President Obama has been on a kick to promote natural gas production. He said in his State of the Union address, “And by the way, it was public research dollars, over the course of 30 years, that helped develop the technologies to extract all this natural gas out of shale rock—reminding us that government support is critical in helping businesses get new energy ideas off the ground.”
There are two very big problems with this statement. First, it makes it sound as if the government invented the technology, commercialized it, and handed it over to private companies. Second, it assumes that if the government hadn’t invested in natural gas technologies, we wouldn’t be where we are today in terms of natural gas production. Both are far from the truth.
Well before the government invested in natural gas technologies, it was the private sector that established and developed hydraulic fracturing (or “fracking”), a process by which producers inject a fluid, composed of 99 percent water, and sand into wells to free oil and gas trapped in rock formations. Its roots go as far back as the 1860s, and in the 1940s, Stanolind Oil and Gas Corporation began studying and testing the method, with a patent issued in 1949 and a license granted to Halliburton to frack on two commercial wells. In an overview of the history of fracking, Carl T. Montgomery and Michael B. Smith of NSI Technologies write:
In the first year, 332 wells were treated, with an average production increase of 75%. Applications of the fracturing process grew rapidly and increased the supply of oil in the United States far beyond anything anticipated. Treatments reached more than 3,000 wells a month for stretches during the mid-1950s. The first one-half million-pound fracturing job in the free world was performed in October 1968, by Pan American Petroleum Corporation (later Amoco, now BP) in Stephens County, Oklahoma.
Government involvement came years later. The Department of Energy partially funded data accumulation, microseismic mapping, the first horizontal well, and tax credits to extract unconventional gas. But in the driver’s seat was George Mitchell, who invested millions of his own money in research and development for fracking and horizontal drilling. His company’s geologist, Jim Henry, first identified Barnett shale as a possibility for more energy. Mitchell spent between $7 million and $8 million of his own money trying to successfully extract shale gas and eventually made it economically viable. He is behind the shale gas revolution, not the government.
Saying that without government spending we would not have the natural gas production we have today is like saying without the grocery store down the street from your house, you would starve. You find another way to get food. If shale gas production is economical, private companies would have found a way to make it work. The Houston Chronicle reports that “Dan Steward, a former geologist and vice president with Mitchell Energy who wrote a history of the company’s development of the Barnett shale, said industry eventually would have figured out how to make shale gas profitable. ‘But George Mitchell is responsible for making it happen right now, when we need it,’ Steward said.”
The government’s involvement merely supplants industry dollars with taxpayer dollars. It’s not a matter of congratulating government on dollars well spent if they aid a commercial success or blasting them for wasting taxpayer dollars when a government-propped industry files for bankruptcy. It’s that good economic ideas will find their way to reach the market while bad ones will fall by the wayside. Either way, the use of taxpayer dollars does not make sense.
If venture capitalists and businesses are overlooking investment opportunities in energy technologies, they are overlooking them for a reason. The United States enjoys robust domestic energy resources (nuclear, natural gas, oil, coal, hydroelectric, wind, and solar). The energy market can be diverse and competitive without government interference. The opportunity to profit off of the domestic and global demand for electricity and transportation fuels is sufficient incentive for the market to invest in these technologies.
No evidence exists to suggest that the Department of Energy is better equipped to make investment decisions or commercialize technologies when the private sector chose not to invest, and no evidence exists to suggest they are a driver behind commercializing an energy technology.
President Obama says government support is critical in driving new energy technologies forward. It’s not. It’s wasteful.