This article is an excerpt from Richard Heinberg’s new book SNAKE OIL: How Fracking’s False Promise of Plenty Imperils Our Future. Given the urgency and importance of the issues we are serializing the book here at Resilience.org.
The boomtown syndrome is as old as the petroleum industry itself. Once commercial deposits of oil or gas are confirmed, drillers and speculators arrive by the truckload, driving up prices for just about everything. Prostitution and motor traffic proliferate; peace and quiet disappear. Years later, after local citizens have spent their money from drilling leases, the oil or gas begins to peter out. High-paid workers leave town, and the local economy deflates.
Hydraulic fracturing has . . . boosted local economies—generating royalty payments to property owners, providing tax revenues to the government and creating much-needed high-paying American jobs. Engineering and surveying, construction, hospitality, equipment manufacturing and environmental permitting are just some of the professions experiencing the positive ripple effects of increased oil and natural gas shale development.”7
In their many opportunities to testify before Congress, oil and gas industry representatives have repeatedly painted a glowing picture of how America is benefiting from expanded shale gas and tight oil development. Here is Daniel Yergin speaking on the topic of shale gas in 2011:
This abundance of natural gas is very different from what was expected a half decade ago. It was then anticipated that constraints on domestic natural gas production would result in high prices for consumers and the migration of gas-using industries—and the jobs that go with them—out of the United States to parts of the world with cheaper supplies. The United States was also expected to be importing substantial amounts of natural gas in the form of liquefied natural gas (LNG). That would have added as much as $100 billion to our trade deficit. None of that has occurred. Instead, the United States has become, except for imports from Canada, mostly self-sufficient. . . . Gas prices have fallen substantially, lowering the cost of gas-generated electricity and home heating bills. Several hundred thousand jobs have been created in the United States. Gas-consuming industries have invested billions of dollars in factories in the United States, something which they would not have expected to do half a decade ago—creating new jobs in the process. The development of shale has created significant new revenue sources for states—for the state of Pennsylvania and localities in that state, for example, $1.1 billion in revenues in 2010.17
Net imports of crude will continue to decline. . . . [W]e will see the Western Hemisphere, and North America in particular, moving towards greater self sufficiency. At the same time, the very large, technically advanced refining complex on the Gulf Coast—along with the shifting domestic product demand—will put the United States in the position to continue to expand exports of refined products. . . . [E]xpanded domestic supply will add to resilience to shocks and add to the security cushion. Moreover, prudent expansion of US energy exports will add an additional dimension to US influence in the world.18
Since June 2009 the volume of oil and gas extraction has risen by 24%. Over the same period the production of mining machinery has risen by 47% and the output of mining support services, which includes oil and gas drilling, has leapt by 58%. . . . But that rise explains only a small part of the economic recovery. Admittedly, it is responsible for a fifth of the 18.3% increase in overall industrial pro-duction. Given that the oil- and gas-related sectors account for only 2.5% of GDP, they have contributed just 0.6 percentage points (ppts) to the 7.6% rise in GDP.24 [Emphasis in original]
THE OIL AND GAS INDUSTRY
When we inquire who benefits from the fracking frenzy, the intuitively obvious answer is, “the oil and gas industry, of course.” Yet this may be a simplistic assumption.
If, in the final analysis, the nation as a whole and the impacted communities within it lose more from fracking than they gain, and the oil industry is seeing diminishing returns on its burgeoning investments, then who does stand to benefit?
In order for a publicly traded oil and gas company to grow extensively, it must manage not only its core business but also the relationship it enjoys with its investment bankers. Thus, publicly traded oil and gas companies have essentially two sets of economics. There is what may be called field economics, which addresses the basic day-to-day operations of the company and what is actually occurring out in the field with regard to well costs, production history, etc.; the other set is Wall Street or “Street” economics. This entails keeping a company attractive to financial analysts and investors so that the share price moves up and access to the capital markets is assured. (p. 6)
Wall Street began executing deals to spin assets of troubled shale companies off to larger players in the industry. Such deals deteriorated only months later, resulting in massive write-downs in shale assets. In addition, the banks were instrumental in crafting convoluted financial products such as VPP’s (volumetric production payments); and despite the obvious lack of sophisticated knowledge by many . . .investors about the intricacies and risks of shale production, these products were subsequently sold to investors such as pension funds. Further, leases were bundled and flipped on unproved shale fields in much the same way as mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downturn of 2007. (p. 1)
1.“Major CEOs Feeling the Recession . . . Somewhat,” Associated Press, May 1, 2009, .
2.Christopher Helman, “The Two Sides of Aubrey McClendon, America’s Most Reckless Billionaire,” Forbes, October 5, 2011, .
