Reports

API Says Fracking Saved Public Schools $1 Billion Last Year


The American Petroleum Institute, one of the biggest oil lobbying groups in the U.S., spends a lot of time these days trying to convince Americans that fracking is good for them. API claims that fracking is not only environmentally safe, but that it carries huge economic benefits thanks to the cheap supplies of oil and natural gas it produces.

In a report (pdf), API says that school children have been among the biggest beneficiaries of the controversial drilling technique. The report calculates that because of the abundant supplies of cheap energy unlocked by fracking, local elementary and secondary schools saved more than $1.2 billion off their combined gas and electricity bills during the 2012-13 school year—or enough money to hire 14,246 full-time teachers. State and local governments saved a total of $720 million because of cheaper gas and electricity, the report says, enough to hire an extra 11,000 workers. Here’s the breakdown:

IHS calculates that fracking saved schools, along with state and local governments nearly $2 billion in 2012-13IHSIHS calculates that fracking saved schools, along with state and local governments nearly $2 billion in 2012-13

The report was put together on behalf of API by energy consulting firm IHS (IHS). In it, the authors calculate that the savings from cheap gas bills have been substantially higher (21 percent) than for electricity, which have been about 9 percent. To achieve this calculation, the authors came up with a scenario of what prices would have been without fracking, something they refer to as the “without unconventional energy case.”

Under that case, the authors determined a premium of $2.23/million BTUs. In other words, IHS thinks that without fracking, natural gas would be about 50 percent more expensive than it’s been over the past couple years. Here’s a graph of what natural gas has done over the past five years:

Fracking has kept natural gas cheap after its price crashed during the recessionBloombergFracking has kept natural gas cheap after its price crashed during the recession

That scenario makes some big assumptions. For instance, the authors “assumed that 100% of the increase in wholesale natural gas prices under the Without Unconventional Energy Case [no fracking] would have been passed through to consumers, thus raising retail prices by the same absolute amount. As a result, energy savings are the same regardless of retail prices.”

That strikes me as a tricky assumption to make, given the complicated interplay between wholesale and retail natural gas markets. Sometimes more than 100 percent of the wholesale price increase gets passed onto the retail market; sometimes it’s less than that. There’s also a big disparity between regional wholesale prices, not to mention the range of retail natural gas prices that people pay across the country. Even though natural gas is really cheap in the Gulf Coast, where it’s priced off the Henry Hub benchmark, regional wholesale prices have been a lot higher in other parts of the country, particularly in the Northeast, where a lack of pipelines led to crazy high gas and electricity prices this winter, especially in the spot markets.

Overall, though, it’s not crazy to think that fracking has saved schools and governments money off their energy bills. Determining how much is where the debate begins, especially since electricity prices have gone up over the past few years. According to the Energy Information Agency, average electricity prices across all sectors of the U.S. economy in March were 6 percent higher than a year ago, 10.3 cents per kilowatt-hour compared with 9.7 cents a year ago.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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