Unearthing New Possibilities: Fracking, AI, and Shifting Costs

Innovation continually reshapes economic frontiers—Breakthrough technologies like hydraulic fracturing and AI bend cost curves, unlocking unseen potential.

In 2010, few foresaw an American energy revival. Domestic oil and gas production had plateaued, and importing from abroad seemed inevitable. But deep underground across North America, shale rock formations held a key. These reserves had long been known but unattainable until techniques like slickwater hydraulic fracturing arrived. The pioneering work of George P. Mitchell, known as the “father of fracking,” was pivotal in adapting the process for shale extraction. By drilling wells vertically then turning horizontally to follow shale deposits, fracking involves blasting underground rock with a high-pressure mixture of water, chemicals, and sand. This fractures the shale, releasing trapped oil and gas. Practiced commercially since the 1940s, fracking finally achieved its full potential through Mitchell’s innovations.

Once-sleepy prairie towns morphed into boomtowns almost overnight. Williston, North Dakota, for example, became a magnet for workers rushing to the oil-rich Bakken Formation. The influx overwhelmed housing and services. At the peak, ten jobs awaited every job-seeker in Williston, with “man camps” popping up for temporary workers.

A global production shift followed as the U.S. rose to become the world's largest oil producer. Far more than an industrial process, fracking transformed economies and geopolitics alike.
And the impacts resonated globally. When Russia slashed natural gas flows to Europe in 2022, extra liquefied natural gas exports from the U.S. helped fill the void. Those shipments more than doubled from pre-pandemic levels thanks to fracking. Some experts argue Putin banked on Europe's energy dependence to hinder sanctions over Ukraine. If so, the shale boom's consequences defied even his calculations.

Expanding the Frontier

The fracking revolution illustrates a fundamental economic principle - how technology can reshape production frontiers. In microeconomics, the production possibility frontier (PPF) represents the maximum output capacity for two goods given fixed resources and technology. Innovations that increase productivity shift the PPF outward. Fracking did just that for oil and gas extraction by radically improving the output reachable from existing inputs like rigs and labor. It made previously inaccessible reserves economically viable.

The Green Revolution had a similar effect on Indian agriculture in the 1960s. In the late 1950s, famine loomed as India's growing population outpaced food production. However, high-yield seed varieties, irrigation infrastructure, and improved farming methods triggered a productivity breakthrough. From 1960 to 1970, cereal production nearly tripled while cultivated land only expanded 30%. India went from the brink of starvation to self-sufficiency. This shock to agriculture's production possibility frontier was just one example of technologies upending expected constraints. Like hydraulic fracturing, the Green Revolution increased efficiency in converting inputs to outputs. Gains in productivity shift production frontiers outward, allowing more of both goods from existing scarce resources.

The Calculator Effect: How AI Expands Production Possibilities

The production frontier model helps explain the AI boom reshaping entire industries. For decades, computing advanced steadily, improving business processes but leaving core work largely untouched. AI changes that calculus. Like past innovations, its techniques expand output potential from existing inputs. But AI’s versatility makes it more akin to an infinitely capable calculator for knowledge work than an assembly-line robot.

Already, AI unlocks new possibilities in sectors from materials to medicine. In drug discovery, DeepMind’s AlphaFold predicts complex protein structures as well as physical experiments – a breakthrough after decades of limited progress. This productivity revolution is attracting vast resources. VC investments in AI firms has grown dramatically, from less than USD 3 billion in 2012 to close to USD 75 billion in 2020. Tech hubs like Silicon Valley and Toronto have become magnets for international AI talent. Industry giants in the US, UK, and China race to lead the AI race. Demand for a still-scarce pool of experts has fueled an AI “space race” between nations. Much as hydraulic fracturing expanded oil and gas frontiers, AI’s versatility expands production possibilities across knowledge work. With skilled labor no longer a binding constraint, this calculator for the mind promises to massively expand output.

Expanding Horizons: AI's Lasting Impact

Like hydraulic fracturing before it, some of today's frenzy around AI will prove fleeting. Even at the height of the fracking boom, data showed 6-7% of shale wells in Pennsylvania failed by 2012 due to compromised structural integrity. When fractures went awry, caustic chemicals like hydrochloric acid could taint nearby freshwater aquifers.

Similarly, the easy money flooding AI guarantees wasted investments. In normal economic times, around 90% of startups fail. Irrational exuberance is unlikely to improve those odds.

But as with fracking, the core technical breakthroughs will remain, permanently expanding horizons. AI makes previously infeasible applications economically viable across sectors. In drug development, it promises to slash discovery timelines and costs, enabling smaller players to compete. It unlocks new production possibilities, from bespoke manufacturing to data generation in knowledge-limited fields like healthcare.

The message is clear - while boom and bust cycles continue, the shifted frontiers persist. Fracking made the US an energy exporter; AI makes businesses capable of things previously unimaginable. Much as shale reserves held oil and gas waiting to be unleashed, our knowledge held potential yet untapped. AI has begun to tap that hitherto unrealizable potential, and the horizons will continue to expand outwards.