September 21, 2011 | Backgrounder on Energy and Environment
Abstract: Natural gas is a plentiful domestic resource with tremendous potential to increase the U.S. energy supply. Tapping this resource will create jobs and boost an ailing economy. More affordable energy will support additional business formation and growth. The role of the government is to regulate—not over-regulate and hamper—natural gas production. Hydraulic fracturing (fracking)—which has never been shown to cause environmental damage—should not be held hostage to unfounded concerns and narrow interests. U.S. policymakers should focus on commonsense access and reasonable safety measures—not burdensome over-regulation and market-distorting subsidies.
The need for plentiful, affordable energy, as well as a political interest in reducing greenhouse gas emissions and dependence on foreign oil has pushed natural gas to the forefront of U.S. energy policy. Natural gas is a plentiful domestic resource that has tremendous potential to increase energy supply and help grow the economy. Tapping this resource will create jobs, directly, in the energy sector, and indirectly, through support activities, such as hotels, restaurants, and local suppliers. Even more broadly, more affordable energy supports further business formation and growth, since energy costs are a critical input cost for most businesses.
Unfortunately, some policymakers are trying to promote natural gas with subsidies for natural-gas-powered vehicles and infrastructure. Others are pushing for more regulation due to environmental concerns over a critical part of the gas-extraction process, hydraulic fracturing. The reality, however, is that hydraulic fracturing is a proven process that should not be subject to overly burdensome regulations. All energy policies, including those for natural gas, should focus on increasing access, opening markets, and ensuring safe operations—not unreasonably increasing regulations or subsidizing technologies to force them into the marketplace prematurely.
Natural gas has many important applications; it accounts for approximately 25 percent of the total energy consumed in the United States. It is a major source of America’s electricity generation, providing 23 percent today. Natural gas is not only important for electricity generation for heating and cooling homes, but also for stoves, furnaces, and water heaters. Furthermore, natural gas has a number of industrial applications. Natural gas and other gases extracted from natural gas provide a feedstock for fertilizers, chemicals and pharmaceuticals, waste treatment, food processing, fueling industrial boilers, and much more. More and more cars and buses are running on natural gas. The United States has 110,000 natural gas vehicles (NGVs), and more than 12 million NGVs are on the roads worldwide.
According to the Energy Information Administration (EIA), the United States consumed 24.1 trillion cubic feet of natural gas in 2010. A new study from the Massachusetts Institute of Technology estimates that, at current consumption rates, the U.S. has 92 years worth of natural gas. Improved exploration and production technologies, such as the use of hydraulic fracturing for shale gas extraction, have increased proven reserves in states like Pennsylvania, New York, Texas, Oklahoma, Arkansas, and Louisiana, also increasing regional interest in natural gas. There have been some differences in estimates of recoverable gas. The EIA and the Department of the Interior’s United States Geological Survey (USGS) differ widely on their gas estimates of the Marcellus shale gas formation in New York, Pennsylvania, and West Virginia, but both agencies estimate a significant amount of natural gas.
These new estimates of the amount of gas that is recoverable from shale formations has also increased concern for the method of extraction, hydraulic fracturing. Hydraulic fracturing, known as “fracking,” is a long-proven process by which producers inject a fluid, composed of 99 percent water, and sand into wells to free oil and gas trapped in rock formations. Used in over one million wells in the United States over more than six decades, fracking has been successfully used to retrieve over 7 billion barrels of oil and over 600 trillion cubic feet of natural gas. Fracking is subject to both federal and state regulations and there have been no instances of contamination to drinking water. Groundwater aquifers sit thousands of feet above where fracking takes place, and studies by the Environmental Protection Agency (EPA), the Ground Water Protection Council, and other independent agencies have found no evidence of groundwater contamination. Where there have been unwanted environmental outcomes—such as gas migration—they were the result of poor well construction or problems with the concrete and steel casings around the well bore. Those instances have been rare, and not a result of the fracking process itself. Hydraulic fracturing will be a critical process in developing energy supplies in the future. The National Petroleum Council estimates that fracking will allow 60 percent to 80 percent of all domestically drilled wells in the next 10 years to remain viable. Moreover, the fracking process has opened up new areas for oil production.
The wide variety of uses for natural gas to provide energy is a good reason for the government to steer clear of dictating which producers are allowed to use natural gas. Yet that is exactly what the flawed bipartisan New Alternative Transportation to Give Americans Solutions (NATGAS) Act does. By providing preferential tax treatment to subsidize the production, use, and purchase of NGVs as well as supporting infrastructure, the government picks NGVs as a winner at the expense of all the other applications for natural gas. The stated goal of the bill is to promote transportation-fuel competition and reduce foreign oil dependence and greenhouse gas emissions. It does neither.
The market distortion in the NATGAS bill causes a number of problems. Rather than increasing competition, a special endorsement from the government gives one technology an unfair price advantage over others. Further, subsidies reduce the incentive for that technology to become cost-competitive, encouraging dependence on preferential government treatment. Targeted tax credits distort the competitive process that so capably yields affordable and viable products, moving the decision-making process from the marketplace to Washington.
Because of the diverse applications of energy sources and fuels, price signals, not legislative attempts to manipulate the market, should guide how we use energy. If the price of natural gas increases, as it has in the past, producers will switch to a more cost-effective source of energy. The same is true for oil in the transportation sector. Despite the popular rhetoric that “Americans are addicted to oil,” they will happily stop using oil when a more economically viable alternative exists. When politicians attempt to promote certain energy use with subsidies and mandates, they ignore the complexity and diversity of energy markets, as well as the unintended consequences of their policies.
