The Shale Gas Revolution Continues

The electricity industry is being transformed by the so-called “shale gas revolution” in the United States. Production of natural gas from shale rock using hydraulic fracturing (“fracking”) has boosted supply and reduced prices, making gas-fired power competitive with coal-fired power on price. Historically, coal-fired electricity generation has dwarfed generation from gas-fired plants in the U.S. However, in April 2012, for the first time ever, gas-fired plants generated approximately the same amount of electricity as coal-fired ones. The Energy Information Administration projects much faster growth in gas-fired capacity than coal-fired capacity in the coming years, primarily because natural gas prices are expected to remain relatively low.

Will gas continue to eat into coal’s share of the market? Law and politics could influence the answer to that question, as state and federal regulators decide whether to impose stricter regulation on the fracking process.

The Controversy

Fracking involves the injection of water, sand, and chemicals deep into shale formations to fracture rock, thereby freeing formerly inaccessible natural gas. Some people support shale gas production in their communities, because it brings economic benefits (including royalty payments to landowners, jobs, and local taxes). At the same time, fracking has generated intense local opposition in some places, particularly in the northeastern United States, where critics worry about the impacts of fracking on drinking water and air quality, among other things. That opposition, in turn, has split local communities and provoked litigation and conflict over proposed bans and regulatory standards at the state and federal level.

Contrary to reports in the popular media (such as the movie Gasland), the scientific literature on fracking does not support the notion that the process of fracturing shale formations causes groundwater contamination; nor is there any scientific support for allegations that air pollution from fracking operations causes cancer. Rather, the risks associated with fracking are like those associated with a variety of other commonly accepted (but regulated) industrial activities.

Which is not to say that those risks are insignificant. It is rare but not unheard of for drillers to spill fracking fluids on the surface or fail to properly construct wells in ways that avoid groundwater contamination. This is essentially a compliance problem. Furthermore, compliance issues aside, when a well is being drilled and “fracked,” the production area is a hive of truck traffic, power generators, and other activities that can transform a quiet rural or suburban landscape into an industrial area. Thus, it is entirely logical for some people to oppose fracking in their backyards. Most of these impacts of fracking are temporary, but it is little wonder some people don’t want to endure them.

In their efforts to keep fracking out of their backyards, opponents of the practice have sought to convince policymakers to impose statewide or nationwide bans on fracking. The states of New York and Vermont, as well as the countries of France and South Africa have imposed such bans. What is missing from these policy conflicts is any sense of the relative health, safety, and environmental risks posed by fracking, and the opportunity costs of discouraging shale gas production.

The Missing Piece

Consider the relative risks of relying on gas for electricity generation compared to coal. Coal has proven a cheap, plentiful, and reliable source of energy. But it is also a relatively dirty and deadly one. The environmental and health benefits of a transition from coal to gas—and the environmental and health costs of slowing or foregoing it—are likely to be enormous. Gas-fired power plants yield half the greenhouse gases (and much smaller fractions of the other pollutants) that we get from coal combustion. A February 2011 study by health professionals published in the Annals of the New York Academy of Sciences underscores the health and environmental harm done by coal; and an August 2011 analysis published in the American Economic Review supports the notion that substituting natural gas for coal in the electric generation mix will yield enormous health and environmental benefits.

So why the disconnect between the fracking policy debate and our understanding of the relative risks of fracking compared to coal? As is often the case in energy policy, the problem is the mismatch between the distribution of the costs and benefits of fracking, on the one hand, and the distribution of political influence (votes) on the other.

Many of those unlucky enough to be killed or sickened by inhaling the byproducts of coal combustion—such as fine particles and mercury—are not heard in the policy process, because they do not know that it was coal that killed or sickened them. By contrast, those who must endure the noises, smells, and other risks associated with fracking know exactly where to point the finger of blame. Hence the fervent opposition to natural gas production in some quarters.

However, it makes no sense for state or federal governments to ban fracking, given the opportunity costs of doing so and the environmental and other benefits it promises. Shale gas production will continue, despite low gas prices, partly because gas is produced along with other, more profitable hydrocarbons, and partly because gas-fired power is environmentally superior to coal.

The reelection of President Obama implies continued regulatory pressure on coal. For federal or state regulators to ban or severely restrict fracking would undermine the effort to develop a cleaner energy mix.

David Spence is associate professor, law, politics, and regulation and co-director of the Energy Management & Innovation Center, McCombs School of Business, University of Texas at Austin.

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