August 29, 2013

A Free Market Solution For Ohio Town’s Fracking Fight

By: Ken Silva

You hear that? If you’re like me — younger than 25 — you probably don’t. You’re probably tone deaf to it because you don’t even know what a real one sounds like.

But that sound you hear coming from here in the Midwest is a real-life industrial boom, brought to you by advances in natural gas drilling technologies vis-à-vis hydraulic fracking. And some people are trying to stall it before it can really have a major impact.


In case you don’t know, fracking is the process of using thousands of gallons of water to fracture the earth’s crust and capture the released methane. It’s been around for decades, but recent advances in technology made it profitable to drill in deep shales thousands of feet below the surface. Since the early 2000s, the U.S. has risen to the top natural gas producer in the world, creating thousands of jobs and bringing billions of dollars of investment to Ohio and Pennsylvania in the process. The Ohio Department of Natural Resources expects to issue permits for 3,000 fracking wells over the next three years, and a study from Cleveland State University estimates that about 65,000 jobs and $5 billion will have been created by the industry by early next year. Youngstown, once featured on John Stossell’s 20/20 in the late 1990s because of its reputation as a failing rustbelt city, is returning to prominence with major projects such as a newly built $650 million factory to create steel tubes for drilling.

Yet the sheer size and scope of these operations cause many, especially environmentalists, to pause. Horrific images of over-drilling that tears asunder the earth’s crust, bringing on 9.0 earthquakes and spilling millions of gallons of chemicals and methane into aquifers, flash across the minds of people when they see fleets of tractor trailers pulling into their sleepy little Midwest towns. While nearly everyone involved in the debate thinks nothing major like that would ever happen, there are real and documented risks involved. Those risks have many calling to ban fracking.

The Oberlin, Ohio, city council voted unanimously in a special Aug. 5 meeting to pass an ordinance directing the city to send an initiative — which will set up a “Community Bill of Rights” if passed — to the Lorain County Board of Elections.

If the initiative were simply a ban on the narrow definition of fracking (the hydraulic fracturing of rock to capture released gases) it probably wouldn’t be much of an issue for the city, as it lies far to the north and west of where of the most of the drilling is taking place in the Marcellus and Utica Shales.

The proposed Community Bill of Rights, however, has language that goes far beyond a simple drilling ban within city limits.

The bill not only bans fracking, but all oil and gas extraction and associated activities, including transportation and storage. That could potentially mean that the bill would be a legal roadblock for a 250-mile gas pipeline expected to be built near the south end of town.

Luckily for those who want to see the boom continue, the ordinance likely won’t accomplish its intended mission, said Oberlin law director Jon Clark.

“I don’t think it will be enforceable, even within city limits,” he said. Clark explained that local laws on gas and oil are preempted by state law, a legal precedent that has been upheld in multiple court decisions.

Many have argued that Oberlin can indeed ban fracking because of the principle of “home rule,” the idea that cities and towns have the right to govern their own affairs, which is guaranteed in the Ohio Constitution. But Clark said there are limitations to home rule.

“Home rule doesn’t apply to laws with statewide applications,” he said. “That may be changed by the (Ohio) Supreme Court, but it’s highly unlikely.”

The Ninth Appellate District struck down several Munroe Falls ordinances regulating drilling, saying they conflicted with state law. That case is being appealed in the Ohio Supreme Court.

Meanwhile, the debate over the pros and cons of hydraulic fracturing rages on.

The Lake Erie Landlord Association held a public debate earlier this summer featuring Ohio Oil and Gas Association vice president of operations Pete MacKenzie and former Pittsburgh city council president Doug Shields. MacKenzie argued that there is nothing inherently dangerous in the process of fracking. The chemically-laced water is pumped thousands of feet below aquifers, where most of it stays, though some flows back to the surface to be captured and stored.

The problem, as in any industrial activity, comes from accidents. A crack in a pipe casing near the surface could leak methane or fracking water into aquifers, a well could malfunction, flowback water could spill over into groundwater, and of course there could be accidents during the transportation of chemicals.

