In this series, I'll game-out strategies of different anti-fracking groups. Should the environmental movement compromise on watered-down regulations, or instead take a radical stand against the fracking industry's very existence?
“While big oil and gas continues its spin campaign to obscure the dangers of this toxic, polluting process, people around the world are taking a stand through the Global Frackdown,” declared the Executive Director of Food & Water Watch, referring to the international movement for an unconditional ban on hydraulic fracking. [1] My last post looked at the strategy of the Environmental Defense Fund (EDF), which doesn't want to ban fracking, but instead to ask the Natural Gas Industry to compromise on a few basic health and safety regulations. But the Natural Gas Industry doesn't care about the environment or human well-being. They only care about one thing: profit maximization. So if we want the Industry to listen to our demands, then we've gotta threaten to bankrupt them if they don't get with the program.
Let's game-out the strategy of the more steadfast environmental groups who are fighting for a comprehensive fracking ban, including Environment America, Greenpeace, and the countless other activists worldwide who are part of the Global Frackdown.
Recall that our game is played by the two primary interest groups who have a stake in the fracking debate: the Environmental Activists and the Gas Industry Lobbyists. Here's a typical scenario: environmentalists launch a public mobilization campaign to ban fracking. As the campaign builds momentum, the ban becomes more likely to pass. However, the Activists still have the option of compromising if they're nervous about the possibility of the ban failing.
The Industry Lobbyists' willingness to accept a compromise depends on the likelihood of a fracking ban passing. If the Industry believed they could buy-off enough representatives to stop the ban, they'd have no incentive to compromise. But if grassroots organizing to ban fracking gains enough steam, the CEOs of America's Gas Industry would wake up one morning to realize that if they don't agree to regulations soon, there's a chance their multibillion dollar industry's production process could become illegal.
The Gas Industry will only accept a deal if their expected profits after the regulations are imposed are greater than their expected profits from rejecting a compromise, after taking into account the probability that the whole enterprise could be prohibited and they'd end up with nothing. Recall that C is the regulatory cost as percentage of the Industry's total potential profit, represented by the variable V. So the Industry expects that if it accepts fracking regulations, their profit will be V * ( 1 - C ).
When the gas industry considers rejecting a compromise, they must weigh the relative probabilities and payoffs of two possible futures: one in which the fracking ban passes (probability = p) and the Industry makes $ 0, and another in which the ban fails (probability = 1 - p ) and the Industry's profit is $ V. The Industry's expected profit from rejecting a compromise is the weighted average of the profit they would earn in each possible outcome:
0 p + V ( 1- p )
0 p + V ( 1- p )
Which simplifies to V ( 1- p )
So for the Gas Industry Lobbyists to accept the initial offer from the Environmental Activists, the Activists must offer C such that the Industry's expected profit under the proposed regulations is greater than their expected profit if they reject compromise and risk a fracking ban:
V ( 1 - C ) > V ( 1- p )
Dividing both sides
by V simplifies to 1 - C > 1 - p
by V simplifies to 1 - C > 1 - p
Which simplifies to C < p
So our result is that the Industry will accept a compromise as long as the percentage cost of the proposed regulations is less than the probability that a fracking ban will pass.
The threat to ban fracking gives the environmentalists leverage because the probability that the Industry could end up with $ 0 is calculated as cost, which is equivalent to other investment costs like drilling wells or hiring workers. So even if a ban is somewhat unlikely to pass -- let's say the probability is only 25% -- the Industry would still prefer to agree to regulations that would only make them 24% less profitable.
Contrast this outcome with "Strategy #1: Beggars Can't Be Choosers", which I modeled in my last post. Remember that this was EDF's mister-nice-guy approach, where the Activists push the Industry to accept regulations, but aren't willing to threaten a ban. We saw that this gives the Industry no incentive to accept any fracking proposal other than complete deregulation. Defenders of EDF would respond that this must be an exaggeration, since in some cases EDF has persuaded the Gas Industry to agree to some minimal safety rules, even if they're not as strict as most would have liked. [2] But the truth is, the only reason the Gas Industry was willing to make even these minor concessions was because other activist groups had already been working tirelessly to build a movement toward a ban. Critics argue that EDF's modus operandi has been "swooping into states where there is a strong grassroots movement against fracking and shilling for the oil and gas industry." [3]
So here's the kicker: even if the Environmental Defense Fund believes in its heart of hearts that fracking should not be completely banned, there still must be momentum for a ban before environmentalists will ever have enough leverage to force the industry to compromise on any regulations.
So here's the kicker: even if the Environmental Defense Fund believes in its heart of hearts that fracking should not be completely banned, there still must be momentum for a ban before environmentalists will ever have enough leverage to force the industry to compromise on any regulations.
In part 3 of this series, we'll show that even in cases where a fracking ban is unlikely to actually pass, the campaign for a ban can become enough of a threat in-and-of-itself to to stop the Industry from investing in fracking operations in the first place, functioning as a defacto ban. Read part 3 >>
