Mises Daily Articles

Home | Mises Library | Government Roads, Subsidies, and the Costs of Fracking

Government Roads, Subsidies, and the Costs of Fracking

Daily fracking

Tags EntrepreneurshipPrivate Property

06/19/2014Salmaan A. Khan

This article is also available as an Audio Mises Daily

Thanks to the extraction of oil through hydraulic fracturing, also known as fracking, the US is not only on its way to being energy independent, but is predicted to become a net exporter of oil and gas by 2025. Serious drilling operations have yet to be started in the Utica Shale, which underlies much of the northeastern part of the US, which is said to contain the richest deposits of natural gas and crude oil in the country. With the excavations in North Dakota’s Bakken Shale alone, enough gas had been discovered to carry on for generations ahead. And since 2008, natural gas prices have decreased by almost 75 percent.

Some of the original pioneers of fracking are impressive in their entrepreneurial and technical skills. Among fracking’s innovators, including Harold Hamm, Aubrey McClendon, Tom Ward, and George Mitchell, few have a college degree or any experience in geology or oil drilling, and are simply examples of the creative energies that are unleashed by the market. Nonetheless, the fracking industry is most certainly not a free-market industry and can be heavily dependent on government subsidies. Mitchell’s impact on the development of fracking technology, for example, is sometimes regarded as equal to Henry Ford’s impact on the automobile, but Mitchell was well known throughout the ’80s and ’90s for petitioning the federal government for increased support. Due to his successful track record in the Eastern Shales Project, the Department of Energy granted Mitchell a fat check to develop technologies that drill deeper into the earth.

In 1980, the Section 29 tax credit for “unconventional gas” companies was started. It supported large investments into infrastructure to carry out drilling operations, and it later led to tripling in production of nonconventional gas. It was during the late ’90s that fracking technology’s big breakthrough came, with the creation of “slickwater” — the industry-standard controversial blend of chemicals that are used in groundwater injections. The fluid is crucial in creating cracks in the thick sediment rock quickly, and wide enough for the gas to leak upwards and be collected. Before its breakthrough, slickwater had been the recipient of federal aid for over twenty-five years.

The State initiatives taken on fracking issues go back to the 1950s before natural gas became the favored household fuel. Over three decades, from the shale fields of Texas and Wyoming to the Marcellus in the East, the federal government contributed more than $100 million to develop fracking R&D projects, and billions more in tax breaks. As of 2013, the natural gas and petroleum industry account for roughly $3.2 billion in federal energy subsidies. Halliburton, along with two other companies (Apache and Chesapeake), dominate nearly 63 percent of the American pressure-pumping market. In 2005, the Bush administration implemented the Safe Drinking Water Act which exempted natural gas drilling on federal land, and allowed drilling companies a loophole to not have to disclose the chemicals used in excavations.

Meanwhile, there are real reasons to be concerned about the impact of fracking operations, including its impact on the environment and on infrastructure. As alarming as the environmental and health issues are concerning the carcinogenic (and radioactive) material found in fracking waste, the greatest economic cost comes to the taxpayer-funded roads. As a matter of fact, the cost of the road damage due to oil carrying heavy-haulers running night and day have surpassed the tax revenues generated by fracking in most states.Indeed, many of the oil wells are located on federal land, so it shouldn’t be beyond our comprehension as to why the bureaucracy throws out any consideration of the capital stock of the roads. In an interview with the director of Cornell’s local roads program, he states that “It’s like the Wild West on those roads,” and “Everybody is making up their own rules.” It is more likely, however, that problems are due not so much to a lack of “rules,” but to a lack of true respect for private property when matters of ownership are confused and obscured by government when it comes to federal lands, private property, and mineral rights.

Figure 1

If roads were private, as was the land surrounding them, only through experience, a working price system, and trial and error, could an owner calculate the true cost of oil drilling. Furthermore, property owners would be motivated to ensure that fracking’s profitability would be sufficient enough to fix the severe wear-and-tear of the roads after drilling. Could fracking be sustained without subsidies and without free use of finite and fragile infrastructure? That remains unclear.

Although now more of our energy is coming from renewable and nuclear energy, oil and gas subsidies continue to be substantial, and since the latter are finite resources, more attention needs to be paid toward what will power up our future in the long term. Even Penn State geologist Terry Englelder, who is a leading proponent of fracking admits, “It cannot provide long term solutions.”

Image source: iStockphoto

Salmaan A. Khan

Salmaan A. Khan is a graduate of Benedictine University with a B.A. in Economics. He currently works for a telecom company and is pursuing a graduate degree in supply chain management.