Hydraulic fracking definition

Hydraulic fracturing is quickly becoming popular as a method of recovering oil and natural gas from subsurface reserves and wells. The popularity of the oil drilling method may be seen in the recent shale boom, which has been strongly linked to the decline in global oil prices. The price of crude oil per barrel is said to have decreased to less than $30 in January 2016 from $100 in July 2014. L. Kilian (2016) L. Kilian (2016) (Kilian, 2016). At the same time period, there was a huge increase in oil output using hydraulic fracturing. The fact that the world economy is largely based on oil dynamics can be disputed since oil is one of the main sources of energy for powering industries and businesses Baumeister, C., & Peersman, G. (2013).(Baumeister & Peersman, 2013). As a method of oil and natural gas production, hydraulic fracking has direct implications on the economy of US and the world economic dynamics.

The economics of shale gas development are largely dependent on the application of fracking as a drilling technique that can be seen to have contributed immensely to energy boost in the recent past. The transformation of the oil and gas industry by fracking can be noted to have come at a time when conventional drilling methods were largely unprofitable due to the problems associated with the geological formations in which there are oil and gas reserves. The resulting boom can thus be noted to have a direct impact on the markets as well as other externalities such as the implications on the environment. The present paper describes implications of the fracking process on Gross Domestic Product (GDP), consumption rates, gross private domestic investment, net exports, unemployment, and inflation rates.

History of Hydraulic Fracking

Morton (2013) reports that even though fracking has just come into limelight the technique has been in use for over 150 years of oil and gas history. Fracking that entails forcing water and sand under high pressure into cracks fracture subterranean rocks and therefore allow extraction of oil and gases is also known as ‘fraccing’ or ‘fracing’. The fracturing of rocks enables access and extraction of oil and gas deposits that would have otherwise proven difficult or costly (Baumeister & Peersman, 2013). The process borrows from a mid-nineteenth century procedure known as shooting well in which underground explosives were used to loosen rock debris and so to release the oil. It is, however, be noted that the initial shooting wells were never industrially reliable and hence the need to modernize the operations. The advent of modern fracking began in 1940 when Floyd Farris of Stanolind Oil postulated that fracturing the rock formation could lead to increased well productivity (Morton, 2013).

The first fracking process was seen in 1947 when one thousand gallons of napalm and naphthenic acid was applied to stimulate natural gas flow from a limestone formation in Hugoton Field, Kansas. The year 1949 saw Halliburton Oil Well Cementing Company obtaining an exclusive license for the hydraulic fracturing process. The first year of operations saw the treatment of 332 wells with crude oil or in combination with gasoline and sand. In 1953 water in combination with other additives was first used. The fracking process was initially limited by difficult geological formation; however, the production by fracturing received a boost with the application of new technologies such as 3D seismic imaging.

Implications of Hydraulic Fracking

The recovery of shale oil can be noted to have attributed significantly to the growth in the US oil production. Fracking can be seen to have contributed to the unlocking of the shale formation Bakken in North Dakota and Montana. The US is, therefore, positioning itself to turn from the largest global importer of oil to a net exporter. The country is further expected to be energy self-reliant by the year 2035 according to the estimates by the International Energy Agency (IEA). The current shale gas levels, for instance, have been reported to have the capacity to supply the country at the current consumption rates for up to 175 years. Such production levels are likely to have significant effects on the economy (Baumeister & Peersman, 2013). More jobs are created as a result of increased production and since many people have a salaried income it is observed that consumption patterns also changes. The drop in oil prices is another example of an impact caused by shale oil recovery through fracking. The cost of doing business in sectors such as transport and manufacturing sectors that rely directly on oil can also be seen to be significantly lowered. Apart from economic implications, it can also be noted that fracking has also led to various environmental concerns like a large amount of water used in the fracking process as well as associating of the technology with earthquakes. Such implications contribute largely to on GDP, consumption rates, gross private domestic investment, net exports, unemployment, and inflation rates. The mentioned dynamics are therefore the basis of discussion of this essay.

