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Frac-o-nomics: More Gas Won’t Guarantee Lower Prices

• June 04, 2012 • 4:00 AM

(Risto Viita /Shutterstock)

As humble guar gum illustrates, the economics of producing more fossil fuels won’t automatically result in lower prices, nor will increased protections necessarily mean big price increases.

A rush in fracking natural gas in the American West has led to Indian guar gum prices flapping upwards like those famous Beijing butterflies of chaos theory. Every American gas well that’s fracked requires about nine metric tons of guar gum, a viscous gel made from the guar bean. Guar gum—also used in ice cream and other foods—makes the “proppants” that are jammed into fractures in shale rocks more viscous and more slippery, which helps free more of the natural gas trapped in the rocks.

As an excellent Reuters article explains, runaway demand for guar beans has transformed the sleepy farms of India’s desert province of Rajasthan. “Guar changed my life,” says a farmer whose income quintupled last year. “Next season I will even try to grow guar on the roof.” Meanwhile, higher guar prices increase the cost of fracking—according to the article, it can be 30 percent of the cost of fracking a well.

I bring up the chaos theory of guar gum because there’s a persistent belief in the U.S. that if we simply increase drilling for supplies of fossil energy, the price will come down. (“Drill baby, drill!” is this idea in its simplest form, but it’s broadly embraced by Republicans and Democrats alike.) Some suggest there is a “choice” between high prices for natural gas and high environmental standards on fracking. This is a false dichotomy. More drilling has already led to an increase in production costs and a decrease in selling price, which is decreasing supply. As you can see from the guar gum example: More drilling means higher costs for drilling, i.e. more expensive guar gum, drilling rigs, labor, and the rest. At the same time, more drilling makes gas prices fall.

Since last year they’ve fallen by 62 percent, and April 19 saw a 10-year low in natural gas prices. That means drilling stops—which is exactly what’s happened in Michigan, where a gas rush has tapered off because there’s too much natural gas available, too cheaply, and simply no point in investing in it.

What will ensure supply? Higher prices, of course.

A new report out of the International Energy Agency suggests that gas needs to be at least twice as expensive to be “sustainable” in the U.S. The IEA was formed in the mid-1970s as the oil-consuming countries’ rival to OPEC, the oil producers cartel, which was throttling back production to push oil prices up. Now, in an ironic twist, the IEA is essentially advocating setting prices for natural gas. (OPEC itself is based on the Railroad Commission of Texas, which started limiting oil production to keep prices higher in Texas in the 1930s, something the commission continues today).

The IEA, meanwhile, isn’t buying that there’s a dichotomy between supply and environmental regulation. Instituting consistent and better environmental practices would raise natural gas production costs by just 7 percent, it says.

Lisa Margonelli
Lisa Margonelli is the author of Oil On the Brain: Petroleum's Long, Strange Trip to Your Tank. She is currently working on a book about termites.

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