The year 2012 marked the 10-year anniversary of natural gas drilling and production in the Barnett Shale in North Texas.  While a thousand or so Barnett Shale wells had been drilled in the 20 years after the first  well was drilled in 1981, drilling activity blasted off in 2002.  By year-end 2012, some 18,591 natural gas wells had been drilled into the Barnett Shale.  Most are horizontal wells that have been fracked (hydraulically fractured), are located in fairly densely populated areas and pass through the 2 major freshwater aquifers that are the source of drinking water for millions of people in North Texas.

Contrary to allegations that not much is known about horizontally drilled and hydraulically fractured natural gas wells, the wells in the Barnett Shale provide a 10-year treasure trove of experience and data.  The decade-long track record of Barnett Shale natural gas wells is proof that shale gas drilling is safe and protective of the water, air and human health.

Regarding water, the Trinity and Paluxy aquifers that these natural gas wells are drilled through are as pristine as they have always been.  There has never been a verified case of contamination of these or any other fresh water aquifers by natural gas wells in the Barnett Shale.  If there ever had been, the local and national media would have made it headline news.  No such news exists because there has been no natural gas related contamination of fresh water aquifers.

Likewise, extensive air testing has shown that Barnett Shale natural gas wells do not contribute to air pollution.  This data comes from the over 12 million air tests that have been performed in the Barnett Shale area.  The Texas Commission on Environmental Quality (TCEQ) installed and maintains 10 continuous air monitors located in and near concentrations of Barnett Shale natural gas wells and facilities.  After 10 years of air testing, officials at the TCEQ say that the air in the Barnett Shale is the most tested air in the United States and that the air tests have shown “no indication of adverse health effects” as related to air quality in natural gas producing areas.

On top of this record of environmental excellence, natural gas activity in the Barnett Shale has produced a huge and on-going economic stimulus for the region.  Over 100,000 permanent jobs have been created and $10 billion is injected annually into the local North Texas economies.  Cities like Fort Worth and Arlington have received over $200 million and $120 million respectively into their coffers from leasing city-owned land for drilling.

School districts in the Barnett Shale region have seen significant economic benefits from natural gas drilling in the Barnett Shale, both from leasing school district lands for drilling and from increases in their ad valorem taxes.  One example is that high school graduates from the Birdville Independent School District can get their first two semesters at Tarrant County College absolutely free, thanks to scholarship programs at the two schools that are funded entirely from natural gas lease and bonus payments.

Fortunately for the many gas shales around the country that are being drilled, the shale-gas drilling technologies and best practices that were perfected in the Barnett Shale are being used.  Anyone living outside of Texas can rest assured that there is a decade of experience and data showing that shale gas drilling in Texas has been protective of the air, the water and human health.  As for people living in Texas, a phrase from Goode Company Barbeque Restaurant in Houston, Texas, sums it up:  “You might give some serious thought to thanking your lucky stars you’re in Texas,”

Even though many exploration and production companies refocused their efforts from natural gas to oil plays, natural gas supplies have continued to increase, in part due to the associated natural gas that accompanies most oil wells.

Recognizing that domestic natural gas supplies will be greater than domestic demand for years to come, some companies have begun the process of obtaining the permits to build liquefied natural gas (LNG) facilities in order to export natural gas. One facility is in Freeport, Texas; one is in Corpus Christi, Texas; and another is in Sabine Pass in Cameron Parish, La.  All three would be bi-directional terminals, meaning they could export or import LNG.

While increased exports of almost anything from the U.S. would normally be welcomed due to our negative trade balance, there have been objections raised to the Department of Energy (DOE) that they should deny the necessary permits to build these facilities. Subsequently, the DOE commissioned NERA Economic Consulting to conduct a study on the impact of LNG imports from the U.S.

The experts at NERA found that LNG exports would produce net economic benefits for the U.S. across a range of possible natural gas price changes. In all cases, benefits increased as LNG exports increased. “Benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices,” says the report. “This is exactly the outcome that economic theory describes when barriers to trade are removed.”

Most of the arguments against exporting natural gas center around the notion that broadening the market for natural gas will raise prices for American consumers, and that any economic gains should be ignored. By such logic, the U.S. should never export anything. That would mean that we should not export corn because, if we do, American consumers will pay more because Chinese demand has raised corn prices. But we all know that the increased profits that our corn farmers get from their exports helps subsidize the prices that domestic consumers pay. The same would be true for exports of LNG.

