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Pump jacks and wells in an oil field on the Monterey Shale formation, March 23, 2014 near McKittrick, California (David McNew/Getty Images)

Not All the Fracking News Is Good

Irwin M. Stelzer

America is a fracking cornucopia of crude oil, independent of the rapacious OPEC cartel. And has an inexhaustible supply of natural gas, putting us in a position to become a major exporter able to use its gas reserves as a geopolitical weapon. Take that, King Abdullah and Vladimir Putin. Too good to be true? You bet.

Oil prices are still set in world markets, fracking oil is too light and too sweet (low in sulfur) for use in U.S. refineries, infrastructure to get fracked oil from well to refinery is inadequate. So we continue to be major importers of crude oil, dependent on unstable regimes for steady supplies at tolerable prices.

As for our natural gas, it will become a geopolitical tool only if substantial political barriers-some created by the Obama administration, some by powerful interests with a stake in keeping gas prices low by restricting its export-can be hurdled.

It is true that technologies known as fracking and horizontal drilling have made available huge reserves of natural gas and oil that previously eluded the drill bit. It is also true that inexpensive natural gas is giving foreign petrochemical companies and other companies that rely on that fuel an incentive to invest large sums in the United States, and that several American companies are finding the combination of relatively cheap energy and rising labor costs in Asia so attractive that we are seeing some “on-shoring” of production facilities, although whether this trend will prove to be as significant as on-shoring enthusiasts are predicting is not certain.

So much for the good news. As always in the case of energy resources, politics trumps economics or, at minimum, seriously affects economic outcomes. In Mexico, oil is regarded as the national patrimony, not to be plundered (i.e., developed) by foreigners. In much of the Middle East, oil is regarded as a “weapon,” to be unsheathed if nasty consuming countries need a lesson in the vulnerability of their economies to supply shortages and price spikes. In Russia, natural gas is a tool to be used in the reconstruction of something approximating the Soviet Union or Russian Empire. Here in America, administration policy towards oil and gas is affected by the conviction that fossil fuels are responsible for climate change, and must be phased out as the transition to renewables is completed. Everywhere and always, oil and politics inevitably mix.

Which is why the mere fact that we find ourselves becoming one of the world’s largest producers of oil and natural gas is only part of the story. The current advantages are obvious: tens of thousands of jobs in the oil and gas industry, much needed given the unsatisfactory condition of the jobs market; enough domestic oil production to ease concerns about sudden supply cut-offs; enough natural gas to attract some foreign and domestic factories to our shores, and to out-compete more carbon-intensive coal as a fuel in electricity generation. The longer-run advantages of our new-found abundance are also obvious: exports of oil and gas to reduce our trade deficit, and enough natural gas sent from purpose-built terminals to ease Europe’s dependence on Russia.

All possible were it not for the political wars that afflict the energy industry. Keep in mind the peculiarly American background to all energy-policy decisions, including those with important geopolitical aspects. The president of the United States and his Secretary of State believe that climate change, to quote Secretary Kerry, “is the world’s most fearsome weapon of mass destruction.” More fearsome than Iran’s nukes might be or North Korea’s nukes are; more fearsome than Assad’s chemical weapons; and certainly more fearsome than the 845,000 Russian troops at the ready should Russians living in what Putin calls his “near abroad” be attacked by a mob egged on by imported Russian agitators.

This is no mere rhetoric on the part of Obama and Kerry: they believe what they are saying, and that other policy goals should be subordinated to their goal of a carbonless future. For them, natural gas is at best a “bridge fuel” to take us to the day when the world relies completely on solar, wind and other non-fossil fuels to operate highly energy-efficient cars, factories and homes. From which it follows that encouraging exports of natural gas is undesirable, putting in place infrastructures here and in importing countries more reliant on climate-changing fossil fuels, and reducing Europe’s incentive to continue down the expensive path to a fossil-fuel-free future. Key Democrats up for re-election in November don’t have as green a view of the future: they see fracking and natural gas exports as job creators and, now, an essential piece of any strategy to contain Putin.

Some 16 groups have sent a letter to the White House opposing a proposed LNG facility in Maryland on the grounds that approval runs contrary to the administration’s effort to fight climate change. Ironically, the administration’s attempt to curtail the use of coal here in the U.S. has resulted in a spurt in exports of this carbon-intensive fuel to overseas markets to which exports of natural gas are limited.

That is not the only reason only six of 37 applications to build the terminals needed to liquefy natural gas for export (at an estimated cost of $30 billion each) have climbed the first step on the ladder to approval, and that only one is under construction. Environmental groups fear the impact on areas in which these terminals would be built. A powerful lobby, America’s Export Advantage, led by Dow and Alcoa, wants to keep these resources right here for domestic use at low prices, and the law requires special government review of any natural gas exports to nations with which the United States does not have a free-trade agreement (FTA). Since no such agreement exists with the European Union, and negotiations are dragging on over chickens, safety regulations, permission to call cheese made in America “Parmesan cheese” and other weighty issues, any exports to the EU will have to survive public comment and regulatory review, which is difficult although not impossible — one has survived the required review by both the Department of Energy and the Federal Energy Regulatory Commission, and three have passed DOE muster and await word from FERC. Meanwhile, exports are stalled, giving green groups time to campaign to have fracking sharply curtailed because, they contend, it threatens the purity of water supplies, and the oil it produces is more combustible than crude oil from traditional wells.

Add to all of this a 40-year old statute that makes it virtually impossible for American companies to export crude oil, and it will be a long while before America becomes what it might become — the world’s largest exporter of LNG, and a major exporter of crude oil. Good news for America’s petrochemical industry, for Americans who use gas-fired electricity and heat their homes with natural gas, and for Vladimir Putin.

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