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A Needed Economics Lesson About Shale Gas

December 21, 2011

To this point, I have not dealt with Shale Plays from an economic perspective. I must admit that I feel ashamed of this fact because it is the most important consideration pertaining to the various Shale Plays. Not only is the Economic consideration of Shale the most important, it is also the most obvious; so in effect, I can not give an excuse as to why the origin of this blog did not find its genesis in light of Economic Considerations.

With that being said, I feel that the only lens through which we should view Shale Gas is founded upon the Economic Principles that govern our country.

A concise definition of Economics can be found in the one-stop-shop, Wikipedia. Wikipedia defines Economics as “the social science that analyzes the production, distribution, and consumption of goods and services.”

An objective and inescapable reality is that the Capitalist mentality is inseparable from the DNA of the United States. This has been, and hopefully will continue to be, a country made great by Capitalism.

Within this lesser context, exists a greater system of core economic principles which govern the actions of businesses nationwide. Economics are all about “the consumption of goods and services.”

Poor adherence to governing economic principles will result in financial collapse. We have experienced this stateside when the housing bubble busted and this poor adherence is immediately responsible for the foreclosures and bankruptcies that plague us. When one continually spends more than they earn, the debt will crush him/her. This being said, our poor adherence cannot continue if we expect to continue as a prosperous nation.

On a historical note, great civilizations often collapse not because of military might or disease but because of economic degradation. We currently sit on the brink of such a collapse. The United States of America can not continue illogical economic practices if we expect to enjoy the quality of life we’ve previously enjoyed to this point. This fact, should sober us. For those who have a firm grasp of economics, there is reason for alarm, particularly when the brightest prospect for our struggling economy is being opposed and inaccurately covered by major media.

Our economy has the equivalent of a terminal illness. Though the treatment may be daunting, it is entirely necessary.

My concern is rooted in the personal belief than in all of the freedom we are provided, we have, in the post-modern school of thought, decided that we will determine our own reality at the cost of a concrete reality. I mean that attempting to remedy our current woes is not feasible without Shale Gas being a major part of the plan.

My fear, is that differences in ideologies and abstract thought will stymie economic growth to the point of no return.

Our modern world is not familiar with this concept. Economically, we often act like there is always a point of return. The US’s interrelation with global markets dictates that this is not the case. We must alter our current practices or we will crash and burn. A ideological objection to “cracking a few eggs to make an omelet” will result in a collapse.

The first economic principle that I will treat rests squarely on the shoulders of human nature. People want. Economically, this is referred to as demand. To illustrate this point during Christmas season, we need look no further than a line at a toy store.

You may remember “Tickle Me Elmo”.

The toy was introduced in the United States in 1996, quickly becoming a fad. Some parents literally fought other parents in stores to purchase one for Christmas. The dolls’ short supply due to the unexpected demand lead stores to increase their price drastically. Newspaper classifieds sold the plush toy for hundreds of U.S. dollars. People reported that the toy, originally sold at US $28.99, fetched as much as $1500.[1]

The reality that People Want (Demand) correlates directly with the economic reality of scarcity. Scarcity paired with demand creates cost. “Tickle Me Elmo” may be a miniature example that betrays a larger principle buts its effectiveness in revealing the truth of how economics work is nonetheless potent.

Larger and less microcosmic examples include gold and platinum. For the ancient Romans, this included salt. In this contemporary time it includes Oil and Gas. Current demand for and the scarcity of Oil and Gas globally makes it extremely valuable to the world. We can and should take advantage of this situation because unlike Elmo, when fuel production stops, commerce stops.

Continuing in the vein of the ancient Romans, it is necessary to cite the fact that “scarcity paired with demand creates cost” in terms of imperialism.

Empires expanded because of limited access to resources. Land was worth lives and military exploits because of demand. In their eyes, the cost was worth the reward and the rule (which hints at another economic principle) was to choose the means that provided the most benefit with the least cost.

There is simply more energy potential in Oil and Gas than there is in alternative energy. I am not solely realizing the monetary potential. I mean energy producing potential in the atomic sense. There is, simply put, such a tremendous amount of energy potential in the molecules of fossil fuels. This is how jets thrust off of the ground and how trains pull so many tons. There is a cost for these fuels but for the same amount of power, there is no present alternative.

So, if I may tie that last sentence to another economic principle, it is that there is always a cost. All choices cost. If I have five dollars to spend and there are two items that cost five dollars in front of me, I am faced with a choice because I can not purchase both. So, in terms of economic governance, I will choose what I believe will benefit me more. If I spend my five dollars on Oil and Gas, I will get a lot more bang for my buck than I would with Green Energy.

Robert Frost, in his famous poem The Road not Taken astutely recognized this truth in the final stanza:

I shall be telling this with a sigh

Somewhere ages and ages hence:

Two roads converged in a wood, and I-

I took the one less traveled by,

And that has made all the difference.

We, the reader, are left to interpret whether or not the difference was to a good end or bad. I believe Frost was not requiring that we discern the end, he was observing a reality. There is always a choice, there is always a cost, and for good or for bad, those choices make all the difference in the world. Even if there is no monetary or itemized consequence for the choice, there is still a cost.

So what does this choice have to do with Shale and economics?

Everything.

I have heard it often asked “Do the benefits of Shale Outweigh the Risks?” There have been at least a dozen headlines that have read as such.

On one side, Environmental Activists believe that a finite resource like Fossil Fuels are an inferior choice for two basic reasons.

