Money and Finance

Placing the American Gas Boom in Perspective - By Vaclav Smil

Natural gas will continue its conquest of global and national energy supplies.

Before the end of 2005, the U.S. price of natural gas rose above $15/1,000 cubic feet, nearly 12 times the all-time low reached in 1995. Production was down by about 8 percent compared to 2001, news reports speculated about supply shortages, and gas companies were gearing for expanded imports of liquefied natural gas (LNG) from overseas. Six years later, by the second week of April 2012, the market price of U.S. natural gas fell to less than $2/1,000 cubic feet (to levels not seen since January 2002), nationwide gas extraction in 2011 was nearly 12 percent above the 2009 level, and record production was expected in 2012, when all storages would be filled to capacity. No wonder that gas companies are now planning to export LNG, and that new drilling projects have been shelved in the anticipation of gas glut.

This amazingly abrupt change of gas fortunes has been due to the rising production of shale gas. Shale gas is released by horizontal drilling followed by hydraulic fracturing of the porous rock using proprietary high-pressure mixtures of water and chemicals (the practice now widely known as fracking).

Has this been too good to last? Critics say so. They point to a substantial downward revision (roughly a two-thirds reduction) of shale gas reserves in the Marcellus formation that underlies the Appalachian states from West Virginia to New York. They claim that the industry is nothing but a variation of a Ponzi scheme (see Rolling Stone). They note that the gas flow from new wells declines exponentially in a matter of months. Their most often repeated argument is that fracking is a huge environmental disaster that will contaminate aquifers wherever it takes place.

Here is my advice. Do not get carried away either by bonanza claims (implying only sinking natural gas prices and seeing Marcellus as the Saudi Arabia of natural gas) or by the negativism of anti-fracking activists (recently joined by Hollywood celebrities).

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