Fracking and Property Rights

March 24, 2014

Fracking turned the United States into the world's largest total supplier of oil in 2013, says Gary D. Libecap, a research fellow at the Hoover Institution.

  • If you include natural gas liquids, biofuels and crude oil, the United States produced 12.1 million barrels a day in 2013.
  • That is 300,000 barrels more per day than Saudi Arabia and 1.6 million more than Russia.
  • Forty-four percent of total U.S. natural gas output is the result of shale-gas production from the Bakken Formation (North Dakota), the Eagle Ford Formation (Texas) and the Marcellus Formation (which crosses parts of West Virginia, Ohio, Pennsylvania and New York).
  • Eventually, that figure could rise to 70 percent.

Fracking is a technique that mixes water together with sands and chemicals. The mixture is injected into geologic formations that contain hydrocarbon, creating small fissures, and the hydrocarbons inside flow through the fractures. For oil and gas deposits that are not near the main well, horizontal drilling is used to reach them. This combination of techniques has been a total game changer, as the deposits would not be economically viable otherwise.

It is the United States' system of secure property rights that have enabled these new technologies.

  • In the rest of the world (other than western Canada), subsurface mineral rights are owned by governments, not individuals. Incentives, therefore, are different in those countries.
  • In the United States, with mineral rights belonging to private parties, those parties are the ones that capture the benefits from new oil and gas discoveries. On federal lands, however, the government still owns the subsurface rights.
  • But when those property rights are not secure, entrepreneurs have much less of an incentive to explore risky technologies. This is why fracking and horizontal drilling have flourished in the United States, but not elsewhere.
  • When the government owns subsurface rights, transaction costs rise. Politicians, unlike private landowners, are not direct recipients of the benefits of fracking. They are, however, motivated by interest groups. In Europe, these groups have lobbied to slow and block the use of fracking technologies.

Private mineral rights developed in the United States during the gold rush, when minerals became valuable. Local mining rules were developed throughout the West to assign private mineral rights. Those local rules were eventually incorporated into state law and later into federal mining law.

Source: Gary D. Libecap, "Three Cheers for Fracking," Hoover Institution, March 5, 2014.

 

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