Drilling in Northeast shows the benefits of free market

SOME activists believe government planning, via regulation, generates better outcomes for society than unfettered free-market forces. Yet experience continues to show the market routinely provides public good exceeding what government officials can even envision.

The latest example comes from Northeastern states now enjoying a boom in power plant construction despite low electricity prices. Why is this happening? In part because increased drilling has created ample supplies of natural gas at low prices.

In 2008, natural gas prices ran as high as $13 per million British thermal units. Today, prices are closer to $3. This is due to the surge in drilling and production since 2008.

Energy producers have backed efforts to increase pipeline construction nationally, which will allow them to move product to market easier. But power plants, built near the site of drilling, can buy gas at low prices and are attractive customers to energy producers because transportation costs are greatly reduced.

The Wall Street Journal reports this has led power companies to build gas-fired power plants in Pennsylvania and Ohio capable of generating a combined 8.6 gigawatts once the plants all come online by 2020.

Those plants will be part of the PJM Interconnection LLC, a power grid serving all or parts of 13 states, including Illinois, Michigan, New Jersey, Ohio and Pennsylvania. The Journal reports competition among power providers in the grid has already driven rates down. A megawatt hour traded for $29.23 last year, the lowest level since at least 1999.

The stereotype, held by many government planners, is that business owners will refrain from building new plants in such an environment to limit supply and drive up prices. Instead, power producers are finding ways to improve their profit margin in a competitive environment with low consumer costs and increased supply. And this is thanks largely to increased drilling.

Due in part to punitive regulations imposed during the Obama administration, many coal-fired plants are being shuttered. So construction of natural gas-fired plants to replace them is in part a response to the impact of government regulation, which proponents of regulation may argue is a point in their favor. Yet the above-noted market realities suggest natural gas would have phased out coal regardless of regulation, based simply on natural gas prices and the age of many coal-fired plants.

One side-effect of the shift to natural gas in production of electricity is an associated reduction in greenhouse gas emissions. This means the increase in oil and gas drilling is good for the environment.

The benefits of increased drilling aren’t limited to states where drilling occurs. New York famously banned hydraulic fracturing in 2014, yet a recent report by NPR’s State Impact noted, “Moratorium notwithstanding, New York is still reaping the rewards of fracking, importing shale gas from neighboring Pennsylvania and preparing to process it in a mammoth power plant under construction 65 miles northwest of New York City.”

The increase in drilling has created jobs. But the benefits are far greater. Drilling has also indirectly helped keep electric rates lower for consumers and improved the environment. It shouldn’t go unnoticed that market forces, and not government planning, are responsible for those benefits.