Issues 2020: A Fracking Ban Would Trigger Global Recession

The Narrative

"I will ban fracking—everywhere."[1] — Elizabeth Warren   "Any proposal to avert the climate crisis must include a full fracking ban on public and private lands."[2] — Bernie Sanders   "I favor a ban on new fracking and a rapid end to existing fracking."[3] — Pete Buttigieg

Reality

The extraction of oil and gas through the techniques of horizontal drilling and hydraulic fracturing (colloquially, “fracking”) has catapulted the United States into leadership of the world’s energy markets. Since 2007, fracking has doubled U.S. oil production and increased gas production by 60%. Instead of a major importer, America is rapidly becoming the largest exporter of oil and is expected to supply the majority of net new energy traded on global markets over the next two decades.

If the U.S. imposed a fracking ban, the supply disruption would trigger the biggest oil and natural gas price spikes in history—almost certainly by more than 200%—which would, in turn, tip the world into recession. Even the expectation that a ban could be enacted would destabilize markets. U.S. imports and the trade imbalance would soar, as would consumers’ spending on energy. To keep the lights on, America would have to nearly double the quantity of coal burned, as well as import up to 1 million barrels of oil per day for dual-fueled power plants that would lose access to natural gas.

---

1. Fracking technology has nearly doubled U.S. oil production, an increase of some 7 million barrels per day (mmbd) since 2007, as well as another 10 mmbd (in energy-equivalent terms) rise in natural gas production.[4]

• The massive increase in supply from U.S. shale fields triggered a roughly 50% drop in global oil and natural gas prices.[5]
• U.S. net oil imports have collapsed from 12 mmbd a decade ago to nearly zero now. Exports of crude oil have soared from zero to 3 mmbd following the 2015 legislation that revoked the ban on U.S. petroleum exports.[6]
• The U.S. is expected to account for 70% of the global growth in oil supply over the next five years[7] and to supply at least half the world’s new demands for natural gas.[8]

2. A ban on fracking would eliminate 7% of world oil and 17% of world gas supply in a global commodity market where changes of even 1%–2% in the supply/demand balance trigger huge price swings.

• When, in 1973, Saudi Arabia implemented an oil embargo and took some 4 mmbd off world markets (approximately 7% of the total at that time), world oil prices jumped 400% and triggered a global recession. Similarly, in 1979, the Iranian revolution took a comparable 5% of oil off world markets and prices spiked over 200%, sparking another global recession.[9]
• A 200% price hike would increase U.S. consumer spending at the gas pump alone by over $100 billion a year, an average of $1,000 per household. A collateral spike in natural gas prices would also add billions of dollars in heating costs for 50% of all U.S. homes and offices.[10]
• To keep the lights on, electric utilities would need to quickly replace natural gas (currently 35% of all electricity) with coal. This would mean burning an additional 400 million tons of coal a year. That would increase carbon-dioxide emissions by 300% more than the emissions eliminated by all wind and solar capacity in the United States.

3. Alternative energy sources—in particular, wind and solar—could not replace what would be lost from a ban on fracking in time to prevent massive economic and social disruptions.

• Oil and gas together supply 54% of global energy, little different from a 55% share a decade ago or the 53% share forecast by the International Energy Agency for 2040. Oil alone powers 98% of all global transportation.
• Wind and solar together supply 1.8% of the world’s energy, and electric vehicles have displaced 0.1% of global oil use over the past decade.
• The entire world would have to increase global wind and solar installations by 500% to replace the energy that would be lost from an American fracking ban—never mind the additional energy needed to fuel global economic growth.

On the Record "A fracking ban, regardless of motivation, is anchored in magical thinking that non-hydrocarbon energy sources could fill a massive global energy shortfall if the U.S. exited the world stage as a major supplier of oil and natural gas. Both fuels will be critical for the global economy for decades to come. The key issue is not whether wind and solar can supply more energy—they can and will—but whether a future American administration would reverse the progress of the last decade in lowering energy prices and enhancing geopolitical stability." —Mark Mills, senior fellow, Manhattan Institute

Some skeptics caution against overreacting to electioneering rhetoric, citing the practical limits of presidential authority to implement a ban on fracking.[11] But “elections have consequences,” executive orders have an impact, and few industries have been subjected to such consistent attack and misinformation. It might be hard to imagine serious proposals to ban, say, farming or at least all grain farms, but it would be theoretically possible to do so by radically increasing imports. Administrative agencies can pursue creative interpretations of the labyrinth of rules and issue aggressive “guidances.” A broad and coordinated set of such actions can slow or outright stop all manner of industrial activities up and down supply chains, including, especially, the construction of vital pipelines and ports.[12] And lest one forget, Congress enacted legislation in 1972 and 1982 to ban oil production on about 90% of America’s offshore domains.[13]

The fracking ban campaign is neither new nor connected only to the politics of this presidential election cycle. The movement emerged from the intersection of two global trends: the expansion of hydrocarbon production; and a time when many pundits and policymakers believe that an “energy transition” to something different is urgently needed. For example, some 400 domestic and international environmental leaders and organizations petitioned the United Nations in September to demand “a global ban on fracking.”[14] Essentially all fracking production is done in the United States.