3.Christopher Swann and Robert Cyran, “Did Chesapeake miss Enron lessons?” Reuters, May 22, 2012, .
4.Christopher Helman, “Here’s What The Analyst Who Uncovered Enron Thinks About Chesapeake,” Forbes, June 4, 2012, .
5.John Shiffman, Anna Driver, and Brian Grow, “Special Report: the Lavish and Leveraged Life of Aubrey McClendon,” Reuters, June 7, 2012, .
6.Nicholas Sakelaris, “Aubrey McClendon Back in the Game with New Oil/Gas Company,” Dallas Business Journal, April 19, 2013, .
7.“Benefits of Fracking,” EnergyFromShale (website), accessed May 13, 2013, .
8.Matthew DiLallo, “Can Fracking Benefit Your Community Too?” Motley Fool, March 26, 2013, . Alan Bjerga, “Small Towns Find Fracking Brings Boom, Booming Headaches,” Bloomberg, March 27, 2013, .
9.Stephen Herzenberg, “Drilling Deeper into Job Claims: The Actual Contribution of Marcellus Shale to Pennsylvania Job Growth,” policy brief, Keystone Research Center, June 20, 2011, .
10.Susan Christopherson, “The Economic Consequences of Marcellus Shale Gas Extraction: Key Issues,” Community & Regional Development Initiative, Cornell University, CaRDI Reports no. 11 (September 2011), . See also “Economic Impacts of Fracking,” Save Colorado from Fracking.
11.Tara Lohan, “Resource Curse: Why the Economic Boom That Fracking Promises Will Be a Bust For Most People (Hard Times, USA),” AlterNet, March 6, 2013, . See Susan Christopherson and Ned Rightor, “How Should We Think About the Economic Consequences of Shale Gas Drilling?”.
12.Deborah Rogers, “Externalities of Shales: Road Damage,” Energy Policy Forum (blog), April 1, 2013, .
13.“Increased Crime Rates,” Save Colorado from Fracking, modified October 3, 2005.
14.Deborah Rogers, “Shale and Wall Street: Was the Decline in Natural Gas Prices Orchestrated?” Energy Policy Forum, February 2013.
15.Brett Shipp, “Landowners Upset Over Unpaid Royalties in the Barnett Shale,” WFAA-TV (website), updated October 26, 2012.
16.Andrea Ahles, “DFW Airport Settles Lawsuit with Chesapeake,” Fort Worth Star-Telegram, September 7, 2012.
17.Daniel Yergin, Chairman, IHS Cambridge Energy Research Associates, (testimony, Senate Energy and Natural Resources Committee, Senate Energy Committee), October 4, 2011.
18.Daniel Yergin (testimony submitted for hearings on America’s Energy Security and Innovation, Subcommittee on Energy and Power of the House Energy and Commerce Committee), February 5, 2013.
19.“USA: United LNG, Petronet Reach Main Pass Energy Hub Agreement,” LNG World News, posted April 25, 2013.
20.“US Congressmen Favour Export of Natural Gas to India,” Hindu Business Line, April 27, 2013.
21.The IEA believes that at a natural gas price of $5 per thousand cubic feet, US utilities will begin switching back to coal.
22.Deborah Rogers, “PA Jobs Numbers Poor in Spite of Marcellus Shale,” Energy Policy Forum, February 4, 2013.
23.Deborah Rogers, “Shale and Wall Street,” Energy Policy Forum, February 2013. Data from U.S. Bureau of Labor Statistics, posted May 8, 2012.
24.Brad Plumer, “The US Oil and Gas Boom Has Had a Modest Economic Impact—So Far,” Washington Post, April 23, 2013.
25.Chesapeake Energy Corporation, Q3 2008 Business Update Call Transcript, October 19, 2008.
26.Deborah Rogers, “Shale and Wall Street”.
27.Matthieu Auzanneau, “Total Production by the Top Five Oil Majors Has Fallen by a Quarter Since 2004,” The Oil Drum (blog), April 19, 2013.
28.Steve Andrews, “Commentary: Interview with Steven Kopits,” Peak Oil Review (April 29, 2013): 6–10.
29.“ExxonMobil: ‘We’re Losing Our Shirts’,” gCaptain (blog), June 27, 2012.
30.Clifford Krauss and Eric Lipton, “After the Boom in Natural Gas,” New York Times, October 20, 2012. Philip Bump, “Frackers Struggle While Financiers Make Millions. Sounds Familiar.” Grist (blog), October 22, 2012.
31.Deborah Rogers, “Shale and Wall Street”.
Dollars image via 401(K)/flickr