Frackonomics


Between 1868 and 1969, Cleveland’s Cuyahoga river caught fire at least ten times, including one blaze that reached the Standard Oil refinery where storage tanks detonated. Ultimately, the seemingly impossible and unnatural phenomenon of burning water came to represent the dangers of unregulated industrial development and generated popular support for the environmental laws of the 1970s, including the Clean Water Act and the Safe Drinking Water Act.

Today the unsettling sight of burning water has returned, from a new industry that is exempt from both these laws. In homes near installations using the drilling technique known as hydraulic fracturing, or “fracking,” the tap water has been known to ignite with the touch of a lighter. The industry is relatively new, so the scientific literature yields only tentative results and provisional research conclusions. But the early research suggests fracking has serious negative consequences for public health and local ecology, from flaming tap water to toxic chemicals to ground tremors. Industry spokesmen insist that the negative side-effects of fracking are insignificant. But there’s one positive side-effect everyone should be able to agree upon: fracking is an ideal vehicle for explaining key economic concepts of market failure and market power, including externalities, asymmetrical information, and regulatory capture, along with brand-new ones, like science capture. Let’s start with the firewater.

Liar Liar, Taps on Fire
10.0pt;line-height:150%;font-family:"Verdana","sans-serif";mso-fareast-font-family:
"Times New Roman";mso-bidi-font-family:"Times New Roman"”>The heavy use of often-secret synthetic chemicals has also cast a shadow over the fracking debate. Bloomberg News reported in 2012 that energy companies and well operators were refusing to disclose the chemical formulas of thousands of substances used in the fracking process, enough to “keep [the] U.S. clueless on wells.” Many states have instituted a self-reporting law, modeled on one first developed in Texas, allowing drillers to withhold the ingredients used in their chemical mixes. Bloomberg reports that drillers “claimed similar exemptions about 19,000 times” in the first eight months of 2012 alone. The congressional exemption of the industry from federal water requirements (discussed below) makes this non-disclosure possible, so that “neighbors of fracked wells … can’t use the disclosures to watch for frack fluids migrating into creeks, rivers and aquifers, because they don’t know what to look for.”

This development is a perfect example of what economists call asymmetric information, where one participant in a transaction knows relevant information that is unknown to the other party. The lack of information on one side can put the other party at an advantage, like the seller of a used car who knows more about the car’s problems than the prospective buyer. For example, a team of Colorado endocrinologists set out to catalogue these synthetic compounds used in wells across the country, based on regulatory filings. The survey was limited due to the “void of environmental authority” to compel chemical disclosure, and thus the data sheets and reports are “fraught with gaps in information about the formulation of the products.” Many of these reports only specify the general chemical class or use the label “proprietary,” providing no additional information. Ultimately, the scientists found that over 75% of the chemicals were harmful for the sensory organs, nearly half could affect the nervous and immune systems, and 25% could cause “cancer and mutations.”

Another report by Colorado scientists observed that fracking development is increasingly located “near where people live, work, and play.” The study used air sampling to find strongly elevated health risks within a radius of about half a mile from fracking sites. The effects ranged from “headaches and eye irritation” up to “tremors, temporary limb paralysis, and unconsciousness at higher exposures.” A larger review by Pennsylvania scientists reached similar conclusions, based on local resident reporting and finding a match of over two-thirds “between known health effects of chemicals detected and symptoms reported.”

The scientists caution that their findings “do not constitute definitive proof of cause and effect,” but they do “indicate the strong likelihood that the health of people living in proximity to gas facilities is being affected by exposure to pollutants from those facilities.” They frequently advocate the precautionary principle—that careful study showing that a product or process is not harmful should precede its use—as when they recommend “health impact assessments before permitting begins,” and note that “scientific knowledge about the health and environmental impacts of shale gas development … are proceeding at a far slower pace than the development itself.” These conclusions contradict the industry’s claim that fracking is both safe for public health and not in need of any further study. Especially considering the earthquakes.

 

Tectonic Economics
line-height:150%;font-family:"Verdana","sans-serif";mso-fareast-font-family:
"Times New Roman";mso-bidi-font-family:"Times New Roman"”>You might wonder why the EPA has not limited or regulated fracking operations, in light of the combustible water, cancer-causing chemicals, and earthquake clusters. The EPA might well have adopted significant national policies on fracking by now, had the practice not been made exempt from the main national environmental laws in the Energy Policy Act of 2005, an offspring of Dick Cheney’s secretive energy committee. The exemptions from the Clean Water Act, the Safe Drinking Water Act, the Clean Air Act, and the Superfund law drastically limit the agency’s authority to act on fracking.

