An Economic Comparative Analysis of U.S. Energy Prices (Oil, Natural Gas, Solar, Wind, and Nuclear) and the Impact of Fracking Energy Production on Energy Costs in the U.S., Research Paper Example

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Words: 3059

Research Paper

Contents

Introduction. 3

Statement of the problem.. 4

Background. 5

Result from Research & Analysis 8

Summary. 11

Works cited. 13

 

Introduction

The energy sector in the United fuels the economy in a myriad of ways making it pivotal in the growth strategies of the country. The country ranks as the second largest consumer of energy and its products across the globe according to surveys carried out in 2010. The statistics of energy consumption do not take into account consumption by companies that are involved in the direct production of consumer goods for the country’s market. The country has diverse sources of energy that are used to meet the high-energy demands and they include petroleum, natural gas, coal, renewable energy, and nuclear electric power. Current data indicates that each source produces 36, 26, 20, 9, and 8 percent of energy as represented by petroleum, natural gases, coal, renewable energy, and nuclear electric power respectively.

The energy produced within the country sufficiently meets the needs of the country’s economy with the consumption being segmented into four sectors according to usage. The first sector is the transportation industry that accounts for the consumption of twenty eight percent of the energy produced within the country. Secondly, the industrial sector accounts for approximately twenty-one percent of the total energy consumption. Thirdly, eleven percent is consumed by the residential and commercial sector of the country. The bulk of the energy produced within the country is channeled towards the production of electric power that accounts for forty percent of the consumption. It is imperative for the country to have a stable supply of energy for its economy to function at full capacity. The position of energy in the economy is emphasized by the 21st Presidential Policy Directive, which recognizes the importance of the energy sector through its enabling function. The energy sector is dominated by the private sector, which accounts for more than eighty percent of the cumulative production.

The U.S energy prices have been undergoing some fluctuations with a general increase in the prices over the last ten years. All sectors that utilize any form of energy in their processes have had to bear the extra cost and this has had an inverse effect on the prices of goods and services produced for consumption. However, Fracking has emerged as the new form of energy extraction causing equal acrimony as well as support from different sections. Fracking is a form of extraction of Shale gas of which the United States has the largest reserves across the globe. Shale gas is taunted as the solution to the soaring energy prices in the country while at the same time contributing to the country’s efforts to shift from the use of coal energy to renewable ones. Fracking is an acronym for the Hydraulic fracturing process used in the recovering of natural gases from Shale formations (Howarth, Ingraffea, and Engelder 42).

Technology in the exploitation of Shale reserves has evolved over a span of fifty years with innovations increasing the production of the gas at a considerable rate. All the issues related to the energy sector have a significant impact on the production processes in the country and could have an adverse or positive effect on the country’s economy. The sector influences the money supply system of the country reducing or contributing to the chances of inflation. There is great need for striking a balance in the production of energies from various forms to ensure the stability and growth of the country’s economy.

Statement of the problem

The U.S energy sector is faced with the problem of increases in energy prices that can be credited for the instability in the economy. The energy sector requires regulation as it is the pivot of all economic activities within the country and its stability is of essence. The problem arises from the increased and unstable costs of energy production across the globe. The reliance on non-renewable sources of energy has exposed the country to undue instability raising the need to establish a more reliable source of renewable energy to provide stability and lower the prices of energy. Exploitation of Shale Gas through Fracking has emerged as one of the best solutions to lowering the prices of the energy sector. However, the exploitation of this form of energy has been faced with a myriad of challenges from environmentalists, leaving the country at a cache twenty-two situation. Financial institutions and the economy in general are reliant on the energy sector to boost production efforts within the country in efforts of sustaining a steady money supply within the economy.

Background

The energy sector has undergone immense transformation over the life of the country with a tilt towards the exploitation of renewable sources of energy. Drawing from the statistics of the Energy Information Administration (EIA) there has been a steady per capita consumption of energy in the United States from the early 70s up to date. The steady consumption of energy in the country can be directly attributed to the transfer of production processes from the country to other countries (Linn 11). The country has capitalized on its strengths in producing across the sectors  it enjoys a higher competitive advantage while off shoring and outsourcing products from other  countries in sectors that it has lower competitive advantage. The development of energy in the industrialized world has evolved over time and it forms a backbone for activities in industries that include transportation, information technology, waste collection, communication, and the agricultural sector.

The above-mentioned sectors of the economy are essential in developed societies. The use and exploitation of energy has had its fair share of fluctuations and negativity. The negative attributes fashioned against the energy sector are related to the exploitation and harm to the environment. Sources of energy can either be classified under two broad categories that include renewable and non-renewable sources. The sources of energy are placed into use if they can be transformed to other specified forms of energy to be used in particular activities. The common forms of energy sources include petroleum, electricity, and other fuels that are used in daily activities at homes and in industries. The energy sector has a direct correlation to Economics as they form an important component of the global economy. Economic activities are highly dependent on the different sources of energy in the manufacturing, transportation, running of machines and other technologies. It is the essence of energy in every economic aspect that has contributed to the volatility across the globe concerning the pricing system.

