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Fracking illustrates principles of environmental and resource Economics

Date Released: Wed, 10 October 2012 10:59 +0200

The economic realities of the plan by oil companies to carry out the process of hydraulic fracturing for shale gas in the Karoo were explored in an inaugural lecture given by Professor Gavin Fraser of the Department of Economics and Economic History.

Commonly known as fracking, hydraulic fracturing is a method used to extract natural gas (such as shale gas) from reservoir rock formations. There has been a heavy debate raging around the practice, with proponents pointing out the economic benefits and opponents the potentially severe environmental impacts which include the contamination of groundwater, destruction of aquifers, migration of gases and chemicals, possibly radioactive ones, to the surface, risks to air quality and, of course, the destruction of the natural habitats and ecosystems of the already fragile Karoo.

Professor Fraser, whose talk was entitled Institutional Economics and the Environment, has recently been awarded a research focus area by the Rhodes Research Office to explore environmental and resource economics from an institutional economics point of view.  

While, historically, environmental exploitation has not topped the critical level for resources, the situation the world finds itself in today – use of fossil fuels, deforestation, overfishing, climate change – means that this can no longer be counted on to remain the case. The proliferation of largely ineffective Protocols, such as Kyoto, Rio, Stockholm and Montreal, indicate the concern which exists, albeit largely ineffectual up to this point.

Environmental economics is a relatively new area, only coming into its own in the 1970’s, explained Professor Fraser, with ecological economics arising even later. In an interesting and informative exploration of economic history, he dealt with the evolution of economic theory, from classical practitioners such as Smith and Malthus through the neo-classical approach, and looked at New Institutional Economics’ attempts to explain the interdependence of institutions, and their evolution over time, to evaluate their impact on economic growth.

Returning to the issue of fracking, Professor Fraser expounded on an application of New Institutional Economics, namely property rights. In the rush to attempt to extract the shale gas from the Karoo, property rights have, he says, been ignored and the principle of exclusivity inherent in the rights of the property owners would be breached if fracking concession holders were to go ahead onto privately owned land.

Farmers in the Karoo have incentive to either obtain a good price for the use of the land, or to retain and maintain their farms as they are for the use of future generations.  Concession holders, such as Shell Oil, Sasol and Falcon Oil & Gas, should be negotiating with the farmers for a fair price for both the use of the land and its rehabilitation once the extraction process is complete.

By Jeannie Mckeown

Photo by: Ross Shackleton