It’s been a little more than a year since I launched the
present series of posts on the end of America’s global empire and the future of
democracy in the wake of this nation’s imperial age. Over the next few posts I
plan on wrapping that theme up and moving on.
However traumatic the decline and fall of the American empire turns out
to be, after all, it’s just one part of the broader trajectory that this blog
seeks to explore, and other parts of that trajectory deserve discussion as
well.
I’d planned to have this week’s post take last week’s
discussion of voluntary associations further, and talk about some of the other
roles that can be filled, in a time of economic contraction and social
disarray, by groups of people using the toolkit of democratic process and
traditional ways of managing group activities and assets. Still, that topic is
going to have to wait another week, because one of the other dimensions of the
broader trajectory just mentioned is moving rapidly toward crisis.
It’s hard to imagine that anybody in today’s America has
escaped the flurry of enthusiastic media coverage of the fracking
phenomenon. Still, that coverage has
included so much misinformation that it’s probably a good idea to recap the
basics here. Hydrofracturing—“fracking” in oil industry slang—is an old trick
that has been used for decades to get oil and natural gas out of rock that
isn’t porous enough for conventional methods to get at them. As oil and gas
extraction techniques go, it’s fairly money-, energy- and resource-intensive,
and so it didn’t see a great deal of use until fairly recently.
Then the price of oil climbed to the vicinity of $100 a
barrel and stayed there. Soaring oil prices drove a tectonic shift in the US
petroleum industry, making it economically feasible to drill for oil in
deposits that weren’t worth the effort when prices were lower. One of those
deposits was the Bakken shale, a sprawling formation of underground rock in the
northern Great Plains, which was discovered back in the 1970s and sat neglected
ever since due to low oil prices. To get any significant amount of oil out of
the Bakken, you have to use fracking technology, since the shale isn’t porous
enough to let go of its oil any other way.
Once the rising price of crude oil made the Bakken a paying proposition,
drilling crews headed that way and got to work, launching a lively boom.
Another thoroughly explored rock formation further east, the
Marcellus shale, attracted attention from the drilling rigs for a different
reason, or rather a different pair of reasons.
The Marcellus contains no oil to speak of, but some parts of it have gas
that is high in natural gas liquids—“wet gas” is the industry term for this—and
since those liquids can replace petroleum in some applications, they can be
sold at a much higher price than natural gas.
Meanwhile, companies across the natural gas industry looked at the
ongoing depletion of US coal reserves, and the likelihood of government mandates
favoring natural gas over coal for power generation, and decided that these
added up to a rosy future for natural gas prices. Several natural gas production firms thus
started snapping up leases in the Marcellus country of Pennsylvania and
neighboring states, and a second boom got under way.
As drilling in the Bakken and Marcellus shales took off,
several other shale deposits, some containing oil and natural gas, others just
natural gas, came in for the same sort of treatment. The result was a modest
temporary increase in US petroleum production, and a more substantial but
equally temporary increase in US natural gas production. It could never be anything more than
temporary, for reasons hardwired into the way fracking technology works.
If you’ve ever shaken a can of soda pop good and hard and
then opened it, you know something about fracking that countless column inches
of media cheerleading on the subject have sedulously avoided. The technique is
different, to be sure, but the effect of hydrofracturing on oil and gas trapped
in shale is not unlike the effect of a hard shake on the carbon dioxide
dissolved in soda pop: in both cases,
you get a sudden rush toward the outlet, which releases most of what you’re
going to get. Oil and gas production
from fracked wells thus starts out high but suffers ferocious decline rates—up
to 90% in the first year alone. Where a
conventional, unfracked well can produce enough oil or gas to turn a profit for
decades if it’s well managed, fracked wells in tight shales like the Bakken and
Marcellus quite often stop becoming a significant source of oil or gas within a
few years of drilling.
The obvious response to this problem is to drill more wells,
and this accordingly happened. That isn’t a panacea, however. Oil and gas
exploration is a highly sophisticated science, and oil and gas drilling
companies can normally figure out the best sites for wells long before the
drill bit hits the ground. Since they are in business to make money, they
normally drill the best sites first. When that sensible habit intersects with
the rapid production decline rates found in fracked wells, the result is a
brutal form of economic arithmetic: as
the best sites are drilled and the largest reserves drained, drilling companies
have to drill more and more wells to keep the same amount of oil or gas
flowing. Costs go up without increasing
production, and unless prices rise, profits get hammered and companies start to
go broke.
