A Fracking We Will Go

Did you happen to catch Promised Land, the film with Matt Damon, Frances McDormand and John Krasinski? Judging by the film’s paltry revenues and lone reference in Misix's Movie Quality Index, I’m guessing you passed on it. Admittedly, this blogger missed it as well, but still has good intentions to see the film. Why? Well, besides the star-studded cast, the screenplay grapples with the intriguing topic of hydraulic fracturing, or fracking, and the societal tensions surrounding it.

First off, an explanation of fracking is in order. Fracking is a modified mining process that allows hard-to-get oil and natural gas embedded in layers of shale rock miles below the Earth’s surface to be extracted. The multi-step process begins by drilling an L-shaped borehole thousands of feet underground to reach the levels of shale rock. Concrete and steel are then used to reinforce and seal the borehole. Next, shockwaves from conductors and millions of gallons of water, sand and chemical mixture are used to fracture the shale rock in order to release the natural gas and oil. Extraction then occurs until the well runs dry, wherein the process begins anew. This cycle is repeated until the well can no longer be fracked to produce more fuels.

Fracking has proven to be highly efficient and successful. According to the New York Times, in 2011, the U.S. imported 45% of the liquid fuels it used, down from 60% in 2005, largely because of increased fossil fuel production resulting from fracking. Proliferation of fracking is expected to continue, boosting domestic fossil fuel supply and applying downward pressure on prices of natural gas, oil, and gasoline. The Energy Department estimates domestic oil production could increase over 20% to 7 million barrels a day by 2020, and more liberal estimates from The International Energy Agency predict the United States will overtake Russia as the leading producer of natural gas by 2015, outpace Saudi Arabia in oil production by 2017, will be a net exporter of oil by 2030 and energy “self-sufficient” in about two decades.

Such projections have profound effects on the economy, foreign policy and national security. Cheap energy means lower input costs for firms, which may drive profitability, job creation and a resurgent economy. Much like the economic boom of the 1990s, the U.S. economy could experience economic expansion partially as a result of inexpensive energy. Additionally, with energy security, U.S. foreign policy could abstain from geopolitical gamesmanship. Foreign policy could be direct, transparent and less involved, as energy needs are eliminated from political decision making. National security would benefit as a result of the reduced U.S. foreign footprint.

However, fracking does not come without costs. Fracking has been contested by many environmental groups as detrimental to local water, air, climate, communities and public health. The main contention is that the chemicals used during the fracking process can leach into aquifers, introducing carcinogens and pollutants into local water supplies. Environmental coalitions also cite negative externalities associated with fracking – air pollution, decreased land values, sustainability issues, and toxic waste – as reasons to oppose the process. Additionally, nations such as France and Bulgaria have already banned fracking, supporting environmentalists’ claims. Yet oil companies contend that the mining process is safe and water aquifers are protected from the pressurized water, sand, and chemical mixtures by steel and concrete barriers. The competing claims of environmentalists and industry proponents are currently being researched by the EPA, with an expected ruling due in 2014.

Forthcoming years will likely bring escalation of the fracking debate. Economic and environmental tradeoffs will be weighed, studied, researched and quantified by proponents and opponents. But fracking does not need to be dualistic. There are clear economic and political benefits to achieving energy independence, just as there are potential significant costs inherent to the mining process. In the coming years, hopefully we can find a middle path, allowing the U.S. to reap the rewards of fracking while minimizing costs.

The Whole World is Watching

Two billion people worldwide love the sport Americans love to hate. Football (colloquially: soccer) has traditionally been deemed unpalatable by the American audience. Soccer in the United States has customarily maintained a dreadful reputation, received underwhelming support, been the target of mockery from certain mainstream television programs, suffered belittlement from “traditional” sports fans, and produced terrible displays of quality football in its professional league. Yet the sport perseveres. In fact, soccer is the fastest-growing sport in the United States and has the potential to unseat more traditional, Americanized sports to become the nation’s most popular.

Passion for a particular sport begins at a young age, and soccer organizations have excelled at exposing children and adolescents to soccer in order to maximize their future engagement with the sport. Growth in soccer’s youth development programs has been astounding. According to the United States Soccer Federation, involvement in youth soccer programs in the United States has doubled since 1990, growing to over 4 million youth soccer players. Participation in high school soccer programs has also shown outstanding promise. Using data from the National Federation of State High School Associations, from 2007-2012 the number of soccer participants grew by 7.2%, whereas football, basketball, and baseball/softball (combined participation), fell by 1.2%, 3.1%, and 1.2%, respectively. Soccer’s growth rate even exceeded the overall growth rate of all high school sport participation (3.5%). Not only is soccer growing faster than the mean growth of all high school sports participation, but it is doing so while other major sports are declining. Additionally, significant soccer program expansions have occurred at the collegiate level. The number of women’s collegiate teams has jumped 115 percent since the United States hosted the World Cup in 1994, and the number of men’s teams rose 27.6 percent over the same period, according to the NCAA.

