What environmental concerns does widespread use of fracking create? What is the appropriate tradeoff between environmental concerns and economic growth?

Joseph Schumpeter, an Austrian-born economist who emigrated to the United States in 1932, championed entrepreneurship and free markets.
Schumpeter is perhaps best known for popularizing the phrase “creative destruction,” the concept that innovation—new technologies, new products, new ways of doing business—inevitably disrupts, supplants, and devalues the economic structure that preceded it. One such new technology—the hydraulic fracturing of shale and other rocks containing oil and natural gas deposits, popularly known as fracking—provides a perfect example of Schumpeter’s concept. Fracking holds the potential to turn world energy and industrial markets upside down, and to scramble geopolitical relations and alliances that have dominated the past half century.
Fracking involves the injection of fluids at high pressure into rock formations containing hydrocarbon deposits such as oil and natural gas.
The fracturing fluid cracks open new channels in the rock, creating pathways for oil and gas to flow and be captured by the driller. Although the technology was developed in 1947, it was little used until combined with modern horizontal drilling. Fracking became commercially significant in 1998, when it was applied to exploit the so-called “tight” gas formations in Texas’ huge Barnett Shale field. The potential reserves in such tight formations are enormous: China is estimated to have 1,275 trillion cubic feet of reserves; the United States, 862 trillion; Argentina, 774 trillion; and Mexico, 681 trillion. Even South Africa’s Karoo region, a semi-desert lying between Cape Town and Johannesburg, may contain shale-gas reserves as large as 485 trillion cubic feet, the fifth largest in the world.

Fracking is important—and disruptive, in the Schumpeterian framework—
for at least four reasons. First, it promises new supplies of energy, lowering its cost. Second, it substantially shifts geopolitical power among the world’s nations. Third, it implies major changes in the competitiveness of nations and in the location of the production of energy-intensive goods. Finally, fracking has the potential to have major impacts on the environment and on the global quest to control the emission of greenhouse gases.
U.S.-based oil companies have been the most aggressive users of fracking technology, creating drilling booms in numerous areas, including North Dakota’s Bakken formation, Pennsylvania’s Marcellus shale, and Texas’
Barnett and Eagle Ford fields. The impact on the U.S. natural gas market, which accounts for 30 percent of U.S. electricity generation and heats half of U.S. homes, has been enormous. In 2008, natural gas was selling for \($12\) per million British Thermal Units (mBTU) at the Henry Hub, a Louisiana crossroad for gas pipelines that serves as the basis for pricing natural gas in the United States. The boom in exploration and production of shale-based gas drove the price below \($2\) per million BTU in 2012; by early 2018, the price has risen to \($2.60.\) U.S. production of shale-based oil has also increased, thereby reducing U.S. imports of crude oil by a third since 2008.
The low price of natural gas in the U.S. market has impacted the location decisions of firms producing energy-intensive products or who use natural gas as a feedstock for their petrochemical products, allowing them to underprice their foreign petrochemical rivals. Companies like Dow and Chevron Phillips Chemical Company are planning new multibillion dollar chemical plant projects in Texas and Louisiana. Not surprisingly, some European and Asian chemical and petrochemical companies, such as BASF and Royal Dutch Shell, are considering building new facilities in the United States to take advantage of the cheap U.S. natural gas. Other energy-intensive factories also benefit. Nucor Corp., for instance, is constructing a \($750\) million facility in Louisiana to fabricate high-purity iron ore pellets, which are used as inputs in manufacturing steel, because of low natural gas prices. When completed, the plant will produce 2.5 million tons of pellets a year, making it the world’s second largest. U.S.
Steel and Austria’s Voestalpine are considering similar ventures, while Midrex Technologies Inc., the manufacturer of the furnaces used to make pellets, is expanding its capacity to take advantage of its customers’
growth.
