Question

In recent years, the United States has experienced large increases in oil production due in large part to a new technology, hydraulic fracturing (“fracking”). Fracking involves injecting a mixture of water, sand, and chemicals into rock formations at high pressure to release oil and natural gas. An article in the Wall Street Journalindicates that economies of scale in fracking may be considerably smaller than in conventional oil drilling. If this view is correct, what would the likely consequences be for the number of firms drilling for oil in the United States?

Answer 1

Consequences for the firms continuing the conventional method of drilling for oil will be both positive as well as negative in nature

Positive consequences:

As clearly stated above, in the new technological method i.e Fracking , the economies of scale is considerable smaller than that of the conventional oil drilling as the economies of scale is considerably larger here which results in a competitive advantage to the firns who stick to the conventional method.

Moreover the conventional method will also save the firms from incurring huge amount of money in introducing the new technology.

Negative consequences:

The firms who will continue to operate on conventional method will put a major impact on the environment , they will cause the wildlife migration , noise pollution and waste in the local area. These ill effects can result in closing of the firm as a result of non complying with the environmental protection norms

Oil drilling results in the oil spills in the local areas which can prove harmful for other vehicles and people passing by, thus posing a threat to the survival of the firm operating in the area and banning to its activities.

The firms sticking to the conventional method also will remain stagnant as a result of the growth in newly adopting to the technology based firms, with huge production due to change in the process of releasing oil thus posingva threat to the survival of the firm.

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