Shields concentrated on the effects of fracking on the water in Pittsburgh.

“Six million gallons of water that is, essentially, a chemical cocktail is used in a given well and only 20 percent comes back,” he said.

That 20-percent flowback gave Pittsburgh some major problems, he said.

“The wastewater was being treated in normal sewage plants,” he said. “That’s not going to take the salts, bromides, and radioactive materials out.”

The mix of bromide in the wastewater with the chlorine used to treat it produces trihalomethanes, which have been linked to cancer and birth defects, he said.

Pittsburgh no longer treats fracking as wastewater, but sends it to Ohio for storage in disposal wells.

Shields advocated for the U.S. to move away from natural gas and into renewable energy. He said this country should follow the model of Germany, which now runs on 30 percent renewables.

MacKenzie disagreed, arguing that natural gas can be a bridge from sources such as coal to renewables over the next several decades. He said natural gas — particularly from fracking — is far cleaner than other fossil fuels. Burning gas produces only about half the amount of carbon dioxide as coal, requires no surface mining, results in fewer human fatalities, and is transported through pipes rather than trucks or freight trains, he said.

A Cornell University study claims that the gas industry actually produces more greenhouse gases when methane released in the extraction process is accounted for. That study assumes methane has 105 times the global warming potential as carbon, though, which many scientists dispute.

Many people claim that fracking also poses a risk of air pollution, artificial seismic activity (earthquakes) from drilling, and has negative effects on climate change, but those issues weren’t discussed as much as water safety.

But while the current debate seems to be between people who want to greatly hinder or ban fracking altogether and those who favor the status quo, Beacon Hill Institute adjunct economist Ryan Murphy proposed a third way to reap the benefits of fracking while reducing the risks.

In an interview with Doublethink, Murphy criticized the fact that the natural gas industry is regulated by state bureaucracies, which can be corrupted.

“If we assume that people are greedy and out for their own self-interests, then it follows that state bureaucrats won’t have society’s best interests in mind and will be prone to be captured by the people they’re supposed to regulate,” he said, referring to the possibility that natural gas companies will bribe or pay off regulators to overlook their mishaps.

But he also said he isn’t in favor of banning fracking.

“You’re always going to have uncertainty,” the economist said. “But the numbers we have show that even if you have a case of poisoned drinking water or an earthquake, the social benefits far outweigh the costs,” he said. He estimated that the national consumer surplus — the difference between what consumers pay and what they’re willing to pay — from natural gas is about $100 million a year.

To reap those massive benefits but still keep large companies from running roughshod over the environment and Ohio property owners, Murphy proposed that natural gas companies should be stripped of their “limited liability corporation” status. Giving LLC status to companies encourages investment because it protects shareholders from being held liable for a company’s actions.

Murphy said this is unfair because investors in fracking can reap profits for years, then simply have the company declare bankruptcy in the event of a major disaster. This form of bankruptcy allows investors to liquidate the company’s assets but keep the profits untouched. If companies were held to strict liability standards, though, they would be better incentivized to have environmentally-safe practices.

Fracking companies held strictly liable for their actions would be forced to buy insurance since their behavior is so risky, making the insurance company the de facto regulator, said Murphy. The insurance company would be a much better regulator than a state bureaucracy could ever hope to be because unlike the bureaucracy, it has financial skin in the game.

If an insurance company miscalculates the risk of fracking activity and it leads to a natural disaster, it could lose billions of dollars. But if a state bureaucracy miscalculates the risk, the most likely thing it would see is an increase in funding, he said.

“We can ask scientists what the risks are, but we don’t have all the information. So the best thing we can do is align incentives the best way possible,” he said. “The key for good behaviors by markets is getting the incentives right, and that means privatizing both gains and losses.”

Murphy said he didn’t know whether his solution would have to be implemented on the federal or state level.

Ken Silva is a writer from Ohio. Natural gas wells image courtesy of Big Stock Photo.

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