Is U.S. Natural Gas Boom Due to Good Government?

Photo by Dru Bloomfield, some rights reserved.

The economics of the energy industry are perennially unstable due to resource availability and regulatory uncertainty, and we are barraged with data about the latest developments every week. Haynes and Boone just released a memo detailing that oil and gas companies paid landowners $21 billion in 2010, and we have written about the average cost of producing oil in the Arctic versus in the Gulf of Mexico and West Africa. Often it is useful to look at all these developments with a different perspective in mind.

Today’s post looks further at the reasons for the U.S.-led surge in shale drilling, considering the arguments of BP’s chief economist that stable property rights in addition to “open access and sound government” – as opposed to dumb luck and fortunate geology – unleashed the recent boom in natural gas extraction. Evidence he offers to support this claim is that natural gas drilling has not taken off outside North America. India and parts of Latin America and Africa also have generous supplies of accessible shale gas, but the market pricing of energy and private-sector drive in the U.S. have enabled natural gas development to become a natural gas boom unlikely to be copied elsewhere anytime soon.

The answers to the questions these politically-driven tidbits touch on will require some serious economic analysis, but still they are a useful reminder that geology is not the only factor in the cost of energy extraction. While production costs in the Arctic may be so much higher than in West Africa for reasons of the physical difficulty of drilling, Canadian and American market pricing, infrastructure, and private property rights certainly drive some of the natural gas industry’s ability to expand so quickly.

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