American energy consumers are best served by letting the market operate. The government should not stand in the way of American energy companies utilizing market opportunities as they arise.

What brought about such a dramatic decline?  It wasn’t new carbon reduction regulations from the Environmental Protection Agency because the EPA just started rolling out their carbon reduction rules this year and carbon emissions have been declining for 3 years.   It wasn’t stringent worldwide carbon reduction agreements because no such agreements have been reached.

While a sluggish economy accounts for some of the reduction, most of the decline in CO2 emissions is the result of basic economics:  the increased use of natural gas due to low prices and the free market system which allows resources to be allocated to the most efficient uses.  The need to force CO2 reductions may be a hotly debated topic but there is nothing wrong with free market generated reductions in CO2.  In fact, economists call this a positive externality of natural gas.

Reductions in carbon dioxide are the result of the shale gas revolution, beginning just 10 years ago in the Barnett Shale in North Texas, which has significantly increased natural gas supplies and pushed down prices. Power generators have been switching from coal to natural gas for the simple reason that it is cheaper.  In April of this year, natural gas fired electric generating plants produced 32% of the electricity in the U. S., which was equal to that generated by coal.  By comparison, coal accounted for 52% of the electricity market in 2000 and 48% in 2008.  Since natural gas emits about 40% of the carbon dioxide emitted by coal, CO2 emissions are plummeting.

The goal of reducing carbon emissions back to 1990 levels has been the stated goal of many environmentalists but was thought to be impossible without regulations that would dramatically increase the cost of electricity and harm the economy.  However, the free market has worked its magic and CO2 emissions are on track to meet that goal and energy bills have plummeted, saving consumers more than $100 billion in 2011.

The market has demonstrated that it is possible for the United States to enjoy a low-cost and environmentally friendly energy future based on the vast domestic resources of natural gas and oil that technology has unleashed but market forces must be allowed to operate without onerous federal regulations and misguided state and local bans on hydraulic fracturing.

Just look at the recent history of natural gas from shale deposits.  Natural gas from shales started only 10 years ago when Barnett Shale development took off in 2002 and other shale gas fields started coming on line soon thereafter.  As a result, natural gas reserves in the U. S. reversed their decline in 2006.  Natural gas prices then peaked 2 years after that in mid-2008 and have been declining ever since.

The same technologies that made shale gas extraction possible and economically feasible, horizontal drilling and hydraulic fracturing are now being applied to crude oil exploration and production.  Due to these technologies, the 40-year-long decline in domestic crude oil reserves was reversed in 2009 and 2012 crude oil production is expected to be the highest level since 1998 (http://www.eia.gov/forecasts/steo/index.cfm ).  These technologies are not only enhancing the productivity of conventional oil wells, some estimate by a factor of 5 times (http://shaledaily.com/news/sd20111115c.shtml ), but they have also brought oil from shale into the picture (http://www.eia.gov/analysis/studies/usshalegas/pdf/usshaleplays.pdf ).

But wait, some may say.  How can increased domestic oil production affect world crude prices since the U. S. has only 2% of the world’s oil reserves (http://www.whitehouse.gov/the-press-office/2011/03/30/remarks-president-americas-energy-security )?  First, the U.S. has a lot more that 2% of the world’s crude oil reserves.  The 2% figure that President Obama has referred to is proved oil reserves of 22.3 billion barrels (http://www.eia.gov/oil_gas/natural_gas/data_publications/crude_oil_natural_gas_reserves/cr.html#fnote1 ) which vastly undercounts how much oil the U.S. actually contains.  According to the Institute for Energy Research, “when you include oil shale, the U.S. has 1.4 trillion barrels of technically recoverable oil, enough to meet all U.S. oil needs for about the next 200 years, without any imports.”

More importantly, HF is opening up new sources of crude oil all over the world, just like it did with natural gas.  This will ultimately reduce the demand for crude from current suppliers, such as Saudi Arabia, Libya and Brazil.

Since the price of crude oil, like all other commodities, is set at the margin and the U.S. could significantly impact the world crude oil price if politics would get out of the way and make accessible the currently inaccessible and vast federal lands and offshore areas and reduce the cost of production by streamlining the permitting process and eliminating costly regulations that have little or no benefits.

Finally, if the U.S. becomes a more significant producer of crude oil, much of the uncertainty associated with on-going turmoil in the Middle East, an important factor that keeps upward pressure on crude oil prices through the operation of rational expectations, will be relieved (http://edireland.com/there-is-a-silver-bullet-for-high-gasoline-prices ).

