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Thursday, June 30, 2011

Why the NYT-Liberal Assault on Shale Gas? How About the Volt?

The New York Times has devoted more than four thousand words to the impending crisis of shale gas over the past four days. The attack began with a full-page investigative report in its Sunday edition. The barrage continued and Wednesday’s edition featured calls by Democrats for Congressional investigations.

You would think the NYT and its Congressional supporters would welcome a new technology that increases domestic energy, lowers the price of a clean fuel, turns us from an importer to an exporter, and creates new jobs.

Why this all-out assault? They need to rub “Big Energy’s” face in the mud in the mainstream press and the halls of Congress to divert attention from real problems.

What is the beef?  According to the NYT and Congressional Democrats, the evil energy giants have hatched another nefarious plot to dupe the gullible Federal Energy Information Agency, uninformed investors, and the general public into accepting an “irrationally exuberant” picture of the industry.  

E-mails obtained through open-records worry that gas “may not be as easy and cheap to extract from shale formations, and that  companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves.” The NYT praises skeptics “who question endorsing shale gas without understanding its economics.” They even complain “that dozens of black churches in Fort Worth signed leases on the promise of big money,” risking their tax exempt status.

This frontal assault on shale gas shows a profound lack of understanding of technology, economics, business, and energy.

Extracting gas from shale is a new technology that combines two established technologies – horizontal drilling and water flooding (which has been used at least since the 1950s and has not polluted our drinking water yet). As a new technology, we have no history to predict the future. Even with the best and most honest of efforts, we do not know how to extrapolate reserves from existing wells, and what the eventual extraction costs will be.

With such uncertainty, there will be a wide variety of estimates of reserves, some optimistic, some pessimistic. No one knows the truth at this point. There is nothing sinister on the part of those who choose to be optimists. All major innovations are made by optimists, not pessimists.

The reserves of any underground resources that can be economically extracted depend on prices now and in the future. If gold rises to $5,000 per ounce, there will be a new gold rush in the United States. The problem is that we do not know the future prices of natural gas. All we know is that it has fallen dramatically since shale oil extraction began. As long as we do not know the future price, there is no way to know the amount of reserves that can be extracted at a profit.

Presumably investors worth their salt know these two facts. They also know enough not to rely on a federal bureaucracy to make their investment decisions. After all, shale gas companies are not selling shares at Wal-Mart. Investors who are optimists will invest. Pessimists will not. Technology and market forces will decide who is right, not the NYT or Congress.

The NYT attack ends with a truism: “If natural gas ultimately proves more expensive to extract from the ground than has been predicted, landowners, investors and lenders could see their investments falter, while consumers will pay a price in higher electricity and home heating bills.”  Yes, if shale gas is a bust, investors will lose and prices will be higher, but what’s new? Why all the fuss? Why should this be Congress’s business?

My two pieces of advice:

First, to the natural gas industry: Avoid at all costs federal subsidies of cars powered by natural gas. This will give the federal government the right to stick its nose into your business.

Second, to the NYT and democratic members of Congress: Obtain e mails of internal discussions of the Volt or of lithium battery manufacturers to see whether  investors, taxpayers, and consumers are being sold an “irrationally exuberant” picture. I may have to wait a long time before the NYT takes me up.  

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