Publications: The Petroleum Economics Monthly

ManuFRACturing Fossil Fuels (November 2014)

Historically, the development of nonrenewable resources has been characterized as a business with ever-increasing costs, while manufacturing is viewed as a decreasing-cost venture. This attitude regarding resource exploration and extraction has been "in vogue" among energy industry economists, geologists, policymakers, and executives for years, perhaps not surprisingly in light of how energy firms have gone about their trade. Traditional companies look to tap easy-to-reach, low-cost resources first. When these are in decline or exhausted, they search for replacement reserves, expecting them, not unrealistically, to be more difficult and expensive to produce. The idea is so basic in the oil and gas industry that it is difficult to find any discussion of the issue. The accompanying idea that energy prices must rise over time to keep exploration and production profitable follows from this view.

Manufacturing, in contrast, has a different metric. Initial output of a product is expensive and difficult. Over time, though, productivity improvements, increasing economies of scale, and innovation drive production expenses down. Fracking, or "manufracturing," has these same characteristics and as a consequence has changed and will continue to change the future of the global energy industry. This month's report provides the details and examines the implications for energy markets.

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