Rocky Mountain States Natural Gas Production and Residential Prices

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$2

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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Rocky Mountain AverageResidential Natural Gas Price

Percentage of Total U.S.Natural Gas Production fromthe Rocky Mountains

Is this “environmentally friendly” drilling?

Oil volumes and probabilities for estimating undiscovered quantities. There is a 95% chance of at least volume V1 of economically recoverable oil,a 50% chance of at least V3, and a 5% chance of at least V2 of economically recoverable oil. Source: USGS 2001

V3

Volume of gas increasing

Estimates of the energy potential should be based on the economically recoverable amount of gas. Relying on technically recoverable estimates exaggerates the energy potential and the opportunity costs.

Look Before You Leap Off the Natural Gas Bridge: Lessons from the Rockies

Pete Morton, Ph.D.Director of EconomicsSenior Resource EconomistDenver, CO

October 2009

While some natural gas lobbyists complain about the costs of renewable energy, they hypocritically cite estimates of natural gas supply that completely ignore the high costs associated with extracting unconventional natural gas.

Increasing Quantities of Natural Gas

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(Per

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Supply is an economic term. If the price is too low to extract the gas, there is no supply. Estimates of technically recoverable quantities of natural gas exaggerate supply by ignoring the economic costs of extracting, producing and transporting the gas to market.

Morton, P. (2009)

Combining current prices for natural gas with the latest economic analysis by USGS scientists (1998) suggests that less than 50 percent of U.S. domestic technically recoverable natural gas can be economically recovered.

An economic analysis by RAND (2003) suggests that less than 60 percent of U.S. domestic technically recoverable natural gas is economically recoverable.

"With natural gas at $3, you can have a huge resource potential, but absolutely no way it is commercially viable,"

Arthur Johnson, an international gas hydrate consultant.

Economists may not agree on much, but we certainly agree that you have to do the math.

Morton, P. (2009)

The Hidden Costs from Oil and Natural Gas Drilling Spillover into our Communities and our Environment

Direct use costs – loss of hunting, fishing, hiking, grazingCommunity costs – increase in infrastructure costs and crime, increase risks to human health, boom-bust economy, negative impacts on hunting and recreation businesses, loss of local controlScience benefits foregone -- loss of natural areas for scientific studyOff-site costs – ozone and human health impacts, greenhouse gases, water pollution from hydraulic fracturing, noise pollution, impact on property values, visual impactsBiodiversity lost -- wildlife habitat fragmentation, loss of endangered species, increase in noxious weeds, fisheries damagedEcosystem services lost – de-watering of wells negatively impacts aquifer re-charge, wetland function, and watershed protectionPassive use benefits foregone-- loss of option, bequest and existence benefits generated by wildlands.

These hidden costs (negative externalities) are not reflected in market prices, but should be accounted for (i.e. internalized) in the economic analysis of proposals to increase the pace and scale of natural gas drilling Morton, P. (2009)

“…science tells us that greenhouse gas emissions are an externality; in other words, our emissions affect the lives of others. When people do not pay for the consequences of their actions we have market failure. This is the greatest market failure the world has seen.” Sir Nicholas Stern, UK Treasury, October 2006

Markets Fail When Hidden Costs (Negative Externalities) are Not Internalized into the Natural Gas Supply Curve

Negative Externalities & Market Failure

The Social Optimum OutputCostsBenefits

Output (Q)

PB = SB

PC

SC

Qp

External Cost

Qs

Many private firms only consider private costs and tend to ignore the hidden costs to the environment and taxpayers from their business activities. These cost are rarely internalized into natural gas and oil production decisions -- are not reflected in market prices -- leading to a market failure.

Public Costs

Private Costs

Costs Benefits

Quantity (Q)

Markets are More Efficient When the Hidden Public Costs are Internalized into the Supply Curve.

Benefits

Hidden Costs

Q2 Q1

A 2009 report from the National Research Council estimated the hidden costs from fossil fuels exceed $120 billion per year.

Morton, P. (2009)

Contact:

Pete Morton, Ph.D.Director of Economics

The Wilderness Society

pete_morton@tws.org

www.wilderness.org