Fracking also has geopolitical implications. Natural gas prices are much higher outside the United States. In Europe, prices average \($12;\) spot prices in Asia often reach \($20.\) Liquefying natural gas, transporting it in specially designed ocean-going vessels, and then regasifying it can cost \($3\) to \($5\) per million BTU. Therefore, the potential profits for exporting U.S.
natural gas are huge. The aggressive exploitation of tight shale fields in the United States suggests that the United States may become a net energy exporter within a decade or two, thereby reducing U.S. reliance on Middle Eastern oil. If so, the political clout of Middle Eastern petrostates may weaken. Moreover, should oil prices decline, the threat of domestic unrest may increase there. Some military experts believe that the United States will reduce its military presence in the area; conversely, European countries may have to become more concerned about protecting their energy security—currently they benefit from being under the U.S. military umbrella. China too may increase its regional military presence as Middle Eastern energy becomes more important to its economy. Yet China also has huge shale gas reserves—an estimated 1,275 trillion cubic feet. If these fields are developed, China becomes less vulnerable to its tankers transporting oil from the Middle East being harassed by the U.S. Pacific fleet. Russia’s ability to influence Eastern and Central European politics may also lessen. Currently, Russia’s Gazprom, 50 percent owned by the Russian government, is the dominant supplier of natural gas to countries such as Poland and the Ukraine. At times, Russia has suspended its delivery of natural gas to these countries to demonstrate its displeasure with their diplomatic policies. Moreover, Gazprom has tied its foreign customers into long-term contracts that peg the price of natural gas to the price of oil. But the spot price of natural gas has fallen well below the equivalent price of oil, so Gazprom’s foreign customers are trying to renegotiate their contract terms. The threat to Gazprom’s gas flows and the geopolitical clout of Russia would grow should the United States choose to export significant volumes of liquefied natural gas.
Fracking impacts the quest to mitigate global climate change and the emission of greenhouse gases. On the one hand, by lowering its price, fracking encourages the use of natural gas to generate electricity in place of coal. Natural gas releases fewer greenhouse gases per unit of electricity produced than does coal. On the other hand, fracking requires a lot of water: 4 million to 5 million gallons per well. In addition, oilfield service companies blend mixtures of special chemicals and thickening agents with water to create their fracking fluids. Environmentalists are concerned that these chemicals can damage water supplies, and the unwillingness of companies to disclose the chemicals used in their proprietary fracking formulas heightens their suspicions.
European voters remain divided over fracking. France, Germany, and the Netherlands have a moratorium on fracking. In environmentally conscious Germany, citizens face an unhappy choice. Many Germans are concerned about the potential contamination of underground water, as are its world-famous breweries. Yet after the Fukushima nuclear reactor fiasco following the 2011 tsunami that battered northern Japan, Chancellor Angela Merkel decreed that Germany would gradually shutter all of its nuclear power plants and increase its reliance on solar and wind energy. By 2020, Germany will close six nuclear-powered facilities. To fill in the gaps, Germany is increasingly relying on coal-generated electricity, which is dirtier than natural gas. Accordingly, German carbon dioxide emissions have begun to rise, undercutting Germany’s commitment to reduce its greenhouse gas emissions. As a result of subsidies for solar and wind power, electricity prices have risen 40 percent in Germany since 2008 and are nearly 15 percent higher than in the rest of the EU, annoying residents and threatening the competitiveness of Germany firms. Poland, which has Western Europe’s largest reserves of shale gas, confronts similar tradeoffs. If developed, Poland would be freed from dependence on using coal for power generation, which currently accounts for 95 percent of its electricity. It would also reduce the country’s dependence on Russian natural gas. Yet Poles too are concerned about protecting the quality of their water supplies.
Fracking has created some unexpected beneficiaries. One group are Indian farmers, who grow 85 percent of the world’s supply of guar.
Because of its previously low price, guar beans were often fed to cattle or used as a thickening agent in ice cream and catsup. (It’s what makes catsup “gloopy.”) Guar, it turns out, is also a perfect thickening agent for fracking. When mixed with water, sand, and specialty chemicals, the resulting fluid can be injected under high-pressure to break up shale formations and allow the trapped hydrocarbons to escape. The U.S. oil industry consumed an estimated 300,000 tons of guar (about one-third of total guar production) in 2012, leading to a 15-fold increase in the price of guar beans. These price increases have benefited poor Indian farmers in Rajasthan, who now can afford to construct new brick houses, after living in mud huts for decades, although it has disadvantaged Indian cows—at these high prices, few farmers are willing to feed guar beans to their herds. And catsup and toothpaste producers are busily seeking alternative thickeners. Similarly, modern fracking technology uses enormous amounts of sand—millions of pounds per well. This has created a boom in the sand market and benefitted the railroads who haul it from Midwestern sand mines to drill sites in West Texas.