The drive to limit even EPA research into fracking is decades old. An extensive New York Times report, based on interviews with scientists and reviews of confidential files, found that “more than a quarter-century of efforts by some lawmakers and regulators to force the federal government to police the industry better have been thwarted, as EPA studies have been repeatedly narrowed in scope and important findings have been removed.” When Congress first directed the EPA to investigate fracking in the 1980s, the Times reported, EPA scientists found that some fracking waste was “hazardous and should be tightly controlled.” But the final report sent to Congress eliminated these conclusions. An agency scientist relates, “It was like science didn’t matter. … The industry was going to get what it wanted, and we were not supposed to stand in the way.”

Similarly, when an EPA public-advisory letter to the state of New York called for a moratorium on drilling, the advice was stripped from the released version. A staff scientist said the redaction was due to “politics,” but could as well have said “business power.” More importantly, the first major EPA review of fracking found “little or no threat to drinking water.” This was an eyebrow-raising claim, given that five of seven members of the peer review panel had current or former energy industry affiliations, a detail noted by agency whistle-blower Weston Wilson. Other studies have been narrowed in scope or colored by similar conflicts of interest. More recently, the agency announced that its study finding contamination of Wyoming groundwater will not be subjected to outside peer review, and that further work instead will be funded directly by industry. As the EPA is presently drafting a brand-new report on the subject, these past embarrassments should be kept in mind.

This brings up the problem of regulatory capture, where an industry to be monitored gains major influence over regulators’ policies. As mentioned above, fracking is very loosely regulated by the states, which is always a favorite outcome for corporate America since the regulatory resources of state governments are far smaller and the regulators are even more easily dominated than those of the federal government. The industry-sponsored FracFocus website is the state-sanctioned chemical-information clearing house, and a masterpiece of smooth PR design, suggesting clear water and full transparency. But Bloomberg News reports that “more than 40 percent of wells fracked in eight major drilling states last year had been omitted from the voluntary site.”

Other state reactions have varied. In 2010, the New York State legislature voted to ban fracking, but then-Governor Paterson vetoed the bill and instead issued a temporary moratorium on the practice, though fracking remains illegal in the New York City watershed. Finally, while the EPA’s main study is still pending, the agency has taken some steps, as in 2012 when it required well operators to reduce methane gas emissions from wells and storage pits to limit air pollution. But even here the regulation wears kid gloves: The new moves do not cut into industry profits. In fact, capturing the “fugitive” methane, the agency estimates, will save the industry $11 to $19 million annually. Also, the regulation won’t take effect until 2015.

 

Neoclassical Gas
line-height:150%;font-family:"Verdana","sans-serif";mso-fareast-font-family:
"Times New Roman";mso-bidi-font-family:"Times New Roman"”>Not that Americans are taking it lying down. A diverse popular coalition successfully fought to block a Gulf Coast gas terminal that stood to inflict major damage on local wildlife. The Oil & Gas Journal reports on the “firestorm” of activism: “In an unlikely but massive undertaking, environmental activists, sports fishermen, local politicians, media groups, and other citizens formed a coalition known as the ‘Gumbo Alliance’ that united opposition to the technology.” The Louisiana governor vetoed the project “under considerable public pressure.” Elsewhere, local residents have taken action to keep fracking and its negative externalities out of their communities. New York State “fractivists” have won an impressive 55 municipal bans and 105 local moratoriums against fracking, to date. The state’s Court of Appeals—New York’s highest court—recently upheld the bans against an industry lawsuit. These activist successes are an early challenge to what the Wall Street Journal called the new “shale barons.”

American job markets remain highly depressed and state budgets are strained. What we need, instead of dogged extraction of every particle of fossil fuels from the ground, is a public employment program geared toward the construction of a new sustainable energy system. This would be a far superior alternative to fracking—on grounds of health, ecology, and employment. It could also serve as a springboard for a broader questioning of the suitability of capitalism for the challenges of the 21st century. That kind of radical approach would see the glass of water as half full, not half on fire.