INSIGHTS: NATURAL GAS PRODUCTION
Guest Columnist Thomas J. Shepstone:
Principal at Shepstone Management Company
Natural Gas Development Is Essential and That Means Hydraulic Fracturing
The U.S. Census for 2010 includes some fascinating numbers from the American Community Survey. It indicates there are roughly 57 million American households or one-half of all households heat their homes with utility gas. Add to that the high and ever growing proportion of our electric power and steam heat generated by natural gas and it becomes very clear just how dominant this natural resource is among heating fuels. And, it’s a good thing because the low price of natural gas has produced major savings for consumers across the nation and now holds forth the possibility of America finally becoming energy independent – a dream most of us thought beyond possibility just a few years ago.
What has made all this possible is the combination of two processes, one being horizontal drilling where the well is actually turned 90 degrees deep underground to economically penetrate relatively thin layers of shale that contain natural gas. The other is hydraulic fracturing, a process in use for six decades to open up pathways for natural gas to be released from otherwise dense rock a mile or more below the surface. Together, these processes are known as unconventional gas production, distinguished from the conventional vertical drilling of wells into pockets of natural gas. Ironically, the success of these combined technologies has now rendered the unconventional conventional. Indeed, it is estimated 60% of all natural gas in the U.S. is now produced “unconventionally.”
This means something on the order of 30% of America’s homes are now heated with the products of what is known, in slang terms, as “fracking.” I dislike the term because it has become the stand-in phrase for all aspects of natural gas development, making it difficult to get the point across that the EPA, among numerous other agencies at the sate and Federal level, have found hydraulic fracturing has never polluted any water supply anywhere. Whenever that statement is made, there is, inevitably, a hue and cry about some methane migration problem that caused a burning faucet someplace, without regard to the fact this is not only a natural occurrence in areas with shallow methane, but, even when attributable to natural gas development, has nothing to do with hydraulic fracturing.
The consumer benefits from natural gas are huge. Consumers Energy in Michigan, for example, lowered its prices by 13 percent in April of this year due to lower gas prices in the pipeline. This one company alone passed along savings of $130 million that will accrue to homeowners over the next year. The value to consumers of these savings suggests the benefits of natural gas development in that state are huge and cannot be ignored. Additionally, the price of natural gas has dropped by more than half while the share of electricity generated with natural gas has increased by roughly half. This translates in tremendous savings for Michigan electric consumers, meaning that most householders win twice, once on their heating fuel and a second time on their electric bill.
They win a third time with the economic stimulus produced by natural gas. Bradford County, Pennsylvania, for instance, where there are more Marcellus Shale wells than any other, has the lowest unemployment rate in the Commonwealth. Bradford, combined with adjoining Susquehanna County, have added 3,600 jobs in the last four years in an area with a population of only 105,000 people. County property values have more than doubled. Businesses across the board have experienced sales increases. This pattern is exhibited, to a lesser degree, in every county with natural gas development. Meanwhile, gas companies have spent literally hundreds of millions of dollars upgrading roads to take the heavier traffic and leaving them in better condition.
Natural gas has produced large reductions in the nation’s carbon footprint over the last two years as electricity generators have shifted to this cleaner burning energy source. No major country is doing better in reducing carbon impacts than the U.S., in fact. The country, by developing its natural gas resources, larger than anyone else’s, is gradually becoming more energy independent in the last few years. This will accelerate as compressed natural gas (CNG) stations continue to proliferate.
Is natural gas a panacea? Of course not. Every energy source has some costs and risks associated with it. Nonetheless, the impact of natural gas development as evidenced by its safe record, incredibly small footprint on the land, reduced footprint on the atmosphere and quantifiable economic benefits is a pretty darned good looking bet and with more than half of households using it, no one is going to let it go anytime soon.
ON THE ECONOMY: LIVIN’ ON A PRAYER
By John Dunham:
Managing Partner, John Dunham & Associates
To paraphrase Jon Bon Jovi,
“Tommy’s got his six string in hock . Now he’s holding in what he used, to make it talk – so tough, it’s tough. Gina dreams of running away. When she cries in the night, Tommy whispers baby it’s okay, someday…..Whooah, we’re half way there, livin’ on a prayer. Take my hand and we’ll make it – I swear. Livin’ on a prayer…”
Last week the second quarter GDP figures came out and it really looks like the US economy is living on a prayer right now. While first quarter figures were bumped up slightly, the second quarter figures show GDP increasing at a rate of just 1.5 percent on an annualized basis. This is remarkably slow economic growth, considering that the annual average rate of GDP growth since the WWII has been more than double that or about 3.6 percent.
There has been a lot of discussion in economics about whether or not GDP is a good way to measure the growth of an economy. One argument goes that since GDP is merely a dollar measure it cannot measure happiness or contentment. Other, less esoteric arguments focus on how GDP is measured. For example, GDP does not take into account the value of non-monetized activity like a mother working from home. So if a family hires a nanny, they add to the nation’s GDP, but if mom or dad stays home to take care of the children, it likely subtracts from the GDP. Another important argument against GDP is that it looks at all economic activity equally. As such, higher crime increases GDP as it necessitates hiring guards, buying security systems, etc. Economists call this the broken-window argument (in other words, if I break a bunch of windows I grow the economy since people have to purchase new windows). These are valid criticisms, but reflect more the way that GDP is measured, rather than what it is measuring.
The Gross Domestic Product is supposed to be a measurement of the size of an economy’s production; however, government statisticians measure GDP by examining the country’s consumption. Since these are accounting offsets they should be equal, and in principle they are, but the measurement leads to misunderstandings.
GDP is important simply because it is a measure of the country’s economic activity, and it is economic activity that leads to the wealth necessary to fund government, pay for necessities like food and shelter, provide for leisure time, or to create future wealth to provide for children. So the faster the growth in GDP, the more stuff (be that time, cognac or medical care) available for all of us.
At the current rate of GDP growth, the US economy will create only $165 more per person than it did last year. This means that overall government transfer payments, corporate profits, wages, rental income, farm income, all of the money that all of us from the top one percent to the bottom one percent can make will grow by just $165 per person (in real inflation adjusted terms) for the entire year. And as we know this is not spread out evenly, someone like Gina or Tommy from the song, working for $10 an hour and bringing in maybe $24,000 will likely not even see that additional $165 in their paycheck after controlling for actual population growth.
This is important. While it is true that money does not buy happiness, it is essential that an economy grow fast enough to create at least enough wealth to support population growth and increased costs for commodity products and raw materials purchased from abroad. Otherwise, the economy shrinks – this is called a recession – and I know of few people who believe that the period from 2008-2010 was a wonderfully, sunny and happy time.
Even in the best of time, many American’s are just livin’ on a prayer and its going to take more than $168 per person to change that.
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