Fracking is known to lead to increased production of natural gas that is a critical element in the US energy portfolio. Natural gas provides about 25% of the energy for electricity generation while being observed as a key feedstock for manufacturing of fertilizers, chemicals and in pharmaceuticals. The abundance of shale gas that can be obtained through a fracking can is seen to stabilize the prices of natural gas that are usually volatile in global markets. Apart from the economic and market implications, it can be observed that there is host of other positive externalities associated with fracking. Mason, Muehlenbachs & Olmstead (2015) assert that shale gas is cleaner to burn and as such produces lower emission of carbon dioxide and other pollutant gases. At the same time, it can be noted that natural gas can form a viable and environmentally friendly substitute to coal thus lowering emissions and consequent environmental problems such as global warming.

Hydraulic Fracturing and Unemployment

The energy production sector has always remained one of the key job centers in America and around the world. Due to the fracking boost of oil production, the energy and oil sector has remained one of the brightest spots in a country that has been faced with high rates of unemployment and dismal job reports. The energy boom can be seen to have created thousands of jobs for the Americans (Baumeister & Peersman, 2013). The low prices of natural gas and oil can be observed to have an effect on job creations as chemical industries regard the US as their prime destination for setting up their factories due to the increased availability and affordability of the raw materials. As the foreign companies set their production facilities they create jobs that are made available to the US citizens and hence reducing the unemployment rates significantly.

Energy-intensive industries are coming to America due to the abundance of natural gas that enables cuts in production costs. Royal Dutch Shell is an example of such foreign and energy-intensive that has in the recent past launched plans to set production facilities in America. Further economic analyses have indicated that with low-cost and abundant raw materials, the US market is one of the most advantageous locations for chemical industries. The company is seen to have announced plans to build a petrochemical plant (ethane cracker) in Pennsylvania citing proximity to feedstock as one of the main drivers. The plant is expected to create massive jobs for the locals ranging from construction to factory personnel with the completion of the plant.

Fracking process can be further noted to have directly led to increasing in job creations. Shale oil recovery and development entails employment of personnel such as engineers as well as jobs in surveying and construction. The ripple effect in job creation can be further felt in fields such as hospitality, environmental permitting and equipment manufacturing. Oil and gas industry is critical to employment rates in the US with the sector estimated to be supporting over 9.8 jobs in the country according to American Petroleum Institute (API). The increase in oil and gas production and eventual energy boom due to fracking is, therefore, likely to reduce significantly the levels of unemployment rates.

Impact of Hydraulic Fracturing on GDP Growth

GDP growth is another economic aspect that has been impacted by the fracking process. Hausman & Kellogg (2015) estimates a change of up to 1/3 or 1% or $150 in the GDP due to the fracking process. As of 2015, $300 billion were estimated to have been contributed to the GDP as a result of fracking. Over 400, 000 are also reported at the same period. The increase in jobs causes economic growth and GDP as the country has more people earning. The economic growth is especially noted in the sense that the local and statewide economies. Oil and gas sector is reported to be making up to 8% of the US GDP and since the sector makes such a large portion of the GDP economical implications must, therefore, be observed regarding the effects of fracking. The savings that are associated with the lower gas prices increase the amount of disposable income per household in the country. A report by API for instance indicates that through the use of unconventional energy development households will add over $2,700 to disposable income in 2020 and more than $3,500 by 2025 284 billion increase in U.S. GDP was reported in 2012 while it is estimated that $533 billion increase in U.S. GDP will be achieved in 2025 (America Petroleum Institute (API), 2014).

The further impact on GDP can be noted in what is termed as manufacturing revolution (Mason, Muehlenbachs & Olmstead, 2015). The manufacturing revolution is caused majorly by the decreased cost of fuels observed in the reduction of costs of electricity or gas. State-of-the-art refining facilities can be seen to have been developed in the country so as to increase capacity that can meet the ever-growing demand. The growth of economy is observed from such instances given the fact that increased production with a matching consumption rates normally leads to growth in GDP. The manufacturing revolution can further be seen in the sense that items such as plastics, construction and automotive materials, medications, clothing, fertilizer, and medical equipment are derived from petroleum refinery products. Reduced costs of feedstock affect the GDP due to the increased consumption and the consequent earnings.