The biggest transformation in energy markets in the past half-century was brought about by American fracking technology. This technology unlocked the astoundingly productive “unconventional” shale fields and has led to America’s reemergence as a global exporter.[15] The transformation has saved U.S. consumers $200 billion a year[16] and restructured the global energy balance: the recent growth in U.S. oil and gas production is history’s biggest increase in global energy supply of any kind in such a short time. The second biggest, with roughly half as much growth in total energy production, occurred in Saudi Arabia during the decade after 1965.[17] America’s emergence as a third major source of oil and gas (alongside OPEC and Russia) on world markets has far-reaching geopolitical implications: 75% of the global economy is found in five regions: North America, Europe, China, Japan, and India. All, except North America, are major net energy importers.[18]

Well before the U.S. began to export natural gas or crude oil, global prices dropped in anticipation. In order to preserve market share, even as U.S. oil output soared, Saudi Arabia incrementally increased production, the opposite direction that was needed to “preserve” price, leading to the epic 2014–15 global price collapse.[19] Similarly, once it was clear that the U.S. was completing construction of liquefied natural gas (LNG) export facilities, global LNG prices dropped more than 50% as markets started to realign with the new competition.[20] Prices also dropped for land-based gas pipeline exports from Russia to Europe in order to compete against prospects of cheap LNG arriving on those shores.[21] The net effect of the global price wars has transferred trillions of dollars from producers, such as Russia and OPEC, into consumers’ pockets.

IEA forecasts—which incorporate bullish expectations for wind and solar production—see 53% of all global needs still met by oil and natural gas in 2040, a minuscule decline from today’s 54%. Of geopolitical relevance, the U.S. is expected to account for 70% of global growth in oil supply over the next five years,[22] and to supply at least half the world’s new demands for natural gas.[23] Growth in U.S. natural gas alone is expected to account for twice as much new energy supply as is forecast for all global growth of wind and solar combined.[24]

A ban on fracking would end U.S. exports, cause imports to soar, and increase the trade deficit by hundreds of billions of dollars. The more serious impact would come from the shock to global markets. Global oil prices swing widely when markets are surprised by even a 1%–2% change in the supply/demand balance. A fracking ban would entail a loss of 7% of global oil production, comparable to the 7% lost with the infamous 1973 Arab oil embargo—an embargo that drove world oil prices up 400% and triggered a global recession.[25] Similarly, the 1979 Iranian revolution took 5% of oil off global markets. Prices rose more than 200%, sparking another global recession.[26] Today, taking shale production off the market would also constitute an additional 17% loss to global markets in the form of natural gas.[27] Higher energy prices would hit global consumers; Americans would pay more than $100 billion a year at the gas pump alone, an average of $1,000 per household.[28] Even a slow 10-year production phase-out would trigger an estimated two-year recession in America and eliminate $270 billion of private investment.[29] There would be some winners: Russia and OPEC would derive huge revenue and geopolitical benefits.

Losing the share of new electricity generation that is now fueled from natural gas (produced by fracking) would push utilities to increase the use of existing underutilized power plants where they’re available, which are mainly coal-fired.[30] That would increase carbon dioxide emissions by some 600%—more than all emissions avoided from wind and solar on U.S. grids.[31]

Regions heavily dependent on natural gas but with minimal coal capacity would be faced with rolling blackouts—such as New England (where gas currently provides 49% of electricity), the Mid-Atlantic region (38%), and the Pacific coast (30%).[32] Some of that shortfall could come from burning oil in the 130 GW of gas-fired turbines designed to be dual-fueled.[33] If fully utilized, those turbines would burn about 1 mmbd of oil (necessarily imported), a 10-fold increase in U.S. oil-fired power generation.

The central motivation for the movement to ban fracking is the global abundance of hydrocarbons at a time when many pundits and policymakers believe that an “energy transition” is urgently needed. But America’s shale production could not be replaced quickly by alternatives, at any price, regardless of climate-change motivations. To the extent that there is an “energy transition” to new technologies, it is happening in slow motion.

Politically popular wind and solar power have become far less expensive and have enjoyed massive global subsidies; but together, they still provide only 1.8% of global energy. The 5 million electric vehicles on all the world’s roads now displace 0.1% of global oil use.[34]

Replacing the quantity of energy produced by fracking in the U.S. shale fields would entail (in energy-equivalent terms) expanding all of America’s solar and wind production by 2,000% more than what has been added in the past decade.[35] Somehow accomplishing that miracle wouldn’t help the 99% of Americans driving oil-fueled cars. In fact, because the hydrocarbon market is global, the entire world would have to increase global wind and energy supply by 500% to replace the energy that would be lost from an American fracking ban—never mind the additional energy needed to fuel global economic growth.[36]

