices of fossil fuels, but why wouldn’t falling natural gas prices impact renewables like wind and solar? In fact in an oversimplified view of supply and demand, that’s exactly what would happen. Natural gas demand would dry up the demand for other fuels, both fossil and alternative, causing the supply of these sources to become more abundant. The abundance in turn would cause the price to fall to match the decreased demand, making these sources attractive alternatives to natural gas. Eventually supply and demand across all sources would reach equilibrium, just as predators and prey in a wilderness will eventually achieve a stable balance.

But this simplified state ignores the reality that coal will not be produced at a loss so it will not be mined. Since oil and gas occur naturally together its possible that a a glut of oil will coexist with an abundance of natural gas. In the past natural gas was simply burned off as a byproduct of an oil well, but oil cannot be disposed of as easily. Wind and solar are threatened by cheap natural gas, and have yet to come up with an economic energy storage medium. Natural gas can be liquified and stored. Oil can sit for years in a tank field, and coal in a pile ready to release their energy immediately upon need. Neither wind nor solar are capable of that. The electricity they create must be used immediately which is fine during a sunny day or when the wind is blowing, but on a still night it’s either do without energy or use a fossil fuel or nuclear backup.

We will be left with much further to fall when the gas runs out. That is because the cheap energy will have prevented the introduction of renewable-energy infrastructure, so we won’t even have that to fall back on.

Like Santa Claus, the tooth fairy and Obama’s humility, peak (fill in the blank here) is a myth. Peak oil remains a controversial topic among environmentalists and gold bugs for a reason: there’s no proof it exists. From an oil perspective the world can be broken into the following areas: places with cheap oil, that is places like Saudi Arabia and Russia where oil is easy and cheap to pull out of the ground; places with not-so-cheap oil such as Venezuela, Mexico, the United States and Canada; places that may or may not contain not-so-cheap oil; and places that don’t have oil at all. What we are finding is that the last area in the list, places that don’t have oil, are gradually getting smaller and smaller as it turns out they have oil and join the places with not so cheap oil area due to improved techniques for finding oil where none was expected. New engineering methods such as fracking have lowered the cost to recover oil that was once thought unrecoverable, making the oil cheaper to pull out of the ground. The higher the price of oil, the more incentive there is to find and refine the last drop of oil, and the higher the price becomes due to demand, the more likely new supplies will be found and those with known reserves thought uneconomic to exploit begin to produce. Similar arguments can apply to natural gas and coal, both much more abundant than oil. There may in fact be peaks for these fossil fuels, but they are hundreds of years if not a thousand years away.

In the meantime, we will be testing the theory of climate change with abandon.

Econmatters writing for Seeking Alpha states, “Although the amount of emission generated from natural gas is still under hot debate, depending on if you take the ‘life-cycle calculation’ approach, natural gas is generally considered cleaner burning than coal and petroleum. A Congressional Research Service’s 2010 report concludes if natural-gas combined cycle plants utilization were to be doubled from 42% capacity factor to 85%, then the amount of power generated would displace 19% of the CO2 emissions attributed to coal-fired electricity generation.” General Electric which makes both fossil fuel and wind turbines finds switching from coal fired to natural gas plants could save 150 million tons of CO2 by 2020. Environmentalists might argue that life-cycle calculations show natural gas emits more CO2 than other fossil fuels, but such calculations are never applied to alternatives methods of power generation such as wind and solar. They can’t be, since natural gas is itself a storage medium for energy. There are as of yet no large scale storage methods for electricity generated by wind turbines or solar cells, and if there were their manufacture, transport and storage would have to be included in such life-cycle calculations.

I am unconvinced that global warming is occurring and that humans are behind it, but the US has the ability to lower its carbon footprint thanks to cheap natural gas. But this isn’t good enough for environmentalists like the letter writer in New Scientist. Instead of viewing natural gas as a way to lower greenhouse gas emissions today, he despairs over its impact on methods of power generation that are impractical, expensive and polluting (ask the Chinese about the damage to the environment manufacturing solar panels cause.)

The author of the letter to New Scientist represents a type of reactionary that I’ve watched take over the conservation movement during the last 20 years. They arrogantly believe they completely understand the world in all its complexities. They know fully its fossil fuel reserves, even as new deposits are discovered on a daily basis. Their rigid thinking ignores the resilience of markets, the creativity of scientists, engineers and inventors, and the progress of science and industry. Their dogma sees humanity as a blight on the world, an Eden bespoiled by the breath of every child or the touch of every human hand, forever preaching that doom shall befall us unless we return to the old ways, whether it’s leaving the village to return to the forest, the city to the farm, or as today forsaking the modern world to return to our barbarous “natural” state of subsistence living and high mortality. Luckily these people have been for the most part ignored throughout history and instead of stopping progress have been run over by it. But they never quit since they are sustained by their faith. They simply dust themselves off to try again to inflict their dystopian vision of the future and idyllic view of the past upon the rest of us.

I have become used to finding such religious arguments in science magazines, but it doesn’t mean that I agree with them or even enjoy them. But I suppose they remind us that even the brightest, most atheistic scientists are not immune to irrational beliefs.