They start to go broke even more quickly if the price of the
resource they’re extracting goes down as the costs of maintaining production go
up. In the case of natural gas, that’s
exactly what happened. Each natural gas production company drew up its
projections of future prices on the assumption that ordinary trends in
production would continue. As company
after company piled into shale gas, though, production soared, and the harsh
economic downturn that followed the 2008 housing market crash kept plummeting
natural gas prices from spurring increased use of the resource; so many people
were so broke that even cheap natural gas was too expensive for any unnecessary
use.
Up to that point, the fracking story followed a trajectory
painfully familiar to anyone who knows their way around the economics of
alternative energy. From the building of
the first solar steam engines before the turn of the last century, through the
boom-and-bust cycle of alternative energy sources in the late 1970s, right up
to the ethanol plants that were launched with so much fanfare a decade ago and
sold for scrap much more quietly a few years later, the pattern’s the same, a
repeated rhythm of great expectations followed by shattered dreams. .
Here’s how it works.
A media panic over the availability of some energy resource or other
sparks frantic efforts to come up with a response that won’t require anybody to
change their lifestyles or, heaven help us, conserve. Out of the flurry of
available resources and technologies, one or two seize the attention of the
media and, shortly thereafter, the imagination of the general public. Money pours into whatever the chosen solution
happens to be, as investors convince themselves that there’s plenty of profit
to be made backing a supposedly sure thing, and nobody takes the time to ask
hard questions. In particular, investors
tend to lose track of the fact that something can be technically feasible
without being economically viable, and rosy estimates of projected cash flow
and return on investment take the place of meaningful analysis.
Then come the first financial troubles, brushed aside by
cheerleading “analysts” as teething troubles or the results of irrelevant
factors certain to pass off in short order.
The next round of bad news follows promptly, and then the one after
that; the first investors begin to pull out; sooner or later, one of the hot
companies that has become an icon in the new industry goes suddenly and messily
bankrupt, and the rush for the exits begins.
Barring government subsidies big enough to keep some shrunken form of
the new industry stumbling along thereafter, that’s usually the end of the road
for the former solution du jour, and decades can pass before investors are
willing to put their money into the same resource or technology again.
That’s the way that the fracking story started, too. By the
time it was well under way, though, a jarring new note had sounded: the most prestigious of the US mass media
suddenly started parroting the most sanguine daydreams of the fracking
industry. They insisted at the top of
their lungs that the relatively modest increases in oil and gas production from
fracked shales marked a revolutionary new era, in which the United States would
inevitably regain the energy independence it last had in the 1950s, and
prosperity would return for all—or at least for all who jumped aboard the new
bandwagon as soon as possible. Happy days, we were told, were here again.
What made this barrage of propaganda all the more
fascinating was the immense gaps that separated it from the realities on and
under the ground in Pennsylvania and North Dakota. The drastic depletion rates
from fracked wells rarely got a mention, and the estimates of how much oil and
gas were to be found in the various shale deposits zoomed upwards with wild
abandon. Nor did the frenzy stop there;
blatant falsehoods were served up repeatedly by people who had every reason to
know that they were false—I’m thinking here of the supposedly energy-literate
pundits who insisted, repeatedly and loudly, that the Green River shale in the
southwest was just like the Bakken and Marcellus shales, and would yield
abundant oil and gas once it was fracked. (The Green River shale, for those who
haven’t been keeping score, contains no oil or gas at all; instead, it contains
kerogen, a waxy hydrocarbon goo that would have turned into oil or gas if it
had stayed deep underground for a few million years longer, and kerogen can’t
be extracted by fracking—or, for that matter, by any other economically viable
method.)
Those who were paying attention to all the hoopla may have
noticed that the vaporous claims being retailed by the mainstream media around
the fracking boom resembled nothing so much as the equally insubstantial
arguments most of the same media were serving up around the housing boom in the
years immediately before the 2008 crash.
The similarity isn’t accidental, either. The same thing happened in both
cases: Wall Street got into the act.
A recent report from financial analyst Deborah Rogers,
Shale and Wall Street (you can download a copy in PDF format
here),
offers a helpful glimpse into the three-ring speculative circus that sprang up
around shale oil and shale gas during the last three years or so. Those of my readers who suffer from the delusion
that Wall Street might have learned something from the disastrous end of the
housing bubble are in for a disappointment:
the same antics, executed with the same blissful disregard for basic
honesty and probity, got trotted out again, with results that will be coming
down hard on what’s left of the US economy in the months immediately ahead of
us.
If you remember the housing bubble, you know what
happened. Leases on undrilled shale
fields were bundled and flipped on the basis of grotesquely inflated claims of
their income potential; newly minted investment vehicles of more than Byzantine
complexity—VPPs, "volumetric production payments," are an example
you’ll be hearing about quite a bit in a few months, once the court cases
begin—were pushed on poorly informed investors and promptly began to crash and
burn; as the price of natural gas dropped and fracking operations became more
and more unprofitable, "pump and dump" operations talked up the
prospects of next to worthless properties, which could then be unloaded on
chumps before the bottom fell out. It’s
an old story, if a tawdry one, and all the evidence suggests that it’s likely
to finish running its usual course in the months immediately ahead.
