By Karl Smith, Contributor Via Brad Plumber, Eduardo Porter worries that the recent decline in carbon emissions will not last Will our carbon footprint continue to shrink? The Energy Department forecasts that CO2 emissions will tick up nearly 2 percent this year and 0.7 percent in 2014, as the economy recovers. Coal use in power plants is also expected to rebound as gas prices rise from their 2012 trough. Historical precedent is not promising. The drive for energy efficiency that started in the 1970s did not continue once oil prices fell in the 1980s; among other things, American drivers fell in love with S.U.V.’s and trucks. In 1981, the Ford F-series pickup truck became the nation’s best-selling light vehicle. In 1986, Ronald Reagan had the White House solar panels taken down. Whether Natural Gas continues to displace coal is a complex, but for the most part it hinges on to two questions: 1) How cheaply can drillers create a horizontally fractured gas well? 2) How robust is the demand for ethane and other natural gas liquids from Petrochemical Manufacturers? Cheap Drilling Traditional oil and gas wells are a long term capital investment similar to an office building.  It costs a lot to drill the well, but you continue to get a  slow stream of profits or rents for years to come. Hence, the key issues are the interest cost of financing the well and the certainty of the stream of profits. From that perspective the swings in both energy prices and interest rates during the 1970s and early 1980s was heart-stopping for drillers. Horizontial Fracking is a bit different. The enormous pressure of the shale formation sends oil and gas gushing out the well when it is first fracked. Fracked wells have been known to gush at 100 times the initial rate of an average vertical well. However, the inherit low porosity of the shale also implies that once the initial gush dies down, the flow will become a trickle. To some old-school analysts this makes fracking seem like a flash in the pan. From an big-picture economic standpoint, however, it makes fracking less like a capital investment and more like a service. You pay X for a fracked well and you get Y in oil and gas – today.  Not 20 or 30 years from now, but right now. Or as soon as you can build the infrastructure to take the fracked products to market. In recent years that has been the bottleneck. This means that well drilling and finishing costs – not financing or the future of energy prices, becomes the major determinate. Wells either pay for themselves in terms of today’s prices or they do not. George Mitchell, the father of fracking, got well costs down to about $4 per million BTU of natural gas for fracking the Barnett Shale. That made fracking economic and started the revolution. This also implies that unless new wells are much harder to drill, natural gas prices will have a hard time staying above $4 …read more
Source: FULL ARTICLE at Forbes Latest