Apart from the growth of national GDP, economic growth can further be seen in individual states in which fracking is taking place. Fracking in North Dakota’s Bakken shale formation is an example of the economic impact of the technique. It is reported that until 2006, the state had a below-average GDP coupled with high unemployment rates. The fracking at Bakken shale formation has made the state to have the lowest unemployment rates and as so far doubled its GDP in the last decade. The state had 2.8% unemployment rate that is the lowest rate in the whole country as at January 2015. Lower global oil prices as a result of shale oil development are further noted to have contributed to a 0.2% growth of GDP in 2015 due to high spending by consumers who take advantage of the reduced inflation rates and associated costs of living. A 10% fall in oil prices is therefore postulated to cause up to 0.1% growth in GDP.

Implications of Hydraulic Fracking on Consumption Rates

A substantial increase in the production of natural gas in the recent past has significantly impacted the consumption rates and consumer behavior patterns. Lower gas prices can be associated with increased consumer surplus as the equilibrium prices due to the increased supply. One of the direct and short-term benefits of the increased consumer surplus can be seen in the reduced heating and electricity costs for domestic use. The prices of electricity for consumers are also lowered for the consumers and hence leading to the direction of the extra cash to other cost areas. The reduced costs of electricity can be further seen to lower the lower the costs of production in electricity-fired businesses and industries leading to cheaper products. Affordability coupled with high purchasing power is always associated with increased consumption rates. The prices of gas have been estimated to have dropped by almost 47% during the energy as compared to the period prior to the application of the process.

The implication on consumption rates is noted in the sense that increased supply of natural gas and the subsequent reduction in prices has been one of the driving forces on the input in most industrial processes through which many consumer goods are produced. For instance, natural gas is an essential feedstock for the production of fertilizers. Reduction in the cost of producing fertilizers will translate to cheaper fertilizers and consequently cheaper farm produce such as dairy products, bread, wheat flour, rice and fruits among others. The impact of fracking can, therefore, be observed indirectly in the reduced prices of basic produce. It is therefore expected that fracking will increase the consumption rates due to the affordability of the products.

The consumption rates can be further explained by the sense of price elasticity of demands. Mason, Muehlenbachs & Olmstead (2015) reports that there is a general consensus that price elasticity has changed over the time. For instance, the weekly data of between 2008 and 2013 indicates that price elasticity of demand had changed by -0.5 in the short term and -0.7 in the long run. Using the estimated elasticity and a specified increase in the natural gas production, it can be noted that the there would be a significant increase in the consumer surplus. The period of between 2007 and 2014 saw an increase of US natural gas production by 26% amount that was largely attributed to fracking. In comparing the consumer surplus of January 2007 to that of January 2014, it is estimated that there was an increase in the order of $4.36 billion or a monthly average increase of $51.9 million (Mason, Muehlenbachs & Olmstead, 2015). The estimations are based on the assumption that all the natural gas outputs were associated with the fracking process. Further assumptions arise from the sense that the estimates were based on the constant monthly increase of consumer surplus in the period of consideration.

Implications of Hydraulic Fracking on Gross Private Domestic Investment

According to a report by API fracking has seen a significant increase in infrastructural investments as the country develop structures to enable exploration, drilling, and refining as well as transporting the oil and gas products. Investments in facilities such as refineries and pipelines ensure constant growth of the economy as production to meet the growing demands for various products. The API further shows that the US reached its maximum capacity in 2015 in almost 35 years. The America’s oil and gas industry is noted to have spent over $174 billion each year investing in America’s infrastructure in the years between 2008 and 2012 (America Petroleum Institute (API), 2014). The expenditure is observed in the fact that the oil and gas sector accounted for 15% of US industries spending during the period (2008-2012). The expenditure is noted to be more than even transport and utility sectors expenditures. It is estimated that about $1.14 trillion would have been spent on the American infrastructure in the period between 2014 and 2025.

Implications of Fracking on Inflation Rates

Even though various global dynamics can be seen to have contributed to the decrease in oil and gas prices, shale formation developments contributed immensely to the observed price changes. Inflation rates are highly associated with falling oil prices with the aspects noted to be having a cause and effect relationship. As the oil prices rise or decrease it can be noted that the inflation moves in the same direction. The cause-effect relationship is due to the fact that oil is a major input in the economy. Major sectors such as manufacturing, transport, and utilities among others can be noted to be heavily dependent on oil or gas as their source of energy as such inflation must, therefore, be related to the cost of oil as an input. Taking plastics as an example, the decline in oil prices has led to decrease in the cost of production that is passed on to the consumer. Mohaddes & Raissi (2015) observe that fracking process has led to oil supply revolution that has in turn impacted significantly on various macroeconomic aspects globally. Inflation, for instance, can be seen to have been reduced greatly in most countries. In countries like UK inflation was observed at 0% as at 2015 as compared to 0.1% of the US during the same period. Even though the reduction of oil prices can be seen to have caused a reduction in prices of commodities and increased spending power, there is a risk of deflation due to the surplus supply of oil. Since fracking can lead to the surplus supply of oil and gas on the global scale it can be observed that resulting price declines may come with high rates of deflation.

