By Anna Mikulska, Michael Maher and Kenneth B. Medlock III
The dramatic increase in domestic oil and gas production since 2008 – the so-called “shale revolution” – has been a boon to the US economy and the Obama administration, not to mention the international and geopolitical benefits. In fact, growth in US oil production alone offset the losses in production from countries beset by sanctions, civil strife and/or sector mismanagement. This, in turn, has impacted US foreign policy as domestic oil and gas have become credible threats to perceived hegemonic intent by countries such as Russia and Venezuela.
At the core of this evolution is hydraulic fracturing. When the US economy needed a boost after the 2008 global recession, the shale revolution delivered by providing job growth and economic stimulus. President Obama nurtured the boom by avoiding restrictive policies, even as the EPA scrutinized the environmental impact.
Enter the two candidates vying for the Democratic nomination. On energy policy, they appear to have either forgotten the last 8-10 years or they are so philosophically opposed to domestic production that it just does not matter. Regardless, the two candidates appear to have little in common in this regard with the sitting president.
Bernie Sanders has called for a full nationwide ban on hydraulic fracturing. Hillary Clinton promises tough restrictions, so great in fact that, as she stated, “By the time we get through all of my conditions, I do not think there will be many places in America where frac’ing will continue to take place.”
Putting aside the practicalities of actually implementing these policies, it is important to ask, “What would happen if hydraulic fracturing were banned in America?”
Long before the proposals of Sanders and Clinton had been announced, in February 2015 the Center for Energy Studies at the Baker Institute for Public Policy at Rice University published a study (authored by Ken Medlock and Peter Hartley and funded by the Alfred P. Sloan Foundation) that looked at consequences of a federal ban on frac’ing (as well as a wide range of other local, state and federal shale gas policies). Thus, the study is well-positioned to shed light on how a ban would impact US natural gas production, natural gas prices, international trade in natural gas, and the potential geopolitical consequences.
Shale gas production in the US grew more than sevenfold from 2 trillion cubic feet in 2008 to 15 trillion cubic feet in 2015). During that period the price dropped more than three-fold, as the Henry Hub spot price averaged almost $9/mcf the year prior to President Obama’s inauguration and averaged $2.62/mcf in 2015. This has carried significant, far-reaching impacts. For one, inexpensive natural gas has been the major factor in leading America away from coal in power generation, which has contributed to a significant reduction in US carbon dioxide emissions over the past decade.
Low-price natural gas has also revitalized the industrial base in the United States, with ongoing and planned $100+ billion in expansions in the petrochemical and manufacturing sectors, a source of real macroeconomic benefit and rebuilding of the high-wage, skilled manufacturing workforce. It has also stimulated significant investment in the midstream sector, from pipes to LNG export terminals, which also carry substantial benefits for the labor force and the macroeconomy more generally. Moreover, the leverage that US natural gas introduces with regard to Russian dominance in Europe and the potential environmental impact it has in meeting growing Asian demands cannot be overstated.
The short answer to what a federal ban on shale development would mean is that natural gas would get a lot more expensive.
According to the analysis by Medlock and Hartley, a full ban on frac’ing would reduce US domestic gas production by more by 30% or just over 9 tcf by 2030 compared to the no ban reference case. The resulting higher natural gas prices would encourage some offsetting conventional and offshore natural gas production of around 12 tcf so that the decline in total production would be less than the decline in unconventional gas production of over 20 tcf (Figure 1).
Figure 1. Change in US Supply by Resource and Play Relative to the Status Quo
But, the drop in US shale gas production would shift US prices into parity with European prices while in the no ban case, the Henry Hub price would be $4/mcf or so lower than Europe. In fact, the price at Henry Hub would rise by almost $4/mcf in 2020 and would be $6/mcf higher in 2030 compared to a case where current policies are kept in place. Under a frac’ing ban, U.S. consumers in 2030 would pay around $100 billion more annually for natural gas by 2030. Of course this assumes supply responsiveness is possible from other types of natural gas opportunities, Senator Sanders’ proposal to end offshore development would exacerbate these trends.
The longer term implications are significant. Revival in US manufacturing, especially in the chemical sector, would be cut short, due to a more than doubling in price of one of its key inputs. Families relying on electricity and gas for home and water heating would also be hard hit.
Globally, a US shale gas ban has a smaller effect as production in various regions outside of the US can at least partially offset the US decline. However, coal use would be stimulated – both in the U.S. and abroad – relative to the case where no such ban was instituted. In turn, environmental aspirations – would take a big hit, thereby challenging a gas-driven low cost net reduction in CO2 emissions globally.
In addition, by altering US production, a ban on hydraulic fracturing can shift the US position from one of being an exporter to the global market in the coming years to one of importer, effectively cementing the fate that many though would come to pass in the late-1990s/early-2000s – namely, the US as a large importer of LNG. More generally, if US supplies to the global market are impeded, the impact the US has on global landscape is diminished. This will result in reduced liquidity and slow ongoing transitions in the global LNG market. In addition, any geopolitical leverage associated with a greater US supply presence in both Asia and Europe would be foregone. Instead, two of the key beneficiaries of the ban and decreased US supply would be Russia and Iran, the top two holders of natural gas reserves.
All of this being said, institutional limitations to federal and presidential prerogatives seem to make an outright federal ban on frac’ing, as proposed by Bernie Sanders, rather unlikely. Somewhat more possible is the proposal by Hillary Clinton where various legislative actions could make hydraulic fracturing difficult and expensive enough to effectively stop future development. At the very least new federal legislation relating to issues like water or fugitive methane would have to be far more restrictive than what has been proposed to date under existing regulatory authority and confirmed by both the House and Senate.
However, even this would be difficult regardless of who holds majority in the House and Senate given that many Republican and Democrats alike have seen positive economic impact of shale development for their states and constituencies. Indeed, President Obama in his 2015 State of the Union Address specifically mentioned the positive impact of rising US natural gas production on the US economy and energy security. And the analysis above only provides an indication of the costs of a ban on shale gas development; the impact on unconventional oil from a frac’ing ban would also yield significant economic and security costs for the U.S.
Thus, while electoral rhetoric can be myopic and extreme, it is important to inject rationality into the discussion. Fortunately, the implications of a ban on hydraulic fracturing have been studied, and the consequences of such a policy intervention are not only dramatic, they bear significant costs that should ultimately check any effort to institute such a policy.
Anna Mikulska is a Scholar in Energy Studies at the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
Michael Maher is a Senior Program Advisor at Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
Kenneth B. Medlock III is the Senior Director for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
