Love it or hate it, fracking is here to stay.
Since 2010, oil and gas production in the U.S. has gone from a bit over four million barrels a day in oil equivalent to 12 million a day as of September. This is according to the Wall Street Journal and U.S. Energy Information Administration, and is largely due to surges in fracked oil and gas production.
To put this eight million barrel a day figure in perspective, remember that countries like Iran or Iraq only produce around three million a barrels a day of oil. This is a massive amount of energy to come on the market in just a few years.
It’s as if someone beamed up a couple of U.S. states and replaced them with oil-rich Middle Eastern countries.
And it doesn’t even count Canadian fracking, which is also booming, or the oil sands.
While fracking has been most controversial for its local impacts in terms of traffic, noise, water use and potential above- and below-ground pollution, those impacts may be dwarfed in the long run by the frack revolution’s mega-impacts on geopolitics and the climate.
Let’s talk geopolitics first. Fracking has kicked the legs out from under energy prices. The most immediate impact was felt over the last few years in North American gas prices. The American petro-chemical industry, for example, is enjoying a renaissance thanks to cheap energy and cheap feedstock.
The next domino fell this quarter, as surging North American oil production undermined global oil prices. Oil, of course, is traded on global markets and prices from Singapore to Seattle have been pulled down by new supply.
The next thing to go may be gas prices around the world. Gas has historically been priced regionally, since liquefying it was expensive and required billions in capital for tankers and coastal gas plants. The U.S., as well as British Columbia, are now feverishly working on facilities to export North America’s gas glut to other countries where gas prices can be two or three times higher.
Over the next five or 10 years, the phenomenon could get even more powerful. Right now, Canada and the U.S. are the planet’s frack leaders. But the Energy Information Administration estimates that China, Argentina and Algeria might each have more shale gas than the US or Canada. Mexico, Australia and South Africa are not far behind. If fracking gets as big in a couple of these countries as it already is in Canada, there will be even more energy coming onto the market.
All of this is bad news – very bad news – for authoritarian regimes that have propped themselves up with oil money. Think about Russia, Iran and Saudi Arabia.
The strongmen in these countries are rapidly recalculating their budgets. It is expensive to keep big military and secret police establishments happy; history shows that cutting their budgets can seriously shorten a strongman’s tenure, and sometimes his life expectancy. Nor will the long-suffering populace be happy if the government has to cut oil-financed subsidies and public services. Everyone remembers what happened to the presidents of Egypt and Libya when street protests started.
It is even worse for regimes like Russia or Iran that have embarked on expensive foreign policy adventures.
The nature of fracking also changes the game. In the old days, a period of low prices would kill off a few megaprojects. A few years later a shortage would ensue, and prices would soar. But fracking can get underway much faster and with smaller amounts of capital. Now, if prices start to tick upwards, fracking companies can quickly step up and stimulate more production. The oil and gas supply is much more responsive to increases in demand and prices than it was before fracking. Dictators can’t count on scenarios where energy returns to being scarce and expensive in a few years.
We don’t know what this will do to the less stable producing countries. We may see some nasty regimes totter and fall. And while it might be nice to see them go, the accompanying geopolitical chaos will be less pleasant.
The second mega-impact is the climate. A few years ago, there was a promising trend that renewable energy sources were getting cheaper thanks to things like improved solar technology and better wind-turbine engineering. Meanwhile, fossil fuel prices were rising. It was possible to dream of scenarios where the world’s economy would shift naturally towards renewables.
However, the tidal wave of cheap fracked energy has devastated the business cases for many renewables. Cheap energy also undermines the incentive to invest in insulation and energy-saving infrastructure. The giant new volumes of fracked energy mentioned above are getting burned somewhere, releasing huge amounts of carbon dioxide into the atmosphere. This is very worrying, and will get worse if China, Mexico and Argentina start fracking in earnest.
Who would have guessed the impact of fracking would be so big back in 1975 when the U.S. Department of Energy began research on the technique?
Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s Yukonomist show or Twitter @hallidaykeith