So if history is a guide to the future, which it is, the price of crude oil can be expected to decline.  Furthermore, if politics does not get in the way of common sense policy making, these declines can happen sooner than later due to the operation of rational expectations.  Rational expectations means that the mere recognition in the market that crude oil production in the U. S. will increase, will cause crude prices to start falling.    All it takes is for policy makers to open up more federal lands and offshore areas to drilling and stop the EPA from increasing the cost of drilling and producing oil and gas through regulations with costs that exceed their benefits for crude oil market forces to start pushing oil prices down.

What caused this decline? It wasn’t stringent worldwide carbon reduction agreements. And, new carbon reduction regulations from the Environmental Protection Agency didn’t bring about the change. In fact, carbon regulations had nothing to do with it—but natural gas did. The primary reason for the continued decline in carbon emissions is the increasing number of natural gas-fired electricity generating plants, thanks to the shale gas discoveries in the United States.

The EIA first took notice of the contribution that natural gas was making to reductions in carbon dioxide emissions in their May 2010 report entitled “U. S. Carbon Dioxide Emissions in 2009:  A Retrospective Review”, in which the organization noted: “The 4-percent drop in the carbon intensity of the electric power sector, the largest in recent times, reflects a large increase in the use of lower-carbon natural gas because of an almost 50-percent decline in its price.”

These statistics tell the story:

• U.S. power plants are now producing 64% more power from natural gas than was produced in 2000.
• Natural gas powered electric plants emit 40% less carbon dioxide than coal powered plants.
• Natural gas power emits 20% of the carbon monoxide of coal power, 20% of the nitrogen oxides or NOx (an ozone precursor) and less than 1% of the sulfur dioxide, particulates and mercury of coal power.

So, thanks to the free market, private companies have developed the means to reduce carbon dioxide emissions. This is in spite of the myriad of regulations that limit and/or stop natural gas development in the United States, and the anti-frac’ing activists that continue to stop the development of domestic shale gas.

The importance of shale gas, as mentioned in the EIA energy outlook, is staggering. The EIA expects shale gas to increase from its current 23% of domestic natural gas production to 49% in the next 22 years.  And, remember that shale gas was virtually non-existent just 10 years ago when the Barnett Shale was just starting to be developed.

All this said, the 100-year supply of natural gas that is currently projected changes the fuel mix for electricity generation in this country. By 2035, the EIA projects that the share of natural gas that contributes to electric power generation will increase from currently 24% to 27%, while reliance on coal-fired plants declines from 49% seen in 2007 to 39% over the same period. The contribution of renewable energy also increases from 10% to 16%.

The result is lower carbon dioxide levels in 2035 than we had in previous years. The EIA notes that carbon dioxide emissions will grow an estimated 3% to a total of 5,806 million metric tons in 2035, which leaves them more than 7% below the 2005 total. The EIA also notes that emissions per capita fall by an average of 1% per year from 2005 to 2035.

In his 2012 State of the Union speech, President Obama recognized the importance of shale gas in the United States:

“We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade. The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy.”

In the discussion of what is valuable to our country, natural gas continues to be a topic of interest—and for good reason. The contribution that natural gas has made, and will continue to make for decades, to lower levels of carbon dioxide should be welcome news for Texans living in the Barnett Shale and all Americans alike.

President Obama recently told a crowd at a community college in Maryland:  “there is no such thing as a quick fix when it comes to high gas prices.  There’s no silver bullet.”  He could have been referring to releasing oil from the strategic petroleum reserve or he could have been arguing against a policy of encouraging more domestic drilling or both.  Contrary to the President’s statement, there is a silver bullet, which economists call rational expectations, but it does not always work in the direction the President would like.

The President’s comments are a reaction to rising gasoline prices, which have produced two conflicting positions.  One is that increased domestic drilling for crude oil, which would increase the supply of oil, would not cause the price of oil and gasoline to go down.  The other is that releases from the strategic petroleum reserve (SPR), which would also increase the supply of crude, would lower crude oil prices and gasoline prices.  So which was is it?  Either supply matters or it does not.

One of the arguments against domestic drilling says that more drilling and oil production will not push oil and gasoline prices down because the process takes too long.  In 2008, President Obama’s Campaign for the Future said: “New drilling wouldn’t bring the first drop of oil to market for at least 10 years—and they know it. Normally, it takes years—to set up operations, dig test wells, and build a functioning oil rig—before any oil goes to market.  So it would take 10 years before any oil is pumped out of new offshore wells, and about 20 years before those wells would reach peak capacity.”

