The Next Big Thing: It's Not Alternative Energy, It's Traditional Energy Through the Miracle of Fracking

From the Bloomberg editorial "Energy Revolution Keeps Carbon on Top," by Nathan Myhrvold, former chief strategist and technology officer at Microsoft and the founder/CEO of Intellectual Ventures:

"A remarkable thing happened in Silicon Valley during the past decade. Venture capitalists and entrepreneurs set their sights on clean energy as the Next Big Thing. They audaciously hoped to reinvent energy by harnessing the incredible innovation that had transformed information technology and biotechnology. 

Some of the best venture capitalists in the business detached from their computing roots and focused on energy startups. The result was a staggering surge of capital into clean-energy technologies. Worldwide, from 2006 to 2010, about $535 billion in venture capital, private equity and initial public offerings as well as mergers and acquisitions flowed into 4,236 clean-tech businesses, according to a recent analysis by GlobalData.

Venture-capital investing is inherently high-risk, so it shouldn’t surprise or bother anyone that many of these startups failed -- some rather spectacularly. Solyndra, the solar-cell company, for example, went bankrupt even after receiving a $535 million in loan guarantees from the U.S. Energy Department. But similar failures happened during the dot-com bubble. Remember pets.com and its infamous sock-puppet TV ads?

What is worrying is that almost a decade of energy investing hasn’t produced any home runs -- no green-energy equivalents of eBay, Amazon, Google or Facebook. The modest, incremental advances we have seen don’t perceptibly move the needle on the energy problem.

In the meantime, however, a real revolution has happened in traditional energy -- one that poses a serious challenge to companies and investors betting on alternative energy. This breakthrough is arguably one of the greatest advances in energy production since the 1960s. And it came not from a Silicon Valley company, or from MIT or Stanford, but from George Mitchell, the son of a Greek goatherd who immigrated to the U.S.

After graduating from Texas A&M, Mitchell tinkered with a variety of long-known techniques that had never been used in combination. One of these was horizontal drilling, which originated in the 19th century, was adapted for oil production by the Soviets in the 1930s and was perfected by oil drillers in the 1980s. A second idea was to inject fluid into the rock to fracture it into lots of pieces, thus allowing the gas and oil inside to flow more easily. 

A third technique that Mitchell tried was adding sand to the water to help prop open the cracks that formed in the rock. Together these approaches, collectively called hydraulic fracturing, or “fracking,” allowed drillers to inexpensively recover gas from tight shale rock.

Not so long ago, many people believed that the cost of oil and gas would rise indefinitely, thus supporting the market for alternatives. Mitchell’s miracle has changed that calculus, much to the chagrin of the Silicon Valley venture capitalists who caught the green-energy bug."