Fracking and Information Disclosure

There's a weak new rule floating around DC (in draft form) that would require oil and gas companies to disclose the chemicals they use in the hydraulic fracturing, or fracking, process - but only if they're fracking on federal land.

Of course, industry groups and some members of Congress argue that such disclosure requirements would reduce the competitiveness of firms by revealing trade secrets, but intuitively, that's not true.  There are only a few companies with the physical capital necessary to frack, and it's a safe bet that those companies already dominate the market.  It's like Wal-Mart being worried about competition from a mom-and-pop store because it had to disclose the contact information of its Chinese wholesalers.  Ridiculous.

I harp about externalities a lot, but that's because they're a main theme in environmental economics.  In case you've missed other blog posts where I define it, an externality exists when one actor's decisions impact another actor without taking those impacts into consideration.  A common example is second-hand smoke: if I'm smoking a cigar outside a bar, I've probably weighed the pros and cons for myself (e.g. lung cancer vs. looking "cool"), but it's unlikely that I considered the negative effects my cigar smoke has on all the people around me.  It's easy to extend that example to industrial pollution.

Two externalies that have been linked to fracking are ground water contamination and earthquakes.  Industry groups argue that the science is unclear, but that's the same story we've heard from the same groups concerning climate change science.  It's an old trick. 

From an economic perspective, information asymmetries are a classic form of market distortion, which prevents an efficient and optimal allocation of resources from being achieved.  With that in mind, it is the government's responsibility to correct those asymmetries by requiring companies to reveal everything they do that could negatively affect society.  That gives consumers the information they need to make rational decisions.  If consumers then decide not to purchase natural gas that was extracted via fracking, then the externatlies imposed by oil companies are internalized, and efficiency can be (theoretically) achieved.

The point is, this law should be stronger and it should be enacted quickly.