Thursday, July 28, 2022

Throwing Money at Fracking

Hydraulic fracking transformed America's energy landscape; these days more than half of our oil and gas come from fracking, and we are completely independent of Middle Eastern oil. As they wrangle in Washington about how much money to spend on transitioning to clean energy, a question comes to mind; how did we pay for fracking? In the NY Times, David Wallace-Wells explains:

Perhaps the most striking fact about the American hydraulic-fracturing boom, though, is unknown to all but the most discriminating consumers of energy news: Fracking has been, for nearly all of its history, a money-losing boondoggle, profitable only recently, after being propped up by so much investment from venture capital and Wall Street that it resembled less an efficient-markets no-brainer and more a speculative empire of bubbles like Uber and WeWork. The American shale revolution did bring the country “energy independence,” whatever that has been worth, and more abundant oil and gas. It has indeed reshaped the entire geopolitical landscape for fuel, though not enough to strip leverage from Vladimir Putin. But the revolution wasn’t primarily a result of some market-busting breakthrough or an engineering innovation that allowed the industry to print cash. From the start, the cash moved in the other direction; the revolution happened only because enormous sums of money were poured into the project of making it happen.

Today, with profits aided by the energy price spikes of the last year, the fracking industry is finally, at least for the time being, profitable. But from 2010 to 2020, U.S. shale lost $300 billion. Previously, from 2002 to 2012, Chesapeake, the industry leader, didn’t report positive cash flow once, ending that period with total losses of some $30 billion, as Bethany McLean documents in her 2018 book, “Saudi America,” the single best and most thorough account of the fracking boom up to that point. Between mid-2012 and mid-2017, the 60 biggest fracking companies were losing an average of $9 billion each quarter. From 2006 to 2014, fracking companies lost $80 billion; in 2014, with oil at $100 a barrel, a level that seemed to promise a great cash-out, they lost $20 billion. These losses were mammoth and consistent, adding up to a total that “dwarfs anything in tech/V.C. in that time frame,” as the Bloomberg writer Joe Weisenthal pointed out recently. “There were all these stories written about how V.C.s were subsidizing millennial lifestyles,” he noted on Twitter. “The real story to be written is about the massive subsidy to consumers from everyone who financed Chesapeake and all the companies that lost money fracking last decade.”

There is nothing unusual about this. The building of America's railroads was a boondoggle on a similar scale, and most investors lost money. In most of the country (New York is the exception) nineteenth-century investors lost a ton of money trying to build canals, hardly any of which were ever finished. Capitalism was able to supercharge economic growth in Europe and its settler colonies because of the way stock markets and other mechanisms can raise huge amounts of money to throw at promising technologies. At one level this is a scam, in that very few ordinary folks investors ever made any money in canals, railroads, coal, airplane manufacture, airlines (a truly awful investment), or many other new tech booms. Or fracking. But in the bigger picture this spigot of money, directed at wherever the potential for growth seemed highest, created the modern world, and investors who spread their money around usually came out ahead in the long run.

So, yes, fracking happened because a lot of investors threw money at it, and lost. David Wallace-Wells seems to be decrying this waste and wishing the money had been spent on solar instead. But technologies developed with all that money may end up having a great value in the future, if they enable (as investors are now betting) efficient geothermal energy.

Besides which, the same thing is happening in clean energy. American companies are spending gigantic sums on solar and wind, thanks to a new spigot of Wall Street money being directed toward those fields. I should know, I make half my living these days from new solar farms. The money is now flowing toward solar because 1) the technology has reached a point where it makes economic sense, and 2) many investors want to see their money working toward saving the planet, hence all those "Green" investment vehicles. They are still wrangling about subsidies in Washington because climate alarmists think the transition isn't happening fast enough and want the government to "do something." A secondary issue is that the Chinese seem to be massively subsidizing their own solar industry, and many Americans don't want to see China dominate this technology or vacuum up all the "green jobs."

But you can bet that if we do transition to green energy, most of the money will come from investors, some of whom will lose a lot. Capitalism thrives despite is gigantic flaws because it has this world-transforming power, and nobody has found any other system that can do this thing nearly as well.


David said...

It's interesting, though, to see that a lot of the investing doesn't seem to be done in a purely rational way. I suspect there's some semi-rational "I believe in this technology and its potential," plus gut feelings, cultural affinity, sunk costs, peer pressure, and other psychological things. I'm not saying that means capitalism is bad--though bubbles are a thing. But count me as a fan of the move away from the "humans as rational advantage maximizers" model of economics (and much else).

John said...

I was just thinking about what 19th-century regular folks thought when they invested in railroads or canals. Were they just out to make a buck, or was it about becoming the kind of person who invests in the future?

David said...


I would imagine there was, in most cases, a mix of motives. Gambling (which what investment is, at least in part) is a very complex thing in itself. Then there are obvious psychological motives like proving to oneself, family members, internalized/archetypalized figures, etc., etc., that "I'm a forward-thinking, stand-up guy who does things!," "I'm not a loser, I'm not!," "I've still got it!," etc., etc. Then there are less dramatic, less potentially tormented motives like FOMO, fear of being different, or respect for a person who is doing/wants you to do it, or being persuaded (whatever that means, but IMO in large part a socio-psychological process) by some sales-oriented type (seller in the professional sense, or someone who has some psych need of their own to persuade others to do things). One could go on and on.

G. Verloren said...

"I was just thinking about what 19th-century regular folks thought when they invested in railroads or canals. Were they just out to make a buck, or was it about becoming the kind of person who invests in the future?"

My sense is that "investing in the future" is mostly just an exercise in finding a feel-good justification for wanting to make a buck. The trend stretches back through history quite a long way.

Back in the 1700s, well before railroads and canals, people flocked to invest in the South Sea Company (a ponzi scheme empowered by [somewhat] unwitting royal decree), at least in part under the argument that it would strengthen Britain on the world stage and enrich the whole populace.

Back in the early 1200s, during the Fourth Crusade, the Venetians gambled their entire economy and their very existence as a state by accepting a contract to build an absurdly large fleet of ships for crusading German princes, tying up their entire maritime industry for a full year to fulfill the order, in exchange for a massive future payment which... never materialized, leading the Venetians in desperation to force the Crusaders to repay them via other means, directly leading to the sacking of Christian Constantinople by the Crusaders. All of this, of course, was done under the justification of being for the sake of all Europe and all Christendom, making the world a better place by "reclaiming" the Holy Land from "evil infidels".

Back in the 2nd century BCE, in the waning years of the Roman Republic, men like the brothers Gracchi sought to enrich themselves by fomenting Populist uprisings against the Republic itself, gambling that they could retain control of the mobs they both created and whipped into a frenzy, using them as a tool to defeat their enemies and secure power for themselves, and all the while arguing that they were acting in the best interests of Rome and the Roman people, "investing" in the future of the Republic by enacting radical reforms under the authority of the will of the people. Quite predictably, they lost control and paved the way for the collapse of the Republic and the rise of Imperial Dictatorship for centuries to come.

Monarchy itself could be argued to have arisen out of the spurious claim that it was an "investment in the future", rather than powerful individuals leveraging their power to eliminate competitors and make themselves de facto despots lording over entire societies. "Help me to seize enough power to be come unchallengeable! It's for the good of us all! (...and also I will repay you with land, wealth, status, et cetera...)"

Ask yourself this - if you took away the promise of a return on investment, would people still have thrown $300 billion into fracking over ten years? No, of course not. The people spending that money were not motivated by investing in the future - not enough to freely give away their money without a promise of getting it back, plus profit / interest. They did it out of greed, with the "investing in the future" angle being the excuse to justify their greed.