1. Holmes Lybrand, “Fact Check: Some Democratic Presidential Candidates Want to Ban Fracking. Could They?” CNN, Sept. 16, 2019.
2. Bernie Sanders, Twitter, Sept. 4, 2019.
3. “Where 2020 Democrats Stand on Climate Change,” Washington Post, Nov. 20, 2019. From the same article, Tulsi Gabbard: “Yes, I support a ban on all hydraulic fracking operations.”
4. EIA, “EIA Adds New Play Production Data to Shale Gas and Tight Oil Reports,” Feb. 15, 2019.
5. Morgan Stanley, “Could Liquefied Natural Gas Fuel Global Commodities Disruption?” Sept. 4, 2019.
6. Amy Harder and Lynn Cook, “Congressional Leaders Agree to Lift 40-Year Ban on Oil Experts,” Wall Street Journal, Dec. 16, 2015.
7. International Energy Agency (IEA), “Oil 2019: Analysis and Forecast to 2024,” Mar. 11, 2019.
8. Christopher E. Smith, “McKinsey: US to Source 50% of New Gas Through 2035,” Oil & Gas Journal, Sept. 20, 2019.
9. Frank A. Verrastro and Guy Caruso, “The Arab Oil Embargo—40 Years Later,” Center for Strategic & International Studies, Oct. 16, 2013; Council on Foreign Relations (CFR), “Oil Dependence and U.S. Foreign Policy: 1850–2017.”
10. EIA, “Natural Gas Explained: Use of Natural Gas,” July 10, 2019.
11. Chris Tomlinson, “A Fracking Ban Is About as Realistic as a Border Wall,” Houston Chronicle, Sept. 13, 2019.
12. Chris White, “Liz Warren Is Introducing a New Bill Blocking Natural Gas Exports,” Daily Caller, Oct. 9, 2019.
13. Lisa Friedman, “Trump Moves to Open Nearly All Offshore Waters to Drilling,” New York Times, Jan. 4, 2018.
14. “Request to the United Nations to Call for a Global Ban on Fracking,” open letter to António Guterres, Secretary-General of the United Nations, Sept. 18, 2019.
15. Javier Blas, “US Becomes Net Oil Exporter for First Time in 75 Years,” Transport Topics, Dec. 6, 2018; Lyaman Zeynalova, “US to Become Net Petroleum Exporter in Q4 2019,” Oil & Gas 360, Oct. 25, 2019.
16. Council of Economic Advisers, “The Value of U.S. Energy Innovation and Policies Supporting the Shale Revolution,” October 2019.
17. EIA, International Energy Analysis, Country Outlook, Saudi Arabia, Oct. 20, 2017.
18. IEA, “Key World Energy Statistics,” Sept. 26, 2019.
19. Reuters, “Saudi Arabia Says Won’t Cut Oil Output,” Dec. 21, 2014.
20. Morgan Stanley, “Could Liquefied Natural Gas Fuel Global Commodities Disruption?”
21. Morgan Stanley, “Liquefied Natural Gas Fuels Energy Disruption,” Sept. 23, 2019.
22. IEA, “Oil 2019: Analysis & Forecast to 2024,” and “World Energy Outlook 2019.”
23. Smith, “McKinsey: US to Source 50% of New Gas Through 2035”; IEA, “World Energy Outlook 2019,” Nov. 13, 2019, and “Gas 2019: Analysis and Forecast to 2024,” June 7, 2019.
24. EIA, “Annual Energy Outlook 2019,” and “Renewables 2019.”
25. Verrastro and Caruso, “The Arab Oil Embargo—40 Years Later.”
26. “Crude Oil Prices—70 Year Historical Chart,” Macrotrends—The Premier Research Platform for Long Term Investors; CFR, “Oil Dependence and U.S. Foreign Policy: 1850–2017.”
27. IEA Atlas of Energy: 138 TCF/yr global production vs. 24 TCF U.S. shale; EIA, “EIA Adds New Play Production Data.”
28. Tim Mullaney, “Risks Are Rising That Oil Prices Will Cause Next Recession,” CNBC, July 23, 2018.
29. Jesse Naranjo and Christopher M. Matthews, “Fracking Ban, Embraced by Some Democratic Hopefuls, Could Hit Economy,” Wall Street Journal, Sept. 22, 2019.
30. EIA, “Natural Gas Explained.”
31. EIA, “How Much of U.S. Carbon Dioxide Emissions Are Associated with Electricity Generation?” Calculation based on loss of 50% natural gas generation.
32. EIA, “Electric Power Monthly,” September 2019.
33. EIA, “Electricity Annual,” table 4.11: Fuel-Switching Capacity of Operable Generators Reporting Natural Gas as the Primary Fuel, by Producer Type, 2018.
34. IEA, “Global EV Outlook,” May 27, 2019.
35. Jack Perrin and Emily Geary, “EIA Adds New Play Production Data to Shale Gas and Tight Oil Reports,” IEA, Feb. 5, 2019; IEA, Renewables 2018: Market Analysis and Forecast from 2018 to 2023, Oct 8, 2018.
36. Mark P. Mills, “The New Energy Economy: An Exercise in Magical Thinking,” Manhattan Institute, March 2019.