The Fracking Fracas: Fracking May Be Here Today, Gone Tomorrow

Fracking, the process also known as hydraulic fracturing, involves pumping millions of gallons of water into Marcellus and other types of shale deposits under high pressures,  along with a slurry of sand and other chemicals, shattering the hydrocarbon-infused rock and releasing the natural gas and crude oil encapsulated in the shale. Fracking itself  – the process of using explosives placed underground to shatter oil shale deposits – dates back to 1865, when the process was first patented by Col. Edward A. L. Roberts.  The modern practice of hydraulic fracking has been around since 1947, but it wasn’t until 1993 that fracking started to achieve its current level of success.

That success may not be long-lived, however, because the falling prices of crude oil around the world has put a cap on new fracking projects as the cost per barrel of oil produced by fracking exceeds the going price for crude oil. In November, for example, new permit applications for hydraulic fracturing projects declined more than 40 percent in the month of November alone, according to a December, 2014 article by Dennis Dimick in National Geographic magazine.  In that article article, Dimick predicts that oil frackers are facing tough times because  oil produced from new fracking projects could conceivably cost more per barrel than the going price for crude.  In the longer-run, hydraulic fracking may not be financially viable because “frack-able” oil reserves are themselves in increasingly short supply. In other words, U.S. crude oil self-sufficienc may be a transitory phenomenon.

“Though daily production now rivals Saudi Arabia’s, it’s coming from underground reserves that are a small fraction of the ones in the Middle East, ” writes Dimick.  Although current U.S. oil production, now topping off at more than nine million barrels of oil per day, matches the daily oil production from the country’s oil boom heydays of the 1970s, and nearly matching the  9.6 million barrels per day produced by Saudi Arabia today, the Saudi known oil reserves are 10 times larger than the known U.S. reserves.  Oil produced by fracking increased from one million barrels per day in 2010 to three million barrels per day in 2013 fueling the burst of self-sufficiency.

Even though the U.S. is presently able to meet domestic demand from domestic resources, the prospects for being able to do so for the foreseeable future are bleak. Dimick explains that “…the oil reserves that we are using will not last forever and the U.S. will constantly have to search for new sites to frack. Fracked wells are short-lived, with a well’s output typically declining from more than 1,000 barrels a day to 100 barrels in just a few years. New wells must be drilled frequently to maintain production.” The bitter pill for frackers is that fracking is more expensive than other kinds of oil production, which that the need to frequently drill for new wells is one that will translate into a serious drain on the pockets of investors.

In dollars and cents, according to Christopher Helman of Forbes,  there’s not as many dollars and much less sense to fracking than there used to be.  “There’s been a lot of talk about the breakeven prices per barrel needed to sustain drilling in various oil plays. Some say $80, others say $70. If you have acreage in a sweet spot you might be safe down to $50.”  When prices start down toward $50 a barrel the entire fracking industry becomes non-viable.

Critics of hydraulic fracking have raised the national consciousness about the harmful side effects that fracking has on everything from groundwater to air quality, raising the question of whether it makes sense to deplete oil shale deposits now, when cheap oil is readily available from the Middle East, which produces 12 times more than domestic oil producers. According to, there have been over 1,000 cases of water contamination reported near fracking sites, as well as cases of sensory, neurological and respiratory damage from ingested the contaminated water.  The leftover water from fracking, called flowback, is left in pits around the sites. These pits are open and left to evaporate into the air. This releases volatile organic compounds  (VOCs) , into the air. VOC’s are harmful to the environment causing, according to the fracking critics, acid rain and contaminated air.

Whether fracking is harmful to the environment depends very much upon who is answering the question. There are quite a few environmental activists who are convinced that fracking is very bad for people and the planet, but there are quite a few people who believe the exact opposite , while scientific opinion on the subject oscillates back and forth depending on which way the wind blows.  In an article in Washington Post,  Chris Mooney wonders , “Does this mean that the fracking issue — still an emergent topic — is destined to break like the climate change issue and become almost pathologically polarized? At minimum, the latest research suggests there is great potential there for this to happen.”  It appears that, while people argue about whether or not this is a safe process, the argument may be moot as the industry struggles to stay viable.

“A perfect example is Goodrich Petroleum GDP -1.94%, which announced some big new discoveries in the Tuscaloosa Marine Shale. While the oil may be there, ‘the play is not economic at current oil prices,’ wrote Cowen & Co. Analyst Christopher Walling yesterday, adding that ‘liquidity is a growing concern.’ Goodrich shares are down 70% in six months.”  Even though the oil is there and it can be extracted, that is not likely to happen if the price of extracting it is too high in comparison to the return.

This is much like extracting gold. There are dormant gold mines all over the world because the price of extracting the gold is higher than the actual price of gold. Barry Riltholtz of the Washington Post explains that the situation with the cost of fracking is much like that of these gold mines. “Gold frequently has these run-ups only to get trounced eventually. See 1974-76, 1981, 1983-85, 1987-2000, 2008 and now 2011-14.”

Economics of gold mining are well understood by gold investors.  Each gold mine has its own price point, the cost per ounce incurred for the exaction of an ounce of gold. When the value of gold falls below that price point, the mine closes down until the price of the precious metal recovers, allowing the mines to re-open.  Aside from gold dumping episodes such as the one Russia reportedly went through a couple of months ago. Fracking can be seen much in the same way as oil demand goes up and down. With other less costly resources in the MiddlEastern and Russia, oil companies may decide to follow the same paradigm as the gold mines — shuting  them down until the profit of fracking outweighs the cost.

If the frackers decide that shutting their sites down is the best option, even on a temporary basis, the move would inevitably drive oil prices back up again and, in the interim, it might also improve the economic climate for alternative extraction systems that are safer and less harmful to the environment.  Some states, including major petroleum producing states like Texas and California, and even an “old oil” state like Ohio, have decided to ban the practice altogether, having determined that fracking process is too costly in terms of the environmental impact of the process.

Texas, a state with massive oil reserves, appears to recognize that the long-term cost to the environment is not worth the immediate gratification of extracting this oil now. On, blogger  Mike Gaworecki points out that, “The fact that this happened in Texas, the biggest producer of oil and gas in the nation, speaks to how rapidly the American public is waking up to the dangers of fracking.”  California, of course, always jumps aboard any ecological bandwagon passing anywhere near the Golden State.

During his most recent State of the Union Address, President Barack Obama sang the praises of hydraulic fracturing, calling it a “bridge fuel.”  Mr. Obama’s support for tracking, which has been denounced as harmful to the environment by senior members of his own party, has only made the debate more confusing. Washington Post columnist Brad Plumer supports the President’s policy, explaining, “If fracking is done right, the idea goes, then all that natural gas can provide somewhat lower-carbon electricity as an interim step as we develop more carbon-free sources of energy. That’s how we’ll tackle global warming.”

Already on the ropes from a combination of medical, environmental and ecological challenges, fracking may have been set up for a knockout punch as declining crude oil prices make the process unprofitable as well as unpopulare.

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