Fracking freakin’ good

Following up on the latter part of my column last Tuesday about how the latest oil and gas production technology called fracking is rocking the world, here are a few more observations.

But before that, let me explain a little more about this fracking business that’s driving world crude prices down to date by almost 40 percent – from an average of $100 in almost a decade to just $70 today – to give US consumers a first crack at this technology’s windfall benefits.

This has also affected the global natural gas price, reducing it by more than half to date. Subsequently, the fracking of natural gas-laden fields is being temporarily discontinued by some US energy companies because the basic math is no longer attractive.

In the US where fracking started and is now catching fire, the extraction of oil and gas from reservoirs considered in the past as “too tight” to be able to draw out economical amounts is bringing huge amounts into the market, and has caused the current glut that is driving prices down.

OPEC producers, especially those whose economies are already tightly tied up with the income that is to be derived by crude oil and natural gas sales, are the most affected by this US-based fracking boom.

It has become a double-edged sword for many OPEC countries because they are constrained to reduce production for fear of affecting their own income from their oil and gas fields. On the other hand, because of the ensuing glut in the world market, prices are continuing to drop, and are actually affecting their income.

Bonus effects

If OPEC members are now tightening their belts to cope with the inevitable, the rest of the world will definitely benefit from this significant drop in petroleum price levels. There may be some downside effects, but overall, fracking is going to be freakin’ good for the world, even if just until the decade is over.

That’s still a good six years until 2020, which is when some doomsday economists and experts are saying that the fracking boom will reach its peak and start to decline – and which can be translated to mean that OPEC will be riding high once again.

The other argument, of course, is that the outlook for fracking producers will continue to be rosy for a good couple of decades since the amount of oil and gas trapped in shale rocks where fracking is being used in the US is beyond enormous.

Furthermore, the technology is getting better in terms of cost, although this may not drive down world crude prices as dramatically as it had in the last months, but which should continue to make fracking companies happy to stay in business.

Deepwater Malampaya

So where do we stand in all of these? First of all, we are not mere kibitzers just waiting for some good graces to fall on our heads. We all know about Malampaya, a natural gas field in Palawan that’s currently still bringing in some good revenues for our government.

Well, it’s time to do some recalculation on this, especially since the price of natural gas has been the worst hit by this recent addition of significant amounts of oil and gas from fracked shale fields.

Thankfully, the Philippines is not as dependent on its extracted fossil fuel revenues unlike some others, both OPEC and non-OPEC members. But still, a 50 percent cut is something that will hurt, not just the government coffers but also the Malampaya partners.

Worst case scenario: stopping production from the deepwater Malampaya field could be an option if the cost of bringing out the natural gas will be higher than current market levels. Now, that’s going to be really worth some big thinking.

Prosperity for many

Otherwise, the fracking boom – that is being likened in the US as similar to the period when the railway tracks were introduced, or when oil was first discovered, or to the more recent dotcom phenomenon – ushers in a period of prosperity, even if for a short time.

After the global financial crisis’ debilitating effects, US citizens find they have extra spending money saved from reduced prices of gasoline and diesel for transport, lower electricity rates from fossil fuel-fired power generating plants, and lower-priced agricultural produce because of a reduction in fertilizer (also sourced from oil) prices.

What the American citizens are already savoring now, having been the first to experience fracking’s good graces, we Filipinos should also expect to feel some benefit in the next few months.

Of course, expect a few tugs of resistance here and there (jeepney drivers have already manifested protest on the proposed fare reduction), but the dust will eventually settle at a level that would be generally acceptable to all.

And just as America and her brightest and most brilliant economic teams are trying to figure out the full extent of what this new era will bring, the Philippines will have to do its own refiguring – and more importantly, how to capitalize on this windfall.

If there is going to be a quick leveling of the bonanza from the fracking boom, then it is best to act fast by leveraging on dropping prices of goods, especially construction materials. The country stands to benefit from substantially reduced infrastructure spending because of this lower oil price era.

More opportunities stand to be squeezed from this changing economic environment.

Dirty word

The other side of this happy equation is the concern that environmental activists are raising, and this is not just about the work-related accidents that the fracking industry is experiencing or the technology that uses enormous supplies of water to flush out the oil and gas from fractured shale.

In the past era of the $100 per barrel oil, green gas emissions and the deterioration of the ozone layer were major global concerns. With the return of “cheap oil,” there could be less pressure on consumers to conserve energy, which had in the past become a major contributor to lowering pollution.

At this point, more vigilance and eagle-eyed monitoring seems to be the only option that will help influence the world not to forget Mother Earth even as she enjoys a new era of wealth and affluence.

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