What’s the Fracking problem?

Like a trendy social networking term, fracking has entered everyday conversation.  For the sake of the US economy we should all hope the trend is not fleeting….

Based on the controversial horizontal drilling technique, the energy markets have already assumed new access to large US natural gas reserves, and consequently prices for natural gas are forecasted to stay low for the foreseeable future.

Of course investors are scrambling to participate, with the largest private equity firms getting ready to put down a large bet on the success of fracking.  As one utility executive told me recently, “our electricity rate negotiation with the PUC is heavily based on fracking.”  On the corporate front, Groom Energy customers have also priced in low expected inflation for their cost of electricity for the next few years.  Which affects how they consider energy efficiency investments such as on-site generation with CHP, a gas to electricity arbitrage opportunity.

However, with uncertain, but potentially seriously negative environmental impact, the future of fracking remains unpredictable.  Concerns range from polluting water supplies to causing earthquakes (which recently led to a temporary ban in the UK.)    New interest groups are rallying to more closely regulate fracking or stop it completely.  Investors are asking companies like Chevron and Exxon to report their activities.  And after sitting on the sidelines,  the EPA is finally considering how they’ll be involved.

The problem is that the outcome has the chance to be very binary.

Should the EPA come out with a policy which legislates more oversight and compliance, the markets would be largely unaffected.

But if they determine that the technique is environmentally unsound, and temporarily suspend it (like they did for offshore drilling after the Gulf disaster), stall it like nuclear post Japan or ban it (as France is already considering,) prices for short term and long term natural gas (and electricity) would spike immediately.

While we know over the long term financial markets are efficient and will price in either scenario, the latter outcome could be a body blow the US economy doesn’t need at this point.