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Frackonomics: Why the Economics of the Gas Boom Doesn't Add Up

Fracking is an ideal vehicle for explaining key economic concepts of market failure and market power.

Between 1868 and 1969, Cleveland’s Cuyahoga river caught fire at least ten times, including one blaze that reached the Standard Oil refinery where storage tanks detonated. Ultimately, the seemingly impossible and unnatural phenomenon of burning water came to represent the dangers of unregulated industrial development and generated popular support for the environmental laws of the 1970s, including the Clean Water Act and the Safe Drinking Water Act.

Today the unsettling sight of burning water has returned, from a new industry that is exempt from both these laws. In homes near installations using the drilling technique known as hydraulic fracturing, or “fracking,” the tap water has been known to ignite with the touch of a lighter. The industry is relatively new, so the scientific literature yields only tentative results and provisional research conclusions. But the early research suggests fracking has serious negative consequences for public health and local ecology, from flaming tap water to toxic chemicals to ground tremors. Industry spokesmen insist that the negative side-effects of fracking are insignificant. But there’s one positive side-effect everyone should be able to agree upon: fracking is an ideal vehicle for explaining key economic concepts of market failure and market power, including externalities, asymmetrical information, and regulatory capture, along with brand-new ones, like science capture. Let’s start with the firewater.

Liar Liar, Taps on Fire

In the fracking process, natural gas (methane) is released from shale rock strata up to a mile underground, by injecting millions of gallons of water, along with sand and a variety of synthetic chemicals. The huge pressure of the water makes new cracks in the rock, allowing the gas to dissolve and be extracted. Natural gas is now responsible for 30% of U.S. electricity production and for heating half of all U.S. homes. The national and business media have breathlessly reported huge growth in gas production, and the oil-and-gas industry projects that North America will return to exporting energy by 2025. Besides the sheer growth in production, the Wall Street Journal reported earlier this year, the fracking boom has brought other economic benefits, “improving employment in some regions and a rebound in U.S.-based manufacturing,” and “greater defense against overseas turmoil that can disrupt energy supplies.”

As made notorious by the documentary Gasland, water supplies are a major focus of concern about fracking, especially since the emergence of dramatic footage of a number of Pennsylvania homes, near fracking pads above the Marcellus Shale formation, producing fireballs from the kitchen tap. Duke University earth scientists conducted a more rigorous exploration of this phenomenon, published in the Proceedings of the National Academy of the Sciences. They surveyed rural Pennsylvanian water wells for residential use, measuring concentrations of methane, the main chemical component of natural gas. Concentrations rose far above natural levels closer to drill pads, spiking within one kilometer of active gas development sites to a level that “represents a potential explosion hazard.” It was also found that the specific gas chemistry in the wells matched those produced through drilling, rather than through naturally occurring compounds. As the gas boom goes “boom,” the cautious scientists conclude: “Greater stewardship, knowledge, and—possibly—regulation are needed to ensure the sustainable future of shale-gas extraction.”

In parts of the country where water is scarcer, the issue is more ominous. The Environmental Protection Agency (EPA) and U.S. Geological Survey have found toxic alcohols, glycols, and carcinogenic benzene in underground aquifers in Wyoming, evidence that fracking has tainted precious underground water supplies. In press accounts, local residents who requested the study “expressed gratitude to the EPA, and perhaps a bit of veiled doubt about the zeal of local and state regulators.” In parched Texas, the volume of water adequate for irrigating $200,000 worth of crops can be used to frack $2.5 billion-worth of gas or oil. The Wall Street Journal reports that “companies have been on a buying spree, snapping up rights to scarce river water—easily outbidding traditional users such as farmers and cities.” A Texan rancher relates: “They’re just so much bigger and more powerful than we are...We’re just kind of the little ant that gets squashed.”

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