A recent article in the Huffington Post reemphasized the mantra:  “It’s not going to change the price of oil overnight, and it’s probably not going to have a huge impact on the price of oil ever,” said Mike Lynch of Strategic Energy and Economic Research, Inc., referring…to expanding all U.S. drilling.”

This line of reasoning ignores an important economic theory called rational expectations, an economic theory that “the expectations of individuals are rational if they take fully into account the available and relevant information.”  Here is how it works.  If the President announced tomorrow that he was signing an executive order opening up all federal lands and offshore areas for oil and gas drilling and expediting the permitting process and restraining the EPA from enacting new oil and gas regulations, the price of crude oil and gasoline would drop immediately due to rational expectations.  In other words, the operation of rational expectations would provide the “silver bullet” that would immediately lower crude oil and gasoline prices.

As for releases from the strategic petroleum reserves, rational expectations work in the opposite direction.  Many have argued that releases from the SPR will reduce crude and gasoline prices.  For example, the Center for American Progress recently stated that “There is one proven tool for temporary reductions in oil and gasoline prices, and can lower prices to help middle-class families: selling oil from the Strategic Petroleum Reserve.

The problem is that rational expectations produce perverse results in the case of releases from the SPR, causing the price of crude to go up, not down.  This results because the market knows that the United States will have to enter the crude oil market to replace what has been released which increases the demand for crude oil.  Until the oil is replaced, the U. S. is also more vulnerable to supply disruptions, adding additional uncertainly to the market.

The importance of rational expectations to oil prices is seen when problems heat up in the Middle East or North Africa, as they have recently, and expectations shift toward a concern about the instability of future crude oil supplies coming out of those regions. Similarly, the mere forecast of a hurricane in the Gulf of Mexico causes crude oil prices to increase due to the expectations that offshore platforms will shut down and reduce the supply of crude oil on the market.

The bottom line is that opening up more federal lands and offshore areas and encouraging increased domestic drilling will lower world oil prices sooner than later.  The mere announcement of this policy is all it takes.  There is a silver bullet.  Will the President use it?

President Obama has stated that there is nothing that the he can do to influence the price of gasoline.  He goes on to say that more domestic drilling and production will have no impact on prices:  “You know we can’t just drill our way to lower gas prices. Drill, baby, drill is a “bumper sticker, not a strategy to solve our energy challenge.”

Is it true that crude oil and gasoline prices are exempt from the laws of supply and demand?  The simple answer is no.  As U. S. crude oil production becomes a more significant component of world oil supplies, the price of crude oil will come down and bring the price of gasoline with it, assuming that increases in demand do not offset it.  Domestic production of crude oil and natural gas will continue to increase rapidly as a result of horizontal drilling and hydraulic fracturing, the two technologies that have opened up natural gas and oil-bearing shales, resulting significant structural changes in those markets.

President Obama’s position was supposedly bolstered by the release of a study showing that there is no correlation between the level of domestic crude production and the price of crude. The Associated Press article, entitled “Study finds no link between oil drilling, gas prices,” is a statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production.  The authors states that they found no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.

Assuming that the authors performed the regression analysis correctly, this observation does not mean that there will never be a relationship between domestic crude oil production and crude oil prices.  The correct interpretation is that U.S. crude oil has not been a significant enough component of world crude oil production to have an impact on oil prices.

However, this is changing (economists call this a structural change) due to the combination of two technologies:  horizontal drilling and hydraulic fracturing.  Beginning in 2009, the proven reserves of crude oil in the U.S. increased for the first time in decades, according to the Energy Information Administration, as a result of the use of these technologies.  Most of these increases in production have been on private land as access to public lands has declined in recent years.  If the U.S. government would open up more federal lands and offshore areas to drilling, domestic crude oil production would become a more significant component of the world oil supply, and this U.S, produced crude oil production would exert downward pressure on crude prices.  As proof, witness domestic natural gas prices, which are seeing levels not experienced since the early 1980’s.

While the connection between crude oil prices and gasoline prices is not one-to-one there is certainly a connection:  increases in domestic drilling and production will lower price of the crude and this will translate into lower prices of gasoline, all other things being equal.  “Drill baby drill” is in fact the only strategy to solve our energy challenges in the foreseeable future.