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  • Martin Fridson, CFA

Fracking: Proposed Ban and Investment Implications

The Question

Elizabeth Warren has vowed to ban all hydraulic fracturing, or fracking, in the United States. Bernie Sanders also favors that proposal, while Joe Biden opposes it. What are the potential implications for energy-related investments such as Master Limited Partnerships?

The Environmental Case

There is wide consensus on the need to cut carbon emissions to avert calamitous environmental consequences. The role of natural gas in that initiative is more controversial. On the one hand, it is cleaner than coal and its extraction leaves less of a footprint on the landscape than coal mining. Between 2007 and 2012 coal-fired plants’ share of power generation fell from 50% to 37%, with natural gas produced by fracking replacing most of that capacity. But natural gas is not without environmental consequences of its own, particularly methane leakage, which frequently occurs during normal extraction. Over 100 years, methane traps 25 times as much heat as an equivalent amount of carbon dioxide.

In addition, research has found an adverse impact on children born near fracking sites. After declining for a number of years, U.S. emissions rose by 2.8% in 2018. The UK has banned fracking in response to seismic tremors linked to the process. According to the Rocky Mountain Institute, clean energy is already cost-competitive with newly constructed natural gas plants and by 2035 building new wind, solar, and storage projects will be cheaper than continuing to operate 90% of existing natural gas plants. On the basis of all of these factors, many argue against natural gas as a transitional fuel in favor of an all-out push toward renewables.

Also unfavorable from an environmental perspective is the increase in motor and air transportation associated with the decline in fuel prices attributed to the fracking-driven increase in oil production.

Economic Issues

The expanded use of fracking has transformed the United States into an energy exporter. It has stimulated economic growth by reducing energy costs. Fracking has created jobs and created thriving towns in areas that were formerly sparsely populated.

Political Considerations

If elected president, Senator Warren could use her executive power to fulfill her promise of a moratorium on new fossil fuel leases for drilling on public lands and offshore. Note, however, that most fracking takes place on private land. Unlike a ban on drilling leases, outlawing fracking would require new legislation. The prospects for that are not great, with Democratic capture of the Senate still a longshot. On PredictIt, shares on Republican control after 2020 (face amount: $1.00) are currently quoted at $0.66.

Neither does a ban on fracking have unquestioned popular support, despite the public’s concerns about safety and environmental impact. A Colorado ballot proposal to restrict fracking failed in 2018, even though the Democrats won the governorship and majorities in both chambers of the legislature.

Investment Implications

The odds are strongly against a federal ban on fracking, even if Elizabeth Warren or Bernie Sanders becomes president. But if it were to happen, the immediate result would very likely be a sharp upturn in oil and gas prices, benefiting MLPs and other energy-related investments. Over the longer run, alternative energy producers would benefit from a shift in demand away from fossil fuels. But converting the entire transportation fleet to electricity and all power generation to renewables will take decades, assuming in the latter case the necessary advances in storage technology. Renewables, including biomass and hydropower, currently account for just over 17% of U.S. electricity generation. Also taking into account 19% nuclear power, nearly two-thirds of U.S. power generation remains to be decarbonized.

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