Prospect Theory
Prospect Theory is probably the most important piece of literature in behavioral finance. The conclusions made in prospect theory underlie a lot of aversions and biases, which have been discussed in different articles. Hence, in order to understand all those biases and the behavioral finance theory in general, it is important to understand what the […]
Commercial Banks and Branch Banking
The business model behind commercial banking practice has completely changed over the years. Earlier, commercial banks were heavily dependent upon branch banking. Branches that served corporate customers were thought of as being an asset. As a result, it was common for corporate banks to advertise these branches to prospective clients. However, over the years, the […]
What are Common Size Statements ?
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Constraints and Contribution Margin Analysis
Hidden Assumption: The cost volume profit analysis has a rogue assumption. This rogue assumption believes that the cost volume profit analysis is completely scalable. We know that this is not the case. We operate in a finite world and have finite resources. We show this in our analysis when we write down the relevant range […]
Investment Banking and Delisting
It is common knowledge that investment bankers help a company when they want to list their shares on the stock exchange. This process is called listing, and there are hundreds of companies that undertake this process every year. However, the opposite of this process also happens. This means that companies that are already publicly listed […]
The press releases by the United States oil companies will have you believe that fracking is the best thing that has been discovered since “fire”! The newspapers are full of praise for the new technique and how it is likely to bring back the glorious days when America was self-reliant with regards to energy.
However, as it turns out, this glory comes at a cost. There are a lot of arguments against the ability of the fracking technique to survive in the long run. In this article, we will have a closer look at the ugly side of fracking.
Some of the major disadvantages of the use of fracking are as follows:
The long-term economics of the oil industry makes it more favourable to follow the old technique than to follow fracking. For instance, wells drilled using the old technique have an average life of over 20 years. Each year, the oil production drops by around 5% or so. Therefore, once the initial drilling has been done, the oil can be extracted for the next 20 years without additional investments. Only working capital costs need to be incurred to keep the operation running.
In contrast, the wells drilled using the fracking technique, are very short lived. Firstly, a huge amount of capital equipment is required for the drilling of such wells. Then once the wells are drilled, the production declines by 70% in the very first year and then another 50% in the next year. Therefore, over a period of two years, the well runs dry! This necessitates the need to drill more and more wells every year only to maintain production at the same rate! Therefore, over the long run, the fracking process turns out to be more capital intensive as well as more tedious. It is, therefore, unlikely that fracking will ever become the predominant method for extracting oil.
All states in which the process of fracking is being conducted on a large scale have reported destruction of their road infrastructure. Fracking involves huge and heavy equipment to be moved around from place to place. When such equipment is hauled on the roads, night and day, the roads tend to get damaged. The roads were created keeping the weight of vehicular movement in mind. The weight of massive equipment is much higher than the weight of expected traffic, causing the roads to crack.
The states are therefore in effect subsidizing the fracking industry. In a free market, the oil companies would have to recognize the depreciation of the roads as an expense and pay compensation. However no such compensation is paid since the roads are owned by the state.
The tax revenue that the states generate from fracking is much lesser than the amounts they have to spend in order to rebuild the roads and maintain the infrastructure.
For instance, the state of Pennsylvania has received only $204 million in the form of taxation from companies that use the fracking technique. However, estimates suggest that Pennsylvania has had to spend close to $3.5 billion to repair the wear and tear on the roads as a result of usage by the oil industry.
Therefore, if fracking were to operate in a truly free market, the price would rise much higher, and it would become an unviable operation.
The fracking process requires the industry to use a blend of chemicals called “slickwater”. These chemicals cause the rocks to crack, and this is when natural gas is released. However, these chemicals have dangerous side effects which simply cannot be ignored.
A byproduct of the fracking technique is the creation of fracking waste. This waste is extremely harmful since it is known to be laden with carcinogens. Also, it has been found out that this waste tends to seep into ground water reserves in a given area putting the entire population at risk. At the present moment, since the fracking activity is low, the concentration level of such carcinogenic waste in drinking water is not dangerously high. However, if the practice of fracking were to become widely used in the future, serious health hazards could result from it.
Another byproduct of the fracking technique is the radioactive waste that it creates. Experts state that every rock does have some amount of radioactive material. When the fracking process is completed, and the rocks are decomposed, this radioactive waste reaches the land surface creating serious safety hazards. Once again, this problem will multiply if the fracking process were to be widely used.
Hence, fracking may or may not economically viable. That question can still be debated. However, it is certain that fracking is not an environmentally acceptable way to meet the planet’s energy needs unless the process undergoes a drastic change.
Even today, North American companies are trying to replicate the fracking process in European countries and even in South America. However, they are facing stiff opposition from environmentalist organizations like Greenpeace.
Any particular site can only support fracking for a limited amount of time. After a few years, all the oil has been extracted and the industry simply has to shift its base to a newer location. As a result, fracking creates a boom and bust economy for the local population. When oil industries set up shop, the local economy, real estate and the employment rate starts booming.
However, such a boom is extremely short lived as the environmental hazards of fracking leave behind polluted and ravaged landscaped. The real estate rentals experience a substantial drop in value and so do the property prices leaving the local economy in disarray.
After a few early bad experiences, the senators of many states have become wary of the risk of unpopularity that they run if they are seen as being sympathetic to the fracking industry.
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