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.