Granted, participation in sports does not directly translate into the sport being commercially successful. For example, track and field is among the most prolific and participated-in high school sports but does not sustain its popularity at the collegiate or professional level. However, soccer appears to be bucking the trend of a sport children play and adults resent. Recent accomplishments of the U.S. Men’s and Women’s National teams (USWNT gold medal in London, USMNT World Cup 2010 run, ESPY Awards ) have skyrocketed the sport’s popularity and established the legitimacy of the sport in the American psyche.

With these accomplishments, Major League Soccer (MLS) has slowly been increasing its reputation as a genuine premier soccer league. The quality of play has been increasing, and with it, the fan base, match attendance, and TV viewership. Attendance to 2012 MLS matches reached a record high for the second consecutive year and boosted soccer ahead of basketball to become America’s third highest attended sport, with 17,872 average spectators per match. NBC recently dedicated a cable channel to soccer, and viewership has slowly risen as interest in the sport climbs. Sponsors have recognized the growing soccer consumer base and associated economic opportunity in America. Two World Cup sponsors — Castrol and Continental Tire — have signed multiyear, multimillion-dollar league sponsorships with MLS within the last two years. Ongoing growth and synergy with U.S. soccer has incentivized a push for further expansion of the league, and MLS has responded by indicating it will add three more teams in the next seven years.

As the MLS continues to expand, it is likely that soccer will continue its ascendancy in the United States. Perhaps it is a bold statement to suggest soccer could unseat American football or baseball in the future, and it may not happen in this author’s lifetime. But the gameplay, tactics, drama, and impassioned announcers  create a riveting sport dynamic which is hard to ignore. So give soccer a shot. And twenty years from now when you’re sitting down on Sunday at 12 p.m. to watch an enthralling soccer match, just remember, the whole world is watching. And now you are too.

Broken Windows and Hurricane Sandy

"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

You hear the same consolation after every natural disaster. The financial and emotional destruction of Hurricane Sandy was terrible. Thousands of homes and vehicles were destroyed, leaving many people out on the street. New York City ground to a halt and its infrastructure will require repairs. But if there is a silver lining in it all, it is that the destruction will provide a boost to the economy in the form of new construction and infrastructure spending that otherwise would have not taken place.

There is no shortage of people making this statement. But is it true? Will the hurricane be a net improvement to the economy?

Proponents of the argument say the cleanup and reconstruction spending will put a dent in or perhaps even exceed the estimated $50 billion of damages. This includes increased spending on construction, furniture, house wares and automobiles which would otherwise have not taken place. The bump in demand could even cause a short-term rise in employment in these industries. And higher employment means more people in the area have money to spend, which ripples through the local economy.

This sounds like all silver lining and no cloud. In fact, if you took this argument to its logical conclusion, you would say that natural disasters are actually good for the economy, boosting spending and circulating money. So why not go out and vandalize some cars to boost GDP? According to 19^th century political economist Frederic Bastiat the answer lies in opportunity cost.

In his 1850 essay “That Which is Seen and That Which is Unseen” Bastiat tells the story of a shopkeeper whose careless son accidentally breaks a window in his shop. The shopkeeper is furious with his son, but spectators to the incident try to console the shopkeeper by telling him to consider the glazier who makes his living repairing windows. Though the broken window is unfortunate, it encourages trade to the glazier for the amount of the broken window.

Bastiat goes on to say that before you arrive at the conclusion that breaking windows is a good thing, consider that which is unseen. The shopkeeper pays for the broken window, and thereby cannot use that money to pay for something else. Perhaps he was planning on replacing his shoes, but he no longer does so because he must pay for the broken window. The local economy is no better off: true, the glazier has benefited, but the shopkeeper is poorer by the amount he paid the glazier, and just to return to the state he was in before the window was broken. The shoe-maker is worse off because the shopkeeper doesn’t buy a new pair of shoes. And worst of all, a window is now broken.

At best, this scenario simply represents a shift of economic resources from one industry to another. Returning to the topic of Hurricane Sandy, the construction and automotive (and glass repair) industries will benefit as people repair and replace their homes and cars. But businesses, homeowners and insurance companies will still be losers. So will be the industries on which homeowners and businesses would have spent the money that is now appropriated to fixing damages. 

I can see the gears in your head spinning. What if the shopkeeper wasn’t going to spend that money on a new pair of shoes? What if he was going to keep it tucked under his mattress? Wouldn’t it be a net benefit for the economy if he was forced to spend it to replace a window? Similarly, if households and businesses were planning on hording their cash wouldn’t it encourage economic growth if they instead used it on repairs?

It may be true that this instigates consumers to start making purchases that they would not have otherwise. But that doesn’t mean that the hurricane was a net benefit to the economy; it was only the catalyst that spurred people to spend. It would have been much more beneficial for there to be no hurricane damage and people to spend their money on improvements instead of repairs. And remember that although increased spending on repairs might increase economic growth in the short term, it still leaves consumers and businesses less money to use in the future; they may not have been ready to spend it now, but that doesn’t mean they wouldn’t six months or a year from now.

And lastly, it is important to distinguish production from wealth. While production might rise due to the increase in spending, overall wealth is still lower (you have one less window than you did before). No matter which way you cut it, breaking a window doesn’t fix the economy.