Two more reasons for an oil and gas boom in the U.S. – free market capitalism and private property rights

The two biggest factors driving the tremendous expansion of shale oil and shale gas production are first, hydraulic fracturing and second, horizontal drilling.

There are two more major factors that have allowed this boom to take place, as pointed out by The Wall Street Journal in their editorial, The Shale Gas Secret (behind paywall).

It’s not just that there’s an incredible amount of oil and gas in shale in the United States. There are tremendous untapped resources  here – we are tremendously blessed.

However, there’s also a tremendous amount of gas in Great Britain, France, Poland, and Ukraine. The WSJ points out:

Now compare this to Europe, which sits on an estimated 639 trillion cubic feet of shale gas yet remains heavily dependent on Russian imports. The governments of France and Bulgaria have banned fracking on dubious safety grounds, with nary any pushback from their publics.

As I previously mentioned in my post, Energy boom isn’t limited to the U.S., England has untapped gas off its shores equal to around 285 years of current consumption. That’s five times the amount on-shore. 

Ukraine has natural gas inside its borders equal to a century or more of current usage. Yet the political and economic environment in Ukraine is hostile to oil and gas exploration.  So they will continue to be controlled by the political winds between them and Russia.

Why are we seeing a boom in the U.S. but not England or Ukraine?

I suggest the WSJ editorial has hit the nail on the head.

First, free market capitalism allows individual companies to take the risk and reap the reward of exploration.

Second, private property ownership of land allows and motivates landowners to give permission to those individual companies to look for and drill new resources.

This is explained in the WSJ editorial more eloquently than I ever could in two key paragraphs:

What has given the U.S. its edge is that the early development risks were largely borne by small-time entrepreneurs, drilling a lot of dry holes on private land. These “wildcat” developers were gradually able to buy up oil, gas and mineral leases from private owners while gathering enough geological data to bring in commercial producers.

That means wildcatters can take a risk on a field by drilling a few wells. If those pay off, they make lots of money and can drill some more. Eventually other operators who are a bit larger would join in and may hit success. Eventually the big guys will jump in and we see things like Bakken and Eagle Ford.

About the landowners who get huge royalty checks:

Meantime, some of the property owners who leased their mineral rights to companies like Dvorin have received royalty checks, typically worth at least 12.5% of production value. That’s encouraged further leasing and exploration, generated popular momentum for fracking, and brought development to previously depressed regions such as western Pennsylvania and the Bakken area of North Dakota.

If you own the land, you typically own the mineral rights as well. Therefore you are motivated to enjoy your wealth. Deposits are flooding into local banks from newly rich landowners as described in this post at EagleFordShale blog.

The third and fourth most powerful drivers in our current oil boom, after fracking and horizontal drilling, are best described as:

But the deeper lesson is that this is a revolution that came about not through government planning or foresight, but through a combination of individual risk-taking and private property.

(Hat tip to Carpe Diem. Somehow I missed that editorial in the WSJ. Wish I could write headlines like this: Lessons from the U.S. Shale Revolution: It Wasn’t from Gov’t Planners, but Private Entrepreneurs.)

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