No TweetBacks yet. (Be the first to Tweet this post)

16 Comments

  1. Watcher of Weasels » Watchers Council Nominations – ‘Doing Just Fine’ Edition:

    [...] The Dictatorship of the Professorial GrEaT sAtAn”S gIrLfRiEnD – Risk and Rivalry The Razor – Attack on Fracking Betrays Shaky Understanding of Economics The Glittering Eye -What Won’t Happen in a Second Obama Term The Mellow Jihadi – Halden Prison [...]

  2. GayPatriot » Watcher of Weasels Nominations as June Busts out All Over:

    [...] The Razor – Attack on Fracking Betrays Shaky Understanding of Economics [...]

  3. This Week’s Watcher’s Council Nominations | therightplanet.com:

    [...] The Razor – Attack on Fracking Betrays Shaky Understanding of Economics [...]

  4. Trevor Loudon's New Zeal Blog:

    [...] The Razor – Attack on Fracking Betrays Shaky Understanding of Economics [...]

  5. Watchers Council Nominations – ‘Doing Just Fine’ Edition | Independent Sentinel:

    [...] The Razor – Attack on Fracking Betrays Shaky Understanding of Economics [...]

  6. Pj:

    Hi Scott – Interesting post, though I suspect you are wading into dangerous waters by tackling this topic. I remain agnostic on just about anything having to do with oil and energy, given that it is almost impossible to get anything close to an accurate estimate on proven reserves, etc… as these are often closely guarded secrets around the world. How is it possible to make a rational estimate on peak oil (whether one year or a thousand) if you don’t have any reliable data?

    Also, I am extremely wary of the Wishful Thinking fallacy when applied to technology. Technological wishful thinking is used lavishly on both sides of this debate. The faith that science will find a viable “renewable” alternative to oil (if only the government would provide enough incentives) is evenly balanced by the belief that technology will be able to find a way to extract ever more oil from increasingly inaccessible crevices (if only the government would get out of the way and let the market work its magic). The technologists still haven’t found a way to make my Microsoft Windows work in a consistently reliable manner, and not for want of trying…

  7. Watchers Council Nominations – ‘Doing Just Fine’ Edition | askmarion:

    [...] The Razor – Attack on Fracking Betrays Shaky Understanding of Economics [...]

  8. Watchers Council Nominations – ‘Doing Just Fine’ Edition | Virginia Right!:

    [...] The Razor – Attack on Fracking Betrays Shaky Understanding of Economics [...]

  9. Bookworm Room » It’s voting day at the Watcher’s Council?:

    [...] The Razor – Attack on Fracking Betrays Shaky Understanding of Economics [...]

  10. Watcher of Weasels » The Council Has Spoken!! This Week’s Watcher’s Council Results:

    [...] [...]

  11. This Week’s Watcher’s Council Results | therightplanet.com:

    [...] Fifth place t with 2/3 vote – The Razor –Attack on Fracking Betrays Shaky Understanding of Economics [...]

  12. Trevor Loudon's New Zeal Blog:

    [...] Fifth place t with 2/3 vote – The Razor – Attack on Fracking Betrays Shaky Understanding of Economics [...]

  13. Scott Kirwin:

    PJ
    How do you make a rational estimate on peak oil? Price. Price isn’t perfect; for example you won’t know how rare diamonds are while DeBeers exists, but it does provide a rough estimate on supply.

    As for wishful thinking, I hadn’t realized I fell into that trap in this essay. I recognize there is a difference between a problem relying upon the discovery of a new technology and an engineering problem. A classic example of this is the “man on the moon” fallacy one occasionally hears: “Why can’t we fix___ when we can send a man to the moon.” Poverty. Homelessness. Cancer. But by the point we were shooting rockets at the moon all the discoveries were in place, making the moonshot an engineering problem. Not so with those other problems.

    Another example is gold. Seawater is full of the stuff but the cost of recovering it is prohibitive. There are ways to remove gold from seawater, but at the current prices they don’t make economic sense. If that price rises enough, or engineering methods improve to lower the cost of recovery, then extracting gold from seawater becomes economically feasible. Hell, there’s gold on my property – but not concentrated enough to warrant digging it up. Yet. :)

    As for Windows, one of my computer mentors has switched to Mac. This is a guy who taught me everything I know about hardware, and he’s fed up with Windows BS. After loading a Windows 8 beta in a VM I have installed on this machine, I can see why. MS just doesn’t get it. It never has, never will.

  14. The Council Has Spoken! Results Are In! | Independent Sentinel:

    [...] Fifth place t with 2/3 vote – The Razor –Attack on Fracking Betrays Shaky Understanding of Economics [...]

  15. GayPatriot » Watcher of Weasels — Ides of June Winners:

    [...] Fifth place t with 2/3 vote – The Razor –Attack on Fracking Betrays Shaky Understanding of Economics [...]

  16. Bookworm Room » Last week’s winners at the Watcher’s Council:

    [...] Fifth place t with 2/3 vote – The Razor –Attack on Fracking Betrays Shaky Understanding of Economics [...]

Leave a comment