Climate change is a central issue in the federal administration agenda. The recent efforts by the Trump administration to overturn some of the policies on methane leaks and flaring regulations put in place by the Obama administration reflect the divergent views the two political offices hold about the sensitive topic of climate change. The US oil and gas industry, a major contributor to greenhouse gases, experienced significant growth in the recent past. As a result, the release of natural gas, of which methane is a major component increased exponentially (Hiller, 2017). Existing policies on flaring recognize methane as a waste product. Flaring refers to the practice of burning methane into carbon dioxide. The process is backed by evidence that methane contribution to the greenhouse effect is 25 times more than carbon dioxide, even though it degrades faster in the atmosphere than the latter (Harder, 2016). However, the increase in volumes of flared methane raises significant environmental concerns. Flaring equates to wastage of potential energy that could be used constructively. There is an evident disconnect between production and transportation of natural gas in the supply chain. One can argue that the problem is largely a market failure characterized by negative externalities owing to the harmful effects of the activity of drillers for which they are not required to pay.
The oil and gas industry suffer from the forces of capitalism that concentrate power to few players. Such players can distort the market economy creating problems that largely affect the masses. An overview of the US gas industry shows that the demand for natural gas is not fully met. The occurrence of externalities is synonymous with the absence of individual property rights on goods, services or factors. The outcome is a failure of the market to ensure optimum or socially desirable output because of non-payment of the harm caused to others. In this case, negative externality occurs from more than socially desirable output of methane. Flaring is a consequence of the process that contributes to increased pollution of the air, which harms others but they are not paid for by the oil and gas drilling firms.
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The oligopoly market control by suppliers gives them the power to exert influence on the quantity of the commodity supplied failing to meet socially desirable output in the process. Players in the oil and gas mining industry are not affected by the problem of information imperfection; neither are markets suffering from the challenge of productive and allocative inefficiency. The problem is the anticipated products that cannot be handled by the existing production resources and failure to institute corrective measures (Tietenberg & Lewis, 2016). Players’ understanding of the dynamics of the oil and gas industry cannot be questioned. However, there is evident lack of appropriate measures for addressing the problem of moving the excess gas. The preferred mode of pipeline transport for natural is uneconomical; the industry is segregated into players who specifically invest in moving the gas. An alternative is government intervention through policies that integrate technologies that reduce the amount of natural gas released and flared. However, flaring and related reductive strategies are short-term solutions that are unlikely to address the root causes of market failure from externalities.
It is worth revisiting that the environmental problem of greenhouse gases is directly linked to market failure. Natural gas is a commodity with useful potential, but it cannot find its way to the market due to lack of transportation infrastructure. Under the circumstances, government intervention should adopt an approach that restricts the monopolistic and oligopoly players from using their concentrated power to control the quantity of the commodity in the market and it prices. Rules and laws that safeguard the interests of the people are necessary to control the effects of negative externalities. According to Hiller (2017), new oil fields are coming up at an increased rate that is detrimental to the potential construction of pipelines for transportation. The federal government has the mandate to set up policies that facilitate pulling together of resources to invest in such viable projects. In addition, licensing of drillers requires restriction to those operating sites that have access to means of transportation of the commodity. Flaring and alternative technologies aimed at reducing the quantities of methane released from leaks are likely to prove inefficient and unsustainable. In addition, related policies fail to address critical issues of the energy market dynamics. Such policies are founded on the need to address the sensitive problem of greenhouse gas emissions without fundamentally touching on the underlying problem and ways of drawing economic benefits from it.
Government intervention through policies, rules, and laws besides regulation of flaring and reduction of methane quantities may be perceived as efforts contradictory to the concept of free market economy. Players in any industry market are driven by profitability. The government has the mandate to limit effects of negative externalities by preventing harm that is unpaid for by business entities. However, its jurisdiction in determining the activities players in the industry should engage in is limited. In addition, regulatory policies on flaring address crucial issues of resource allocation by drilling firms. Oil and natural gas are limited resources. A new well may dry up after a decade or two of activity. Under the circumstances, the contracted company has to explore new areas where it moves its operations. Therefore, investing in long-term transportation infrastructure for natural gas may prove uneconomical, specifically for small and medium drilling companies.
Adherence to flaring policies offers a better alternative for such players. The growing concerns about global warming present a weighty problem for oil and gas companies in particular. Faced with the challenge of cutting methane release into the atmosphere, and balancing between the viability of the methods used and sustainability of the oil wells, the majority of players opt for a short-term solution. Emphasis is placed on the primary product that is oil and strategies for safe elimination of any secondary products.
Government intervention through policies on flaring to cut down on the amount of natural gas released into the atmosphere is the most economically viable alternative for addressing the negative externalities of market failure in the oil and gas industry. Companies drilling oil wells need a short-term solution that is economically viable to reduce the negative impact of their operations on the environment and the unpaid for harm air pollution causes to others. However, control of the market by powerful players threatens to retain the status quo leading to perceptions of an extended period of outputs that are not socially desirable. The challenges in moving secondary products such as methane justify the adoption of federal policies for minimizing levels of greenhouse gases released into the atmosphere.
References
Harder, A. (2016). Obama Administration Proposes cutting methane waste from oil, natural gas production. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/obama-administration-proposes-cutting-methane-waste-from-oil-natural-gas-production-1453478550.
Hiller, J. (2017). A West Texas oil boom brings an increase in natural gas flaring. MySanAntonio . Retrieved from https://www.mysanantonio.com/business/eagle-ford-energy/article/A-West-Texas-oil-boom-brings-an-increase-in-12354351.php.
Tietenberg, T. H., & Lewis, L. (2016). Environmental and natural resource economics . Routledge.