Fracking and Net Exports

The fracking process is opening new frontiers in the global oil and gas trade. The US has been traditionally an importer of petroleum largely from the Middle East. However, the shale oil development comes with the possibility of the country becoming self-reliant regarding energy production and consumption. The increased production of natural gas, for instance, has seen the US considering the possibility of exporting the product to Asia with Japan being seen as eager to import liquefied natural gas (LNG) from the US (Lam, 2013). The development comes after The Trans-Pacific Partnership removed the trade barriers between America and Asia. Data by U.S. Energy Information Administration (EIA) indicates that the US was the top producer of petroleum and natural gas in 2014 beating countries like Russia and Saudi Arabia that have dominated the global oil scene for years. As the US is increasingly expected to become a global oil and gas leader due to the use of fracking process it can be seen that net exports for products especially LNG to increase in the coming years. However, the role of the US to increase its net oil and gas exports is hampered by various restrictions that regulate exploration and drilling in places such as offshore locations.

Conclusion

Hydraulic fracturing or fracking has unlocked shale gas and oil as well as other types of natural gases leading to increased production of oil and gas. The unconventional extraction of oil and gas that also entail horizontal drilling has opened geological formations leading to accessing the hard-to-reach sedimentary rocks with oil and gas deposits and consequently energy boom that has been witnessed in the recent past. The boom is significantly linked to the dropping in global oil prices with the price per barrel dropping below $50 after many years. Fracking and associated falling oil prices have impacted the economy both positively and negatively. The negative effects have been majorly felt by oil and gas producers who had to incur massive losses in the wake of reduction of oil prices and reduced profitability. Oil product importers and consumers have on the other hand enjoyed the surplus and the associated low cost of cost of oil as a major input in production.

The present paper has established that fracking has significantly affected consumption rates, GDP, net exports, unemployment, inflation rates and gross private domestic investment. Inflation rates are highly associated with falling oil prices due to the cause-effect relationship existing between the aspects. It is observed that growing production of shale gas and oil has significantly led to increased number jobs in the US providing jobs to people from all backgrounds and hence reducing the rates of unemployment significantly. Reducing oil and gas prices have lowered the costs of production and manufacturing leading to high consumer surplus and hence increased consumption rates. The growth of the economy is observed from such instances given the fact that increased production with matching consumption rates normally leads to growth in GDP and economy.

References

America Petroleum Institute (API),. (2014). Hydraulic Fracturing: Unlocking America’s Natural Gas Resources. Retrieved from http://www.api.org/hydraulicfracturing

Baumeister, C., & Peersman, G. (2013). Time-varying effects of oil supply shocks on the US economy. American Economic Journal: Macroeconomics, 5(4), 1-28.

Hausman, C., & Kellogg, R. (2015). Welfare and distributional implications of shale gas (No. w21115). National Bureau of Economic Research.

Kilian, L. (2016). The impact of the shale oil revolution on US oil and gasoline prices. Review of Environmental Economics and Policy, 10(2), 185-205.

Lam, J. (2013). Fracking Free Trading. Yaleeconomicreview.org. Retrieved 2 April 2017, from http://www.yaleeconomicreview.org/archives/article/fracking-free-trading

Mason, C. F., Muehlenbachs, L. A., & Olmstead, S. M. (2015). The economics of shale gas development. Annu. Rev. Resour. Econ., 7(1), 269-289.

Mohaddes, K., & Raissi, M. (2015). The U.S. Oil Supply Revolution and the Global Economy. IMF Working Papers, 15(259), 1. http://dx.doi.org/10.5089/9781513509846.001

Morton, M. Q. (2013). Unlocking the earth–A short history of hydraulic fracturing. GEOExPro, 10(6), 86-90.