Oil Prices Threatened by Fracking in the US

On Friday, March 20, the Obama administration introduced new, more restrictive regulations on gas and oil exploration using fracking, a method that injects water and sand at high pressure into slate formations, which makes it possible to release gas and oil that would otherwise be inaccessible.

The stricter regulation regarding the implementation of the method is due to environmental concerns about the contamination of subterranean water supplies and the release of gases that are potentially harmful to the atmosphere (to a lesser extent).

Fracking has put the United States at the top of the list of natural gas producers and increased oil production; it is the main reason for the surplus of those resources in the market and thus the drop in crude oil prices to levels that the industry had almost forgotten about. The fall in prices has brought benefits to energy-starved industrialized countries and to the United States, which has drastically reduced its foreign imports. However, at the same time, it has led to greater difficulties for [oil]-producing countries that have seen their oil revenue shrink by half. New investments in oil or gas exploration have been suspended or postponed, especially deep-water exploration, in the presence of ever lower crude oil prices.

The new regulations put in place by the White House are only applicable to federal land, which corresponds to 90,000 operations, or about 25 percent of U.S. production.

The industry reacted pessimistically, painting a dismal picture. The Independent Petroleum Association of America as well as the Western Energy Alliance forecast an immediate end to the “oil” boom in the country and greater challenges with the economy’s turnaround, given that, according to them, Obama imposed greater costs on them during a period of low prices. In reality, the biggest problem for the sector is that the companies already saw themselves exporting natural gas and raising international quotas. The federal government’s decision, although it did not quite reach environmentalists’ expectations, is motivating state governments and even counties to prohibit or limit exploration that uses fracking.

In the state of New York, Gov. Andrew Cuomo supported prohibition of the method, which several cities and counties in very promising zones intended to implement, extending it to the entire northern part of the state.

If that wasn’t bad news for the industry, the New York Court of Appeals rejected the appeal filed by the industry against two cities’ decision to prohibit fracking.

Conclusion: The new method that contributed to skyrocketing production in the U.S. and the drop in prices all over the world is thus legally dependent on local and state authorities, while federal directives shape production and force companies to disclose the chemical additives in the water and sand solution used to break rock very far down in the earth.

Being a state court ruling, the New York court’s decision is not binding on California, but it can be referred to and serve as the basis of a decision in that state. The new federal regulations from Washington will only be applied to federal public land, but by extension states and even cities and counties can adopt them.

Of course, nothing happens immediately. The end of fracking is not at stake, just an increase in costs and greater freedom to restrict it and refuse to grant permits.

However, if the situation were to develop, crude oil prices may recover earlier than expected and return to an intermediate price that gives some relief to consumers and producers tied by commercial exchanges.

But it’s good not to forget that American consumers love cheap fuel, and politicians love to be elected or re-elected.