United States Geological Survey (USGS) Highlights Earthquake Risks Due to Fracking Activity

On March 28th, a report released by the United States Department of the Interior indicated that the odds of a destructive earthquake in the next year in Kansas and Oklahoma were the same as the odds for a similar type of earthquake in California. The statement came in the form of the USGS’s map of earthquake risks, which for the first time included the possibility of a humancaused quake. It was reported that in the last year the State of Oklahoma had 907 Earthquakes at a magnitude (Mercalli index) of 3.0+. Three of them were 4.7+, some of the largest earthquakes ever recorded in Oklahoma. Additionally, in the last year, Oklahoma was only behind Alaska in terms of earthquake frequency.

While the increased risks of earthquakes due to the activities (wastewater disposal) of oil and natural gas fracturing is not a new story, the extensive coverage in the national media (New York Times and USA Today among others) is new. It makes clear to a larger audience that the fracking revolution is not without possible consequence, and it will have an impact on the longer-term price structure for natural gas and electricity.

We have argued in the past that some of the questionable environmental characteristics of oil and natural gas fracking create an “event risk” scenario to two commodities now perceived to have an endless cheap supply. We believe the above story only confirms our argument.

A review of the chart at the start of this article shows many boom and bust price moves for natural gas over the last 25 years. The nature of the natural gas market is that it is an eventdriven market. Yes, weather (departures from normal Fahrenheit levels) and natural gas storage are constant events and do have an impact. However, as the labels in the chart indicate, it was other events that really drove prices to extreme highs and lows. We have currently experienced a “bearish event” in that worldwide fracking has caused a supply glut for oil and natural gas, and that is reflected in current prices. Any perception and/or reality that the fracking landscape could change because of an earthquake or any other environmental event should cause an increase in risk premium on further-dated forward curves.

Analyst – David Mousseau
Sources – New York Times, US Geological Survey

Alfa Energy Group

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