There are at least two points worth making as that happens.
The first is that we can expect more of the same in the years immediately
ahead. Wall Street culture—not to
mention the entire suite of economic expectations that guides the behavior of
governments, businesses, and most individuals in today’s America—assumes that
the close-to-zero return on investment that’s become standard in the last few
years is a temporary anomaly, and that a good investment ought to bring in what
used to be considered a good annual return:
4%, 6%, 8%, or more. What only a few thinkers on the fringes have
grasped is that such returns are only normal in a growing economy, and we no
longer have a growing economy.
Sustained economic growth, of the kind that went on from the
beginning of the industrial revolution around 1700 to the peak of conventional
oil production around 2005, is a rare anomaly in human history. It became a dominant historical force over
the last three centuries because cheap abundant energy from fossil fuels could
be brought into the economy at an ever-increasing rate, and it stopped because
geological limits to fossil fuel extraction put further increases in energy
consumption permanently out of reach. Now that fossil fuels are neither cheap
nor abundant, and the quest for new energy sources vast and concentrated enough
to replace them has repeatedly drawn a blank, we face several centuries of
sustained economic contraction—which means that what until recently counted as
the groundrules of economics have just been turned on their head.
You will not find many people on Wall Street capable of
grasping this. The burden of an outdated but emotionally compelling economic
orthodoxy, to say nothing of a corporate and class culture that accords
economic growth the sort of unquestioned aura of goodness other cultures assign
to their gods, make the end of growth and the coming of permanent economic
decline unthinkable to the financial industry, or for that matter to the
millions of people in the industrial world who rely on investments to pay their
bills. There’s a strong temptation to
assume that those 8% per annum returns must still be out there, and when
something shows up that appears to embody that hope, plenty of people are
willing to rush into it and leave the hard questions for later. Equally, of course, the gap thus opened
between expectations and reality quickly becomes a happy hunting ground for
scoundrels of every stripe.
Vigorous enforcement of the securities laws might be able to
stop the resulting spiral into a permanent bubble-and-bust economy. For all the
partisan bickering in Washington DC, though, a firm bipartisan consensus since
the days of George W. Bush has placed even Wall Street’s most monumental acts
of piracy above the reach of the law.
The Bush and Obama administrations both went out of their way to turn a
blind eye toward the housing bubble’s spectacular frauds, and there’s no reason
to think Obama’s appointees in the Justice Department will get around to doing
their jobs this time either. Once the imminent
shale bust comes and goes, in other words, it’s a safe bet that there will be
more bubbles, each one propping up the otherwise dismal prospects of the
financial industry for a little while, and then delivering another body blow to
the economies of America and the world as it bursts.
This isn’t merely a problem for those who have investments,
or those whose jobs depend in one way or another on the services the financial
industry provides when it’s not too busy committing securities fraud to get
around to it. The coming of a permanent bubble-and-bust economy puts a full
stop at the end of any remaining prospect for even the most tentative national
transition away from our current state of dependence on fossil fuels. Pick a project, any project, from so sensible
a step as rebuilding the nation’s long-neglected railroads all the way to such
pie-in-the-sky vaporware as solar power satellites, and it’s going to take
plenty of investment capital. If it’s to
be done on any scale, furthermore, we’re talking about a period of decades in
which more capital every year will have to flow into the project.
The transition to a bubble-and-bust economy makes that
impossible. Bubbles last for an average
of three years or so, so even if the bubble-blowers on Wall Street happen by
accident on some project that might actually help, it will hardly have time to
get started before the bubble turns to bust, the people who invested in the
project get burned, and the whole thing tumbles down into disillusionment
and bankruptcy. If past experience is anything to go by,
furthermore, most of the money thus raised will be diverted from useful
purposes into the absurd bonuses and salaries bankers and brokers think society
owes them for their services.
Over the longer run, a repeated drumbeat of failed
investments and unpunished fraud puts the entire system of investment itself at
risk. The trust that leads people to
invest their assets, rather than hiding them in a hole in the ground, is a
commons; like any commons, it can be destroyed by abuse; and since the federal
government has abandoned its statutory duty to protect that commons by
enforcing laws against securities fraud, a classic tragedy of the commons is
the most likely outcome, wrecking the system by which our society directs
surplus wealth toward productive uses and putting any collective response to
the end of the fossil fuel age permanently out of reach.