Energy prices are not the preserve of individual countries, but are done with accordance to the global arena. The industry traverses all the countries and this has a great bearing on its prices that have had lasting effects on the American Economy. The increase in the demand for cleaner fuel and energy has led to the exploration of alternative energy sources and this has largely diversified the energy sector. The percentage of energy extracted from renewable sources has increased over the last three decades with a notable increase in Fracking. The energy sector’s growth can be attributed to the increased level of technology coupled with increasing innovations enabling the exploration and exploitation of newer forms of energy that diversify the sector. Management issues at the sector in the U.S economy are at the forefront of all exploitation activities with all efforts being directed towards stabilizing and lowering the costs of energy for a better economic performance.

The management of energy is a complex process that involves the utilization of available resources at an effective and efficient manner that keeps incremental costs at a bare minimum. The processes of decreasing or stabilizing the costs of energy have explored the improvement of exploitation techniques without necessarily adopting newer technologies. The reason for the improvement of existing exploitation means is based on the costs involved in the introduction of new technologies (Kilian and Clara 61). The management system affected has increased the consciousness amongst producers and consumers of energy on the need for conservation, which has a direct correlation with the reduction of prices of energy. The efforts have been fruitful with the country recording considerable reductions in the wastage of energy and striking a positive balance between the demand and supply of energy.

All these elements involved in the exploitation of energy sources have had positive results attributed to the support by the Federal Government, States, and other regulatory bodies such as the Environmental Protection Agency (EPA). The average American consumption on an individual basis has been established at three hundred and thirty four million BTUs for the last three decades. This energy consumption is higher than the global average that stands at a bare seventy-five British Thermal units per person. However, the global consumption of energy per person recorded an increase as opposed to the stabilized energy consumption in the American market. The new era in the exploration of energy is a concept that is linked to the increased development and reliance on renewable forms of energy. Renewable sources of energy that have taken the front in substituting older forms of energy include wind, natural gas, and solar energy.

Result from Research & Analysis

The renewable sources of energy are relatively cleaner in comparison to the traditional forms of energy as well as being cheaper. Their use has little or lacks any adverse effects on the environment and this is a strong cost reduction pillar. Conventional forms of energy have been criticized for their pollution of the environment and the depletion of natural resources as well as important reserves (Kilian and Clara 21). The conservation efforts placed to counter the negative effects of using conventional forms of energy have had negative environmental effects as well as high costs. These costs have been borne at every stage of production and distribution with different users and producers bearing part of the costs placed for the conservation of the environment. The increased costs of conservation trickle down to the costs of production of goods and services and this has a negative effect on the money supply system.

The money supply system in the American economy has had several challenges as a result in the increased prices of commodities in the market resulting in a demand-pull inflation. The commodities in the economy have increased prices and thus it causes the government to buy bonds and securities from the public to increase the supply of money for citizens to improve their purchasing power (Kang et al 84). This in effect causes flooding of the money market with a lot of currency in circulation to counter the negative effects of inflation. The supply of money within the American economy requires stabilization as it has global effects that have far-reaching consequences a good example being the financial crisis of 2008. The reality of the large ramifications to the economy resulting from the energy sector necessitates urgent measures to be taken to streamline the industry.

The pressure on the economy can be averted through the establishment of a reliable source of energy in terms of production and the costs borne by consumers. The exploitation of Shale Gas reserves has been taunted as the best solution to the problems arising from the sector in terms of reliability and costs (Jenner and Alberto 62). However, its exploitation as well as that of other natural gases has been surrounded by a myriad of controversies that include public health, social impacts, and environmental contestations on the extraction procedures. Activists taunt the exploitation as a pure disregard to environmental safety while the protagonists look at the reliability, cost reduction, and the environmental impact in comparison to traditional sources of energy. The effects that Fracking has on the economy of the U.S are immense as its exploitation can be attributed to a fifty percent decrease in the average household consumption of energy form natural gases. This means that a huge percentage of natural gases supplied to U.S households emanate from Shale gas deposits extracted across the country.

The equivalent of the percentage decrease is five dollars per Kcf. These estimates were arrived at as per the close of 2012 and they indicate the total savings from consumption of energy from Shale deposits to be at an impressive one hundred and twenty seven billion dollars per year. This figure is expected to increase over the next decade and into the future giving a signal of the significance of Shale and Fracking to the economy and the energy sector. The exploitation of Shale gas through Fracking can be attributed to an annual saving of one thousand dollars per household on the expenditure for energy (Fry et al. 34). One thousand dollars savings per household is a significant amount that could be diverted to other economic uses and improvement of the living standards of Americans. The exploitation of the gas has a direct correlation to a decreased unemployment rate directly and indirectly.

