Fracking Can Contaminate Drinking Water

We should have learned from decades of lying by tobacco companies, but we don’t.  Oil and gas companies have been lying about the “safety” of hydraulic fracturing, “fracking”, of oil and gas wells.  From the The New York Times:

“There have been over a million wells hydraulically fractured in the history of the industry, and there is not one, not one, reported case of a freshwater aquifer having ever been contaminated from hydraulic fracturing. Not one,” Rex W. Tillerson, the chief executive of ExxonMobil, said last year at a Congressional hearing on drilling.

It is a refrain that not only drilling proponents, but also state and federal lawmakers, even past and present Environmental Protection Agency directors, have repeated often.

But there is in fact a documented case, and the E.P.A. report that discussed it suggests there may be more. Researchers, however, were unable to investigate many suspected cases because their details were sealed from the public when energy companies settled lawsuits with landowners.

Current and former E.P.A. officials say this practice continues to prevent them from fully assessing the risks of certain types of gas drilling.

“I still don’t understand why industry should be allowed to hide problems when public safety is at stake,” said Carla Greathouse, the author of the E.P.A. report that documents a case of drinking water contamination from fracking. “If it’s so safe, let the public review all the cases.”

This is another example of how very large corporations, with very deep pockets, can use lawyers, lawsuits, the courts and regulators to their advantage and our disadvantage.

Government Tax Breaks for People Who Speculate in Oil Futures

Gas prices have come down a bit recently, but it’s not hard to remember the over $4 a gallon gas prices of just a few weeks ago.  At the time, I wrote that I (and some others) suspect that these occassional spikes in oil and gas prices were due to speculators, particularly hedge funds and global banks.

Now comes the news that those people who speculate on commodity futures like oil futures get a break on their taxes.  The profits from speculating in commodity futures contracts are taxed at only a maximum rate of 23%.  From Dealbook of The New York Times:

Here’s another little-known group of tax code beneficiaries that he might want to add to the list: day traders and speculators who buy and sell futures contracts.

For years, futures contracts, which are essentially bets on the price of commodities, stock indexes and the like, have received a more favorable tax treatment than stocks. A trader who buys and sells an oil contract in less than a year — even in a matter of minutes — pays no more than a 23 percent tax on the profits.

There are no jobs created from this activity.  It’s mostly speculation – the fancy financial term for gambling. Yet, the government gives these traders a huge tax break.  Traders who buy and sell corporate stocks and bonds within less than a year are subject to regular taxation – max rate of 35%.  But commodity speculators, the folks who collectively can drive up beef, corn, oil, gas, pork, and other prices get a break.

Now one would think that people in Washington who claim they are worried about the deficit and rising debt would look at this and go “aha, a loophole we can end, gain some revenue, and reduce the deficit”.  You would be wrong though.  The Republicans explicitly rejected closing tax loopholes as a method of reducing the deficit.

What’s Up With Oil and Gas?

Calculated Risk sums up recent oil and gas prices nicely a few days ago (bold emphasis mine):

Oil and gasoline prices are probably the biggest downside risk to the economy right now. Oil prices are off slightly today, from the WSJ: Oil Prices Ease

The front-month July Brent contract on London’s ICE futures exchange was recently down 35 cents, or 0.3%, at $114.68 a barrel. The front-month July contract on the New York Mercantile Exchange was trading lower 43 or 0.4%, at $100.16 per barrel.

Looking at the following graph, it appears that gasoline prices are off about 18 cents nationally from the peak. This graph suggests – with oil prices around $100 per barrel that gasoline prices will fall into the $3.50 – $3.60 per gallon range in the next few weeks.

However that just takes us back to March pricing – and that was already a drag on consumer spending. I’ll have more on the overall economy later.


The risk is real.  A continued high level of gas and oil prices threatens to slow down the U.S. economy.  Indeed the results of 1st qtr 2011 GDP and the May employment report tend to indicate the economy is slowing again.  How much of an effect?  Well James Hamilton of Econbrowser, one of the better academic econometricians and also one who follows oil prices closely points out that Americans buy approx. 12 billion gallons of gasoline each month. So when gas goes up by $1 per gallon like it has since February, that’s $12 billion less per month to spend on other things.  That translates to $144 billion per year or approx. 1% of GDP.  So, continuing this kind of back-of-the-envelope calculation, if gas prices continue to stay up near $4 per gallon, we can expect GDP growth to be 1 percentage point lower than it would have otherwise been.  As Hamilton points out, that by itself is not enough to put us into a recession, but it can slow things quite a bit.

But, Hamilton also points out that 10 of the last 11 recessions have been preceded by sharp run ups in the price of oil.  The likely impact of the recent increase in oil/gas prices will definitely include some immediate slowing in GDP growth.  I think we’ve already seen that.  But the more significant risks are still to come.   If prices stay up for the next year or more, then the effects will begin to compound.  Oil price increases have a multiplier effect, much like government spending and taxes.  When the price of oil goes up, the initial reaction is to cut spending elsewhere to continue fund our purchases of gas. After all, we gotta go to work and school.  But then, as purchases of other goods decline, layoffs begin in those other industries.  The increased unemployment in those other industries reduces total consumption spending even more and causes new rounds of cutbacks.  Hamilton points out that the last time we saw this rapid run up in gas prices in 2007-8, it wasn’t until many months later that the real devastating impact was felt.  Overall, it doesn’t bode well for fall 2011.

