Fracking Saves The Economy
...Except When it doesn't

Fracking provides a much-needed boost to the economy, especially in producing states like Texas. We are pulling more resources out of the ground and selling them for a tidy profit. Energy companies are busy drilling more than 100 new wells every day, reporting higher profits, hiring more people, and enriching landowners who hold mineral rights. Oh, and by the way, UT is one of those major landowners making a lot of money from the boom. That economic benefit ripples through the economy to busy restaurants, higher wages, and lower unemployment.

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Natural gas production, consumption, and imports are on the rise. | © Melissa Reese | Source: U.S. Energy Information Administration

It is also helping to keep our energy prices at a reasonable level. The flood of domestic oil and gas production combined with bottlenecks—both real and political—inhibit the movement of energy out to global markets and as a result, domestic prices are lower than international prices. The price of West Texas Intermediate Crude is consistently $5-10 cheaper per barrel than North Sea crude, which gives U.S. refiners, especially those in Texas, a price advantage for creating refined fuels like gasoline and diesel. As a result, profits have recovered after a few rough years when they were squeezed between the regulatory pressures of biofuels mandates, crude oil trading at more than $100 per barrel, and consumers who like to pay less than $4 per gallon for gasoline.

The shale story has affected natural gas, too. The abundance of natural gas and scarcity of export terminals means we have a domestic glut that pushed prices below $4 per thousand cubic feet of gas. Europe pays $12, and in Japan, gas is about $14 per thousand cubic feet, so by comparison our energy is incredibly cheap. U.S.-based chemical companies, many of them lining the Gulf Coast in Texas, often use natural gas and natural gas liquids as a feedstock for making plastics, fertilizers, and other materials. That gives them a remarkable price advantage over chemical companies around the world who pay international natural gas prices or use petroleum as their feedstock. Either way, they are paying a lot more and we are paying a lot less. Consequently, there are tens of billions of dollars of announced investments in chemical manufacturing capacity in the U.S.

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The U.S. has consistently lower natural gas prices than Europe and Japan. | © Melissa Reese | Source: IEA

Trevor Houser’s and Shashank Mohan’s new book Fueling Up: The Economic Implications of America’s Oil and Gas Boom notes that the boom, which accelerated around 2009 and 2010, came at a very fortuitous time. Lower energy prices are like a tax cut, putting more cash into people’s pockets, and the new investment in oil and gas production has been like a stimulus package. Those combined effects have a cumulative impact on the economy that should last about a decade.

OK, so what’s the catch? As the oil and gas sector takes off, the competition for labor and capital drives up the costs for both. Domestic resource booms tend to make the dollar stronger, which hurts exports. That means other export-oriented industries that don’t care as much about energy—like automotive or electronics manufacturing, where labor and capital costs are much more important and where a weak dollar is preferable—will be paying their employees more, will have more expensive debt, and will be exporting against the headwind of a dollar that’s been made stronger by oil and gas.

That inflationary pressure on prices doesn’t only hurt industry, it also hits the people in boomtowns who aren’t landowners, business owners, or somehow working in oil and gas. Teachers, firefighters, and other workers all of a sudden find themselves having to pay more for milk (at least for a little while), or getting priced out of their apartments to make room for oil and gas companies who will pay top dollar for employee housing. In many cases, they are collateral damage from the boom.

An overview of various energy sources and the division of their consumption in the U.S. | © Melissa Reese | Source: U.S. Energy Information Administration

Success for oil and gas comes at the expense of other forms of energy: Coal, nuclear, and renewables are all having a tough time competing against cheap natural gas, for example. Texas is the leading state for natural gas, but it is also the leading state for wind power, the largest consumer of coal in the nation, and the site of the nation’s largest nuclear power reactors. While we’re an oil and gas state by identity and history, when push comes to shove, we’re really an energy state. That means we care about the fate of the other fuels, too.