Fracking Could be Heading Us Into the Next Financial Crisis
The fracking revolution has led to private equity’s highest allocation of investment in fossil fuels in 20 years, but is it basically a Ponzi scheme?
United States natural gas consumption increased 10% in 2018. The U.S. energy boom has been largely driven by hydraulic fracturing, or fracking, the process of breaking rock with pressurized liquid to extract internal fossil fuel contents, but some experts have recently warned fracking is set to create the next economic crisis.
Is Fracking a Bubble?
Fracking is expected to grow another 44 percent between 2011 and 2040, as technological advancements have granted speculators access to previously inaccessible sites.
Bethany Mclean, the investigative journalist who first revealed Enron’s fraudulent accounting practices in her book “The Smartest Guys in the Room”, has pointed to fracking as a new economic bubble in the fossil fuel sector.
Mclean contends that while fracking demands huge amounts of investment, it is not actually profitable. The low-interest rates of the past decade have allowed investors to pump capital into the U.S. fracking revolution, spurred by politicians seeking domestic energy independence from fossil fuel imports.
The fracking revolution has led to private equity’s highest allocation of investment in fossil fuels in 20 years. But according to Mclean’s estimations, they’re investing in what is basically a Ponzi scheme. A recent report by the credit rating agency Moody’s shows that 90% of the debt issued by private equity is rated B2 or lower, putting that debt within the seven lowest possible ratings possible (including default).
Illustration of hydraulic fracturing and related activities. (Graphic via EPA)
Fracking locations lose 69% of their gains after one year, and 85% after three years, forcing them to continue raising capital in order to open new locations to expand production and pay off creditors. Hedge Fund Manager Jim Chanos referred to shale oil companies as “creatures of the capital markets,” because without money from Wall Street (which has been provided with near-zero interest money from the fed) they would not exist. To highlight the absurdity of the situation, here is a quote from the CEO of Anadarko Petroleum imploring speculators to slow lending to his industry at an investor conference:
“The biggest problem our industry faces today is you guys. You guys can help us help ourselves. It’s kind of like going to AA. You know, we need a partner. We really need the investment community to show discipline.” – Anadarko CEO Al Walker, 2017
Fracking Has its Supporters
Proponents of fracking challenge Mclean’s assertions, arguing that natural gas is an ideal transition to renewable energy that supports over a million American jobs. But with solar and wind now cheaper than coal (and steadily improving in efficiency), and the urgency required to cut emissions to meet IPCC targets, setting up fossil fuel infrastructure as an “energy bridge” to renewables is less desirable than investing directly in clean energy.
According to economist Dean Baker, Mclean is correct in her analysis on the weak economic foundations of the natural gas energy boom, but believes a jump back to 2014 oil prices would make fracking profitable. He proceeded to comment he does not predict this will happen.
U.S. shale and natural gas production reflects a larger economic predicament – large amounts of low-interest credit pumped into inefficient sectors of the economy that cannot support themselves without subsidies. Because public companies are required to pursue quarterly expansion, huge debt buildups must be used to placate the need for never-ending “growth.” This has resulted in a debt-laden economy where debt is often paid off by taking on more debt.
From causing pollution to the direct link between fracking and an increased frequency of earthquakes, the external costs of fracking surpass the risk of bad debt. With even the profitability of fracking in question, are the consequences of perpetuating fossil fuel production, and delaying the shift to renewables that experts deem vital to avoid climate catastrophe worth the cost?