Increasing America’s natural gas supply would provide tremendous relief to an ailing economy; in fact, several states have already benefited tremendously from increased production. University of Wyoming professor Timothy J. Considine estimates that the total value added in gross regional production to Pennsylvania from fracking in the Marcellus shale formation was $4.8 billion and generated more than 57,000 jobs. A recent study by The Manhattan Institute projects that ending New York’s moratorium on hydraulic fracturing would create up to 18,000 jobs in the southern tier and western New York and increase economic output by $11.4 billion. These figures increase significantly if production expands to Utica’s shale supply and southeastern New York. Natural gas production can help expand the economy if the government can get the policies right. Specifically, Congress and the Administration should:
President Ronald Reagan famously said that “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” When it comes to natural gas, Washington is offering contradictory policies: more regulation and more subsidies. Natural gas in the United States is an important source of energy, and increasing production can help meet rising energy demand, create jobs, and drive economic growth. The way for that to occur is not by shutting down fracking, implementing unnecessary regulations, or promoting natural gas vehicles with targeted tax breaks, but by increasing access to the country’s natural gas reserves and opening opportunities for domestic producers to sell natural gas abroad.
—Nicolas D. Loris is a Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
U.S. Energy Information Administration, “Primary Energy Consumption by Source,” Table 1.3, May 2011, at http://www.eia.gov/totalenergy/data/monthly/pdf/sec1_7.pdf (September 13, 2011).
U.S. Energy Information Administration, “Natural Gas Consumption by End Use,” August 29, 2011, at http://www.eia.gov/dnav/ng/ng_cons_sum_dcu_nus_a.htm (September 13, 2011).
“The Future of Natural Gas,” Massachusetts Institute of Technology Energy Initiative, 2010, at http://web.mit.edu/mitei/research/studies/report-natural-gas.pdf (September 13, 2011).
U.S. Energy Information Administration, “Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays,” July 8, 2011, at http://www.eia.gov/analysis/studies/usshalegas/ (September 13, 2011), and U.S. Geological Survey, “USGS Releases New Assessment of Gas Resources in the Marcellus Shale, Appalachian Basin,” August 23, 2011, at http://www.usgs.gov/newsroom/article.asp?ID=2893&from=rss_home (September 13, 2011).
U.S. Department of Energy, “Modern Shale Gas Development in the United States: A Primer,” April 2009, at http://www.netl.doe.gov/technologies/oil-gas/publications/epreports/shale_gas_primer_2009.pdf (September 13, 2011).
Institute for Energy Research, “Hydraulic Fracturing—Is It Safe?” May 3, 2011, at http://www.instituteforenergyresearch.org/2011/05/03/hydraulic-fracturing-is-it-safe/ (September 13, 2011).
Environmental Protection Agency, Evaluation of Impacts to Underground Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane Reservoirs, June 2004, at http://www.epa.gov/safewater/uic/pdfs/cbmstudy_attach_uic_exec_summ.pdf (September 13, 2011), and U.S. Department of Energy, “Modern Shale Gas Development in the United States: A Primer.”
U.S. Department of Energy, “Hydraulic Fracturing,” at http://www.netl.doe.gov/technologies/oil-gas/publications/eordrawings/Color/colhf.pdf (September 13, 2011).
Timothy J. Considine, “The Economic Impacts of the Marcellus Shale: Implications for New York, Pennsylvania, and West Virginia,” a report to the American Petroleum Institute, July 14, 2010, at http://www.api.org/policy/exploration/hydraulicfracturing/upload/API%20Economic%20Impacts%20Marcellus%20Shale.pdf (September 12, 2011).
Timothy J. Considine, Robert W. Watson, and Nicholas B. Considine, “The Economic Opportunities of Shale Energy Development,” Manhattan Institute Energy Policy and the Environment Report No. 9, May 2011, at http://www.manhattan-institute.org/pdf/eper_09.pdf (September 12, 2011).
Michael J. Economides, testimony before the House Committee on Science, Space, and Technology, May 11, 2011, at http://science.house.gov/sites/republicans.science.house.gov/files/documents/hearings/Congressional%20Testimonial%20economides.pdf (September 13, 2011).
For a comprehensive solution to energy liability, see Nicolas D. Loris, Jack Spencer, and James Jay Carafano, “Oil Spill Liability: A Plan for Reform,” Heritage Foundation Backgrounder No. 2446, August 2, 2010, at http://www.heritage.org/research/reports/2010/08/oil-spill-liability-a-plan-for-reform.
U.S. Department of Energy, “State Oil and Natural Gas Regulations Designed to Protect Water Resources,” May 2009, at http://www.gwpc.org/e-library/documents/general/State%20Oil%20and%20Gas%20Regulations%20Designed%20to%20Protect%20Water%20Resources.pdf (September 13, 2011).
U.S. Energy Information Administration, “Natural Gas: Natural Gas Prices,” August 29, 2011, at http://www.eia.gov/dnav/ng/ng_pri_sum_dcu_nus_a.htm (September 12, 2011).
Press release, “Cheniere Receives Additional DOE Approval, Authorization to Export Natural Gas as LNG to all LNG Importing Nations Concluded,” Cheniere, May 20, 2011, at http://phx.corporate-ir.net/phoenix.zhtml?c=101667&p=irol-newsArticle&ID=1566413&highlight (September 12, 2011).