Quantifying The Impact Of A Fracking Ban On U.S. Gas Production

A number of Democratic candidates have endorsed a fracking ban, recently including Elizabeth Warren, and as Bob McNally said, this would “vaporize the oil and gas boom in the United States.”  In this piece, I will try to quantify the impact of a fracking ban on the U.S. natural gas supply, and the concomitant economic effects.

Of course, there is some skepticism that she would actually do that if elected, and suspicion that the suggestion is nothing more than an attempt to appeal to the more liberal Democratic primary voters. Given that Democrats from Barack Obama to Jerry Brown have not opposed (regulated) fracking, and the pertinent fact that politicians often make promises they don’t intend to keep, (shocking I know), I would lean towards that myself.

My belief is strengthened by the nature of the arguments in favor of a fracking ban. Yes, it’s done by big oil (I mean BIG OIL), except many of the companies are much smaller. Yes, it’s a novel method, except it’s been done for about a century in various forms. And yes, there is evidence of pollutants like benzene near fracking sites, but mainly because there’s benzene nearly everywhere. One would like to think that the public would recognize that argument resembles fears of radiation from nuclear power plants—which are trivial when compared to natural radiation levels.

But wait, you say, haven’t there been studies linking proximity to fracking sites and health problems like low birth weight? True, although the key word is “link” which is the weakest type of medical evidence. After all, marijuana use is linked to low birth weight, as is caffeine, steroid treatments, depression,  and fears of immigration raids. Governor Cuomo of New York seems unlikely to ban marijuana use because of the link, unless perhaps it was being sold by Exxon.

The existence of such links merely demonstrates how easy it is to look at two databases and find some apparent commonality between them.  In effect, the fracking opposition is equivalent of the anti-vaccine movement, and it seems likely that any new president will move away from a fracking ban just as President Trump never went beyond some lip service to anti-vaxxers.

This becomes even more obvious when we drill into the numbers, because the impact on the U.S. economy would be severe and a new president would quickly realize that. This piece reflects an effort to quantify those effects.

Step one is to estimate how much gas production from shales would drop if fracking ceased. As the figure below shows, the production decline in existing wells in the different basins ranges from 2% in the Permian to 8% in the Anadarko per month. Individual wells see a rapid production decline in the initial couple of years, but each basin represents a collection of new and old wells, so the combined trend is somewhat less than the oft-repeated figure of 60-80% for the first year of a well’s life.

The next figure shows production trends in each of the major basins assuming a total fracking ban is implemented from January 1, 2021 (for simplicity’s sake). Production in the five primary shale basins would drop from 70 bcf/d to about 18 bcf/d in two years. Perhaps 15 bcf/d of that can be offset by ending all exports (mostly by pipeline to Mexico) and importing more from Canada, destroying billions of dollars in assets (pipelines and liquefaction plants). Another 20 bcf/d might be imported as LNG given current capacity, but that would require prices three to four times current levels. (LNG prices abroad are now about $7/MMBtu for spot sales in Europe and Asia, but these reflect a short-term glut.)

Attaching this change to total production of natural gas, as in the figure below, and it becomes obvious that this would not be a tweak of the market, but a devastating blow to  the industry and, frankly, the economy as a whole. Paying $8/MMBtu for 20 bcf/d of LNG imports would add about $60 billion a year to our trade deficit. Presumably, domestic gas prices would rise to that level, and the additional $5.5/MMBtu on the remaining 70 bcf/d of supply would cost consumers about $140 billion per year.  And that would still leave the domestic market short by 17 bcf/d or more. Backing out gas power with coal would offset that, but not leave a lot of happy liberal campers.

Of course, the industry could return to conventional gas drilling, but that would require a very significant effort. Nearly all of the new production capacity in the past year came from three basins—Anadarko, Appalachia, and Haynesville—which drilled about 4,000 wells during that period. To replace 17 bcf/d of capacity would require the drilling of about 5,000 wells over two years, and since they could not be drilled from multiple-well pads, a lot more effort than currently employed in the shale basins.

Needless to say, Democratic candidates are not looking to increase the number of people working in the oil fields as opposed to putting up solar panels on the roofs of upper-middle class voters. But the idea that anyone would be dumb enough to drive up energy costs for consumers so massively stretches credibility—except politicians are all too human, and as Albert Einstein said, everyone is stupid about something.

(A later post will discuss the impact of a shale oil ban.)