Capital Ideas Blog

Economists bring new energy to old fracking debate

By Robin Mordfin
August 20, 2014

From: Blog


In 1959, the Dutch found buried treasure on the coast of the North Sea: Groningen, the largest natural gas field in Europe. In 1977, the Economist found a term to describe the economic malady that followed: ‘Dutch disease,’ the condition of greater dependence on commodities when a country’s other industries are rendered less competitive by higher-valued currency.

It’s a tale at least as old as Groningen—but many economists are betting that the United States, as a leading producer of oil and gas, won’t let fracking set off its latest retelling. Hydraulic fracturing, or fracking, makes it possible (at the potentially significant expense of the environment) for shale oil extraction to produce oil and natural gas in places where conventional technologies are ineffective. The method, which was first used in 1949 by Haliburton, proliferated over the following decades. As many as 82,000 fracking wells were opened in the US between 2005 and the fall of 2013, according to advocacy federation Environment America.

This week, the IGM Economic Experts Panel asked itself, for the second time in two years, “Is the US immune to the Dutch disease?” (Here’s the link to the first time, in 2012.) The poll asked panelists to consider whether newly developed fracking technologies will lower energy costs enough that US industrial firms will become more competitive, and thereby stimulate exports. From the earliest poll to the latest, the ranks of those in agreement or strong agreement increased by 16 percentage points.

Among the 46% in those ranks, several still voiced concerns with a blanket statement of approval. Darrel Duffie of Stanford indicated that the environmental impact could be costly and should not be ignored. “Lower an input cost and produce at a lower cost,” he said with his vote in agreement. “But the statement does not consider the environmental costs, which may be significant.” 

Many others of those who agreed don’t believe the changes will be so significant because of other costs. And still others recognize that competition could change everything. “At least while our extraction technology is better than everyone else’s (we’re not the only with shale reserves)” said Austan Goolsbee of Chicago Booth.

The next largest constituency is that of the uncertain voters—one-fifth of the panelists were uncertain about the outcome of increased fracking, but were happy to talk about it. Princeton’s Janet Currie explained, “The part I am uncertain about is whether lower energy costs are likely to have a significant effect on the competitiveness of US exports.” Meanwhile, other uncertain votes were registered with skepticism for long-term benefits. “I agree that energy costs should fall, which will increase US competitiveness,” said Harvard’s Oliver Hart. “The effects on growth are more subtle, and harder to predict.”

Those who don’t see fracking as an advantage for the US economy were largely concerned with the likelihood of contracting the Dutch disease. “The effect on the world price of energy is probably small,” said Abhijit Banerjee of MIT, “and would be partly balanced by a rise in the dollar as US imports drop.” Stanford’s Caroline Hoxby also disagreed, pointing out that oil is a global commodity. “Fuel prices are largely set on a world market so the supply in any one country does not reduce it producers’ input costs markedly,” she said.

Today, with much of the Middle East in turmoil and with Russian gas production largely going to China and India, the US will likely have a greater need to produce its own fuel. The question is, will advancements in fracking really make a difference to energy costs and make a difference to our economic future?

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