1.) They believe in climate science and believe that decreasing our carbon footprint for the purpose of “saving our planet” is important.

2.) They believe the utilization of a finite resource is irrational. They ask “Why would we continue to use fossil fuels, which are limited, when we have an abundance of free wind and sun to power the same things for which we use Fossil Fuels?”

All of these objections to the utilization of Shale exist within the framework of economic realities that do exist. People fly. Trains pull. Ships motor across the oceans. There is commerce dependent upon the movement that fossil fuels provide and the energy they produce. I want you to notice that I did not say “must exist”. They do exist. The objections cannot supersede or circumvent economic considerations as if the entire known world is void of an economic skeleton dependent upon actual businesses and an actual demand for their goods and services.

These objections cannot exist without admitting that the current world runs on Oil and Gas (demand) and that companies that are largely profitable (because of their understanding of economic principles) are a large and pivotal part of that skeleton.

Calling for an immediate end to Oil and Gas usage is foolish. It is out of touch with reality. Moving to renewables may be the end game but it cannot happen overnight. This would be the equivalent to believing that life can and will continue if we rip the heart out of and drain the blood from the economic body. It’s simply ridiculous.

So, from an economic standpoint, I would like to address what I believe are their larger objections one by one. I will address them respectively after the numbers that correspond to the Environmentalist position.

1.) Saving our planet is important. Excluding those that completely discredit climate science and refer to it as a myth, Oil and Gas companies are moving toward renewable resources and they are moving toward more environmentally friendly practices. This is a fact. When I say moving forward, I mean they are spending more money on renewables than anyone else. If they continue to run their companies as well as they have in the past, when renewables become a larger part of the market, names like Shell, BP, Exxon Mobil etc. will become synonymous with Green energy like they have with fossil fuels.

Along with RFK Jr.’s VantagePoint Capital Partners, Brightsource’s major investors also include Chevron, BP, and Statoil. Oil and Gas companies are simply not the evil polluters as they are depicted, they have the money to fund the progression of Green Energy, and they do. What they understand, economically, is that Green Energy is not nearly as profitable as Oil and Gas. That does not mean that it will never be as profitable or useful, it means that it is not right now. Smart companies don’t put all of their eggs in the basket of unrealized ideas. They live firmly in the here and now and wisely plan for the future without acting insane. Because of the tremendous economic impact that the development of Shale could have, these companies would be counterproductive (and so would our country for that matter) to leave the potential unrealized. For a country that is in the worst of financial conditions, all of the Shale money can not be left on the table while the Greens attempt (and they would fail) to turn a massive ship, with tremendous momentum, instantaneously. Trying to turn a car or a boat too quickly results in wrecking. These businesses will pay a lot of money to play ball. If the United States won’t allow them to play, they will find another field and other countries will profit from their resources (like China: who already has America by the scruff of the neck).

2.) When speaking of “finite resources” vs. “infinite resources” this is where the economics lesson is most necessary. There is no such thing as an infinite resource. For example, wind and solar may be “infinite” as Environmentalists choose to represent it.

Wind and Solar are subject to inefficient and cost ineffective irregularities that do not consistently meet demand. Although it is the age old argument, Wind and Solar are simply not consistent enough to meet current or increasing demands for energy. They don’t have the muscle. For the regular Joe, that $30-60,000 investment is impossible, therefore, the initiative to use widespread Green Energy is also impossible regardless of whether or not it is a “good idea”. To further consider this point, if Wind and Solar were responsible for meeting our energy needs, this whole country would be covered with Wind Farms and Solar Arrays.

Second, Green Energy is anything but free. China is responsible for mining the majority of the rare earth minerals needed for Green Energy. They have an abundance of them and they lack the regulations associated with the risks of mining rare earth. If they have an abundance, while we have scarcity in this country, what do you think is going to happen if demand for rare earth minerals increases along with a Nationwide Green emphasis? Increased demand married to scarcity increases cost. Those costs will increase as the level of demand increases

If we don’t utilize our own energy resources for a profit, and we continue to grow in being a culture that exports nothing and imports everything at a loss, then we will get the same problem we already have with OPEC; except all of that money will be going to China.

In the economic game of life, refusing to capitalize on Shale plays would be the equivalent of leaving your ringer on the bench during the big game. We are playing the largest of games right now. We need to put our ringer in.

Shale Plays represent the potential to increase our energy output (by exporting) while also creating jobs and money within our country by processing the Oil and Gas we already have at home. By doing so, we decrease our imports. This is a model for economic success. We meet demand with vast supply. This helps eliminate the problem of scarcity for our country while benefiting from the increasing demands in other countries.

In summary, Shale Plays can decrease imports, increase exports, and create jobs at home. These are all positive revenue streams. Any economist will tell you that this is sound thinking.

Refusing to utilize Shale Plays means increasing imports (and our dependence on OPEC and for rare earth, China), decreasing exports (because if we don’t utilize Shale Gas, we won’t be exporting it), escalating our scarcity (whether it be for fossil fuels or rare earth), thereby increasing our costs. All the while, the population is not decreasing. This means that the number of consumers is growing and increasing demand.

Economically, Shale Oil and Gas makes sense. In the Bakken, there are currently 18,000 jobs available for folks willing to relocate to North Dakota. These jobs pay around $100,000 annually and are accompanied by benefits.

If we don’t benefit from our own resources, someone else will benefit from our demand. If we can solve our major economic problems with our own two hands, we should.

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