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China Resumes Oil Hoarding Despite Higher Prices

Satellite imaging data suggests that…

The 3 Biggest Downsides to the U.S. Oil Boom

The 3 Biggest Downsides to the U.S. Oil Boom

Unless you’ve been living under a rock, you’ve no doubt heard that the U.S. is in the middle of an oil boom. Advances in technology have enabled the recovery of oil and gas from shale formations that were previously impossible to drill effectively or economically, and have led to a surge in the production of both commodities. This is generally presented as a good thing, for sound reasons. As every pessimist will tell you, however, in front of every silver lining is a great big black cloud.

The upside to the shale oil boom is well known. Increased production means lower prices, and lower energy prices translate to a better economy, from which everyone benefits. In addition, anything that leads America closer to self-sufficiency in energy is a plus for the country. Reliance on a still factionalized and unstable Middle East is not a good position to be in.

While this is all true, there are downsides, namely, its environmental impact, storage and transport problems, and economic distortion.

Hydraulic fracturing or “fracking”, the technique being used to unlock the Earth’s riches, is not new. It has been around since 1908 and has been used in oil and gas wells since 1949, but its massive expansion has raised many concerns.

In 2004, the EPA concluded that “injection of hydraulic fracturing fluids into coal bed methane wells poses little or no threat” to drinking water supplies and “does not justify additional study at this time.” But the study was done at a time when fracking was rare, and researchers also found that fracking fluids were toxic and some residue was left behind in bedrock after fracking operations.

In 2004, that small residue was no cause for alarm, but now that there are around 1.1 million wells using hydraulic fracturing in the U.S. according to this report, so the situation has changed. The EPA has conducted new studies and the results are expected later this year.

The possibility that fracking is polluting out drinking water is not the only risk we’re taking. There is evidence that earthquakes have been caused by the earth-fracturing process. So far, they have not been destructive, but again, fracking on the current scale is a new thing and we cannot be sure that that will be the case in the future.

To some extent, the problems that come with the storage and transportation of the huge amounts of oil being produced are also environmental. There is always the risk of spills from pipelines. According to this Guardian report, around 300 pipeline spills have gone unreported in North Dakota alone in the last two years. This and other concerns have led to the U.S. moving most of the newly extracted oil by rail, but this causes its own problems.

The huge volume being transported means that many older tanker cars are being used, often with disastrous consequences. This Politico article highlights the fact that exploding train cars have become a massive danger. As of June, the total damage done by oil train accidents in 2014 was already around twice that done in the previous four years combined.

Related Article: More Oil Means More Environmental Concerns, With Good Reason

Economic distortion is another downside, but one that’s hard for most people to get their head around. The economic benefits of the boom are immediate and obvious: cheaper oil and gas than would otherwise have been the case and, according to a 2012 IHS Global Insight report, the creation or support of 1.7 million jobs.

The long-term effects are less obvious, but may have more impact.

The resources being exploited are, by definition, finite, and the boom reduces the incentive to research and invest in alternatives that will be needed at some point in the future. Even in the boom areas, the economic effects of massive drilling are not clear-cut. Skyrocketing land and real estate prices are great for some, but leave others priced out of their hometowns.

In the longer term, it should be recognized that investment dollars are also finite. The diversion of resources to the oil and gas industries will leave other areas short of investment, a fact that will become all too obvious when the wells run dry. In fact, they don’t even have to run dry. A serious drop in the price of oil would make many wells economically unfeasible and the boom could vanish as quickly as it appeared.

On balance, the short-term economic benefits of the fracking boom are probably a good thing, but to ignore the downsides would be foolish. The fracking debate has two sharply divided sides, but, as with most things in life, there is a middle ground.

We can and should be grateful for the benefits of the oil boom, but we should also be aware of the risks, and even begin to devote some of the enormous money being made to efforts that will mitigate those risks, where possible.

By Martin Tillier of Oilprice.com

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Leave a comment
  • bmz on July 03 2014 said:
    "The upside to the shale oil boom is well known. Increased production means lower prices"

    The amount of shale oil being produced has an insignificant affect on the price of oil.
  • Lee James on July 03 2014 said:
    Right-on, RIGHT-ON, right-on!

    Three right-ons: one for the author's representation of the two extreme positions in the unconventional oil debate, and a RIGHT-ON (in caps) for his represention of the middle position.

    The piece that is missing in today's accounting of the unconventional petroleum revolution is the middle position. Mr. Tiller captures the middle position well by stressing that there's a sunset on these shale petroleum plays that calls into question the level of investment that we are putting into them. Are we shorting investment in other areas that we're gonna need before too very long?

    As it is, the perceived benefit and boom mentality of shale leads us to put a lot of eggs into the petroleum extraction basket. Production for unconventional wells declines rapidly. Unconventional petroleum fields -- especially the more profitable core areas -- are only so big to begin with. Pipeline companies, fully realizing that petroleum volumes are going to begin a decline round about 2020, are left wondering what kind of volume they will have to transport in 7 years. How can they justify heavy investment in piping and storage? Can we really expand refinery capacity?

    In the short term, shale looks attractive and we've even created the myth that natural gas burns cleanly because none of it leaks before delivery to the end-user. Meanwhile, the cost of production and regulation uncertainty continues to climb.

    The question is, when we finally recognize that tomorrow is today and we need more alternatives to fossil fuels, will be ready?
  • Anonymous on July 03 2014 said:
    "A serious drop in the price of oil would make many wells economically unfeasible and the boom could vanish as quickly as it appeared."

    I mostly agreed with this article, but this sentence in particular is fallacious. I don't know if you are familiar with how supply and demand diagrams work, but you're making the classic fallacy of confusing a movement of the along the supply curve with a shift in the position of the supply curve.

    If supply (i.e. cost of production) is unchanged, a fall in the price lowers the amount produced (this is a movement along the curve). If cost of production falls (i.e. supply increases), the price falls because a lower price is needed to induce consumers to buy more, and hence keep quantity supplied and quantity equal. It's true that more inefficient methods of production will stop being used as the price falls—but that's because they're no longer necessary to meet consumer demand.

    In other words, the "boom" cannot be eliminated by a drop in the price since a drop in the price represents the boom. If the boom were to end, the price would rise to its original level. Clearly, there exists an equilibrium point where the increase in consumer demand due to the lower price equals the increase in production due to lower costs, subtracting the decrease in production due to disuse of more costly methods. This is the "market equilibrium" familiar to economics students.
  • Jackie on July 05 2014 said:
    The shale boom we are experiencing is more about natgas and high-gravity crude than traditional oil. We need to adjust our transportation and refining strategies accordingly, and hope that prices continue to justify our efforts.

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