Our Perspectives on the Latest Issues
At one point or another we all likely received one of those emails. A Nigerian prince, or some attorney, bank officer, or minor government official in a far-off country has millions of dollars, gold, or diamonds stuck in a bank and they need your help to get it out. In return they promise, for just a little help, a large chunk of the money will be ours to keep.
If one responds, the scammer may first ask for something that a legitimate transaction would require, like signatures on official looking papers or copies of identification documents, but that won’t be enough. An issue will come up and they will need money to pay for wire transfers, court fees, or even bribes. The amounts may be small compared to the millions they promise, at least at first, but more issues will arise requiring even more money. Eventually the victims either get wise to the scam or run out of money and the fraudsters disappear without a trace. These are known as advance fee scams and have been perpetrated, in one form or another, for many years.
One of the reasons these scams work is that, in addition to preying on greed, scammers also rely on some quirks of human psychology—in particular the sunk cost fallacy. This same effect causes people who lose $1,000 at a casino to bet another $1,000 in a desperate attempt to win their money back. Economists say “rational” people should cut their losses and move on, but casino owners count on that being much harder than it sounds.
Governments are susceptible to this too. Perhaps the most famous case was the British and French governments continuing to spend money developing the supersonic aircraft Concorde long after they knew “there was no economic case for proceeding with the aircraft.” Part of their rationale for going forward anyway was not wanting to lose the “26,000 jobs” that would be needed to build the 160 to 250 aircraft they were planning to sell. While the most pessimistic view at the time said they might only sell around 60 aircraft, they didn’t even get close to that number. In reality only 14 Concordes were built for commercial service and the 26,000 jobs never materialized.
Sunk Costs in the Fracked Gas and Petrochemical Industry
When the shale gas industry came to Pennsylvania, industry lobbyists told our legislators how profitable it would be. Not only did they promise 200,000 jobs, they repeatedly referred to a severance tax they fully expected to pay and all the economic benefits the industry would bring to our communities. The only thing they needed was a little help: faster permitting, weak regulations, poor oversight, low-cost bonding, advantageous zoning rules, the doctor gag rule, eminent domain benefits, and the list goes on. The courts disallowed some of the early gifts to the industry, but many remain and Pennsylvania still doesn’t levy a severance tax (instead it charges a more industry beneficial, declining impact fee).
Investors were taken with the promise of riches and, as the money flowed in, the drilling increased, peaking at almost 2,000 wells drilled in 2011 alone. Even as the drilling continued to grow, it was clear supply was outpacing demand. The gas was selling for $9.00 per thousand cubic feet (Mcf) in 2008 but was under $6.00/Mcf by 2011 and slid down below $3.50/Mcf in 2020.
As the glut hit and gas prices dropped, the fracking industry faced a wave of bankruptcies and contractions, some companies got out of the business altogether—the promised jobs and prosperity didn’t materialize. Between 2008 and 2019—in spite of the industry increasing production and bringing in tens of millions of dollars—personal income and jobs in the region didn’t even keep pace with the growth nationwide. By 2018, there were only 4,500 jobs reported in the industry.
While gas jobs didn’t grow nearly as much as promised, the industry was spectacularly effective at killing coal jobs. Since 2007, competition from the gas industry caused eleven coal-fired power plants to shut down and five more have announced they will close or convert to gas leaving only one large conventional coal plant in Pennsylvania yet to announce its end.
Of course, the fracked gas industry had a solution for these job losses. In addition to the existing handouts on the supply side (i.e. lax regulations, no severance tax, etc.), they just needed a little more help—this time on the demand-side. If we just help create new markets for their gas, they claim, surely this time things will work out. Faster permitting and fewer regulations were still high priorities, but the industry also secured well over a billion dollars in demand-side subsidies for a new cracker plant to turn fracked gas into plastics and the recently announced gasoline refinery.
Having the state offer tax credits to companies that locate here is nothing new, but the petrochemical companies didn’t want to compete with other industries for the handouts. Enter the Pennsylvania Resource Manufacturing tax credit and the similar Local Resource Manufacturing tax credit—special deals only available to companies that buy gas from the fracking industry. But even that isn’t enough. Our legislature recently held hearings to rail about how failing to invest even more in fracked gas infrastructure, pipelines, and manufacturing technologies “will devastate Pennsylvania’s economy,” raise electricity prices, and various other claims.
Remember Supply and Demand?
The petrochemical industry and their friends in Harrisburg seem happy to have the citizens of Pennsylvania subsidize both the supply and demand side of gas operations, but what exactly are we trying to accomplish?
The glut of gas flooding the market during the fracking boom resulted in supply exceeding demand. That drove prices down and, as electricity generation shifted to this cheaper gas, electricity prices stayed flat too. Adjusted for inflation, average electricity prices in Pennsylvania last year were about the same as they were in 2005. In the process, we’ve gone from less than 5% of our generation coming from gas before the fracking boom to more than 52% in 2020.
Now, with demand beginning to catch up with supply, prices are once again trending upwards. Henry Hub prices in October 2021 were $5.51 per million BTU—a price we haven't seen since 2014. Not surprisingly, with our over-reliance on gas for generation, electricity prices are very sensitive to gas prices too and we are seeing sharp increases as well.
Fracked gas cheerleaders in the state legislature want to blame increasing consumer prices on environmental advocates who oppose massive subsidies for projects like Royal Dutch Shell’s cracker plant in Beaver County, or the recently announced Nacero gasoline refinery in Luzerne County. Others openly advocate for increased gas shipments to Europe and other places. The fracked gas industry might be happy with those ideas, but how exactly is subsidizing projects that increase demand a win for consumers?
Anyone who took Economics 101 should recognize increasing demand will raise prices, not lower them. If we really want lower consumer prices, we should focus on improving energy efficiency and building new clean resources like wind and solar. That will not only control prices by lowering the demand for fracked gas, it will also protect our economy from over-dependence on fossil fuels and help address the growing climate crisis.
Looking back to where we started.
In much of the current gas-industry talking points, we’ve lost track of where we started. At the beginning of the shale boom we were told about the riches that were right at our fingertips if we just gave the industry a little help. The industry took their profits, but didn’t deliver the promised thousands of jobs and booming economy. Now we are told if we don’t give them more, we’ll never see those jobs and all the money we’ve already poured in will be wasted.
If it was a self-described “Nigerian Prince” making those claims, we’d (hopefully) be wary of the advance fee scam and the sunk-cost fallacy and cut our losses.