The extraction of the gas is responsible for the employment of six hundred thousand permanent and casual laborers and this is a positive indication of increased employment from the extraction of the gas and an expected positive performance of the economy. The sector contributes more than two hundred billion dollars to the Gross Domestic Product (GDP) and over fifty billion dollars as tax revenues collected by States and the Federal Government (Jelavich 7). The exploitation of Shale Gas has reduced the importation costs of natural gases by over one hundred million dollars per year and these financial benefits are expected to increase with increased exploitation. The country imported six percent of its natural gas from Canada a figure that has been reduced significantly from highs of forty-five percent in previous years.

This serves as an indicator that the exploitation of Shale Gas from the American reserves will reduce and do away with importation of natural gases from the country’s neighbors. Russia and the Middle East dominate the world market for natural gases. The increased exploitation of Shale Gas within the boundaries of the U.S has shielded the country from undue exorbitant prices from an upcoming cartel between Russia and the Middle East. The U.S exploitation of its Shale deposits contributes to nine percent of the global production of natural gases in their entirety. This percentage is expected to increase significantly and thus improving the country is trading position in the global market. The country will improve its economic status by exploiting its reserves, as it will increase its contribution in the determination and pricing of natural gases in the global market. The use of Shale gas and other forms of natural gases can be attributed to the rapid decrease on the reliance for coal (Cebula 56).

The total coal consumption in the U.S is expected to decrease by over eleven percent over the next decade and complete elimination in the future. The use of Shale and natural gases in power plants has increased the efficiency by twenty-five times a huge improvement in comparison to the use of coal for powering the plants. The equivalent of an increase in the use of coal to substitute Shale would be significant in its environmental implications. The world carbon emission has increased significantly by five percent through the exploitation of Shale gases.

Summary

The energy sector is the driver of the United State of America’s economy. The sector is an important input factor as all other production related industries rely on the supply of energy to achieve their production capacities. The energy sector is crucial in not only accumulation of revenue for the state and federal government, but also in assisting in the operations of other industry as well as the households. The sector has diversified sources of energy whose categorization is under two broad areas that include the renewable and non-renewable energy sources. The non-renewable sources of energy have been referred to as the traditional forms of energy in the paper and they are rivaled with the increased use of renewable sources or the new sources of energy.

The cost of energy in the American market has been on the increase over the last decade while its consumption has stabilized over the same period. However, consumption of energy by individuals in the country is much higher than the global average consumption. The sector has undergone transformations in terms of conservation and price reduction measures over the last fifty years. The measures instituted to increase the adoption of alternative sources of energy include the introduction and innovations to the level of technology. This has enabled the successful increase in the exploitation of natural gases. Shale gas is dubbed as the therapy for the fluctuating prices of energy within the country a fact that is evident from its impacts so far on the prices and cost of energy. The country should overcome the challenge posed by conservationist to increase the exploitation of Shale Gases.

Works cited

“Energy Prices.” Monthly Energy Review (2013): 117. MasterFILE Premier. Web. 6 Nov. 2013.

“Energy Prices.” Monthly Energy Review (2013): 117. MasterFILE Premier. Web. 6 Nov. 2013

Cebula, Richard. Recent evidence on determinants of per residential customer electricity consumption in the U.S.: 2001-2005. inan (2012) 36:925–936

Fry, Matthew et al. “Fracking Vs Faucets: Balancing Energy Needs and Water Sustainability at   Urban Frontiers.” Environmental Science & Technology 46.14 (2012): 7444-7445. Business Source Complete. Web. 6 Nov. 2013

Howarth, Robert W., Anthony Ingraffea, and Terry, Engelder. “Natural Gas: Should Fracking Stop?” Nature 477.7364 (2011): 271-275. Academic Search Complete. Web. 6 Nov.     2013

Jelavich, Mark. “Farm Prices, Energy Prices, and Rural Income In The U.S.” Journal Of Economics (03616576) 36.1 (2010): 1-7. Business Source Complete. Web. 6 Nov. 2013

Jenner, Steffen, and Alberto J. Lamadrid. “Shale Gas Vs. Coal: Policy Implications From Environmental Impact Comparisons Of Shale Gas, Conventional Gas, And Coal On Air,    Water, And Land In The United States.” Energy Policy 53. (2013): 442-453. Business Source Complete. Web. 6 Nov. 2013

Kang, Wei et al. A Regime-Switching Analysis of the Impact of Oil Price Changes on the Economies of U.S. States. The Review of Regional Studies. The Official Journal of the Southern Regional Science Association. (2011) 41, 81─101

Kilian, Lutz, and Clara Vega. “Do Energy Prices Respond To U.S. Macroeconomic News? A Test of The Hypothesis Of Predetermined Energy Prices.” Review of Economics&Statistics 93.2 (2011): 660-671. Business Source Complete. Web. 6 Nov. 2013.

Linn, Joshua. “Why Do Energy Prices Matter? The Role of Interindustry Linkages In U.S. Manufacturing.” Economic Inquiry 47.3 (2009): 549-567. Business Source Complete. Web. 6 Nov. 2013

Overview of U.S. Coal Production And Consumption.” Congressional Digest 92.1 (2013): 2-32. Academic Search Complete. Web. 6 Nov. 2013

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