But why are oil and gas prices so high?  And why did they rise by approximately 25-30% at the end of February?  I think I’ll make that the subject of another post.

A Little Oil History

While most history books focus on 1860 as the year Lincoln was elected and the South decided to secede making the Civil War inevitable, there was another momentous event happening.  In Pennsylvania they found oil (petroleum) and found uses for it. It sealed the fate of the New England whale oil industry and set the stage for the rise of Rockefeller and many others, including, Andrew Carnegie (see the comments). James Hamilton at Econbrowser notes a little history of oil, Pennsylvania edition:

Peak oil in Pennsylvania

Here I pass along a few items on the early history of the oil industry that I found interesting.

The first commercial oil well was completed in Pennsylvania in 1859 under the supervision of Colonel Edwin Drake. Williamson and Daum’s The American Petroleum Industry: The age of illumination, 1859-1899, p. 75 have this colorful description of how Drake earned his colonel’s eagle:

Following [Pennsylvania Rock Oil Company President James] Townsend’s instructions literally, Drake’s first act on arriving in Titusville [PA] brought him what was probably the cheapest, if not the most spurious, colonelcy ever acquired outside the state of Kentucky. Alert to the promotional value of a little showmanship to impress the local citizenry, Townsend had mailed the legal documents ahead to “Colonel” E.L. Drake in care of Brewer, Watson & Company… When Drake called for his mail, he found the townsfolk already interested in and receptive to the great man affairs in their midst, and himself adorned with a new title that would remain with him for life.

Aided by more than a little luck, the colonel did strike oil, and the boom was on. For two decades the state of Pennsylvania was to be the world’s main producer of crude oil. Although production rates from the initial wells on Oil Creek dropped off quickly as the oil was taken out, these were more than replaced by other sources within the state. For example, in 1865, Pithole City, PA became a phenomenal boom town, accounting for a third of the 2.5 million barrels produced in the world that year, only to turn into a ghost town as production rates fell substantially by 1868.

Source: The Oil Well Driller, Charles Whiteshot (1905).

Pennsylvanian production continued to increase as ever-more-productive new fields within the state were developed, reaching almost 32 million barrels in 1891. But I was interested to learn that, despite amazing improvements in technology since the nineteenth century, that was the highest annual production rate that Pennsylvania would ever achieve.

Pennsylvania crude oil production, 1859-1990, in millions of barrels per year. Source: Michael Caplinger (1997).

Here’s an update to the above graph with more recent data. The price increases of the 1970s and 2000s were sufficient to stimulate some increases in Pennsylvanian production. But note that the two graphs here are drawn on the same scale– we’re still under 4 million barrels per year, less than 1/8 of what the sturdy Pennsylvanians of 1891 were able to accomplish. And in 1891, by the way, oil sold for 67 cents a barrel, which corresponds to about $16 in 2009 dollars.

Pennsylvania crude oil production, 1981-2009, in millions of barrels per year. Data source: EIA.

Posted by James Hamilton at November 27, 2010 12:44 PM


Doing With Less Oil

Recession and revulsion at BP are doing what many thought not possible:  getting Americans to use less gasoline per person per day.  From Political Calculations:

Monthly Average Gallons of Finished Oil Products Supplied per United States Resident per Day, January 1982 through March 2010 The chart to the right reveals what we found when we took the U.S. Energy Information Agency’s figures for the average number of thousands of barrels of Finished Petroleum Products Supplied to the U.S. per day, converted those figures to the equivalent number of U.S. gallons, then divided that result by the number of people within the United States, as measured by the U.S. Census’ Resident Population Estimate for each month from January 1982 through March 2010 (we found that data in two places – here it is for between April 1980 through November 2000, and for April 2000 through the present).

What we find is that since January 1982, the average daily oil consumption for individual Americans living in the United States has averaged 2.56 gallons per person. More remarkably, we see that Americans have dramatically reduced their consumption of oil and its derivative products since July 2007.

So dramatically, in fact, that Americans today are consuming roughly one-third of a gallon per person less than they did on average from January 1982 through November 2007, the last full month before the largest recession in the U.S. since World War II began. As of March 2010, Americans are consuming an average 2.28 gallons of oil per day.

That drop has occurred even as the resident population of the United States steadily increased throughout this period.

Norway Thrives by Going Against the Tide –

Turns out that culture matters, too. From the NYTimes (free registration may be required)

The global financial crisis has brought low the economies of just about every country on earth. But not Norway.

Often natural resource wealth becomes a trap for a country as the nation is tempted to consume the riches that come from exporting the natural resources (such as oil).  Other times, the natural blessing ends up only benfitting a narrow, wealthy elite.  Norway has avoided both traps and also avoided much of the global crisis affecting everyone else.  Culture appears to have much to do with it.