what are the problems/issues/fiscal point in the case study (fracturing the energy market)?

CLOSING CASE Fracturing the Energy Market Joseph Schumpeter, an Austrian-born economist who emi- nations and in the location of the production of energy- grated to the United States in 1932, championed entre-intensive goods. Finally, fracking has the potential to have preneurship and free markets. Schumpeter is perhaps best major impacts on the environment and on the global quest to known for popularizing the phrase "creative destruction, the control the emission of greenhouse gases. concept that innovation-new technologies, new products, U.S.-based oil companies have been the most aggres- new ways of doing business-inevitably disrupts, supplants. sive users of fracking technology, creating drilling booms in and devalues the economic structure that preceded it. One numerous areas, including North Dakota's Bakken forma- such new technologythe hydraulic fracturing of shale and tion, Pennsylvania's Marcellus shale, and Texas' Barnett and other rocks containing oil and natural gas deposits, popularly Eagle Ford fields. The impact on the U.S. natural gas market, known as fracking-provides a perfect example of Schum- which accounts for 30 percent of U.S. electricity generation peter's concept. Fracking holds the potential to turn world and heats half of U.S. homes, has been enormous. In 2008, energy and industrial markets upside down, and to scramble natural gas was selling for $12 per million British Thermal geopolitical relations and alliances that have dominated the Units (mBTU) at the Henry Hub, a Louisiana crossroad for past half-century. gas pipelines that serves as the basis for pricing natural gas Chapter 2. Global Marketplaces and Business Centers energy and industrial markets upside down, and to scramble natural gas was selling for $12 per million British Thermal geopolitical relations and alliances that have dominated the Units (mBTU) at the Henry Hub, a Louisiana crossroad for past half-century. gas pipelines that serves as the basis for pricing natural gas Fracking involves the injection of fluids at high pres- in the United States. The boom in exploration and produc- sure into rock formations containing hydrocarbon depos- tion of shale-based gas drove the price below $2 per million its such as oil and natural gas. The fracturing fluid cracks BTU in 2012; by early 2018, the price has risen to $2.60. open new channels in the rock, creating pathways for oil U.S. production of shale-based oil has also increased, thereby and gas to flow and be captured by the driller. Although reducing U.S. imports of crude oil by a third since 2008. the technology was developed in 1947, it was little used The low price of natural gas in the U.S. market has until combined with modern horizontal drilling. Fracking impacted the location decisions of firms producing energy- became commercially significant in 1998, when it was intensive products or who use natural gas as a feedstock applied to exploit the so-called "tight" gas formations in for their petrochemical products, allowing them to under- Texas" huge Barnett Shale field. The potential reserves in price their foreign petrochemical rivals. Companies like such tight formations are enormous: China is estimated to Dow and Chevron Phillips Chemical Company are planning have 1,275 trillion cubic feet of reserves; the United States. new multibillion-dollar chemical plant projects in Texas 862 trillion: Argentina, 774 trillion; and Mexico, 681 trillion. and Louisiana. Not surprisingly, some European and Asian Even South Africa's Karoo region, a semi-desert lying chemical and petrochemical companies, such as BASF and between Cape Town and Johannesburg, may contain shale- Royal Dutch Shell, are considering building new facilities in gas reserves as large as 485 trillion cubic feet, the fifth the United States to take advantage of the cheap U.S. natural largest in the world gas. Other energy-intensive factories also benefit. Nucor Fracking is important and disruptive, in the Schumpet Corp., for instance, is constructing a $750 million facility erian framework-for at least four reasons. First, it promises in Louisiana to fabricate high-purity iron ore pellets, which new supplies of energy, lowering its cost. Second, it substan- are used as inputs in manufacturing steel, because of low tially shifts geopolitical power among the world's nations. natural gas prices. When completed, the plant will produce Third, it implies major changes in the competitiveness of 2.5 million tons of pellets a year, making it the world's second (Continued) Chapter 2. Global Marketplaces and Business Centers Russia's ability to influence Eastern and Central Euro- Poles too are concerned about protecting the quality of their pean politics may also lessen. Currently, Russia's Gazprom, water supplies. 50 percent owned by the Russian government, is the domi- Fracking has created some unexpected beneficiaries. nant supplier of natural gas to countries such as Poland and One group are Indian farmers, who grow 85 percent of the the Ukraine. At times, Russia has suspended its delivery of world's supply of guar. Because of its previously low price, natural gas to these countries to demonstrate its displeasure guar beans were often fed to cattle or used as a thicken- with their diplomatic policies. Moreover, Gazprom has tied ing agent in ice cream and catsup. (It's what makes catsup its foreign customers into long-term contracts that peg the "gloopy.") Guar, it turns out, is also a perfect thickening price of natural gas to the price of oil. But the spot price agent for fracking. When mixed with water, sand, and spe- of natural gas has fallen well below the equivalent price of cialty chemicals, the resulting fluid can be injected under oil, so Gazprom's foreign customers are trying to renegoti- high-pressure to break up shale formations and allow the ate their contract terms. The threat to Gazprom's gas flows trapped hydrocarbons to escape. The U.S. oil industry and the geopolitical clout of Russia would grow should the consumed an estimated 300,000 tons of guar (about one- United States choose to export significant volumes of lique third of total guar production) in 2012, leading to a 15-fold fied natural gas. increase in the price of guar beans. These price increases Fracking impacts the quest to mitigate global climate have benefited poor Indian farmers in Rajasthan, who now change and the emission of greenhouse gases. On the one can afford to construct new brick houses, after living in hand, by lowering its price, fracking encourages the use of mud huts for decades, although it has disadvantaged Indian natural gas to generate electricity in place of coal. Natural cows-at these high prices, few farmers are willing to feed gas releases fewer greenhouse gases per unit of electricity guar beans to their herds. And catsup and toothpaste pro- produced than does coal. On the other hand, fracking requires ducers are busily seeking alternative thickeners. Similarly, a lot of water: 4 million to 5 million gallons per well. In addi- modern fracking technology uses enormous amounts of tion, oilfield service companies blend mixtures of special sand-millions of pounds per well. This has created a boom chemicals and thickening agents with water to create their in the sand market and benefitted the railroads who haul it fracking fluids. Environmentalists are concerned that these from Midwestern sand mines to drill sites in West Texas