Fracking Idiocy

Having dealt in my prior two posts with Climate Change idiocy, (and there’s so much more fertile ground to be tilled on both sides of that subject) I’d like to turn my attention today to Saudi America’s continuing delusion of energy independence.

The news of late in the energy arena continues to be of energy abundance and resultant low consumer prices, with some necessary casualties in the oil patch.  Peak Oil is dead.  Fracking will set us free.  Except in Denton, Texas and a growing number of Texas towns that see fracking as an insidious oppression, joining folks in Pennsylvania, and Ohio, and North Dakota and other places where the wildcatters have run roughshod, aided and abetted by local officials whose greed is comparatively modest in scale, but no less deleterious in effect.

Being an accountant, I try to marshal my humble skills to understand events as they are, and not as they are presented. Among the core tenets of accounting is the principle of substance over form.

So what is the substance of our current fracking bonanza?  Have we unleashed unlimited energy wealth?  No.  Hydrocarbons are still a ‘non-renewable’ resource in the sense that we are depleting them far faster than natural processes can replenish them, and at some point, we are bound to hit a wall.  That it may not be in our lifetime does not absolve us of the moral and ethical obligation of stewardship for future generations. (Moral obligation. Such a quaint notion.)

Do we have an abundance of energy?  No, we have simply found a way to exploit a limited resource faster than before. And in absence of any regulatory discipline of the markets, save the Saudis who are NOT our friends, we have driven down the price of a precious resource by exploiting it unconscionably and creating an illusory abundance.

But aren’t the low prices of the  moment good for consumers and the greater economy, even at the expense of the oil industry?  Yeah,  like sub-prime mortgages and liar loans.  But what about the blow-back that will follow, when the closed-in wells and abandoned rigs don’t snap back to production as fast as prices in the inevitable shortage that will follow?  Remember the boom/bust of the 80s. Or any other period in the history of the industry, which is riddled with boom/bust. And, at the risk of stating the obvious, how long can the consumer expect to benefit at the expense of the industry whose own foolishness has made that benefit unsustainable for both?

Another thing that accountants like to do is to match revenues with expenses.  As I have maintained in prior blogs, if we were to do so with the extractive energy industry, energy prices would be much higher than they are, and we would be conserving much more than we do.  The price of oil and gas does not reflect the burden on the inadequate infrastructure that bears the strain of the current boom and will likely be left severely depreciated without adequate economic recovery when the bust occurs.  It does not reflect the costs of social and environmental degradation, which the industry will not likely clean up before it leaves town. It is consuming water at a voracious rate, frequently in places where it is competing with agriculture and basic human consumption for priority of an exceedingly scare resource.  And while water is a renewable resource, that is not the case for much of the millions of gallons of fracking cocktail that are being permanently sequestered deep in the earth because it is too toxic for recovery and recycle by natural or technological means.  Unless of course another New Madrid quake manages to un-sequester those wells back to the surface, or close enough for unpleasant consequences.  Even folks in Oklahoma and Ohio are beginning to have second thoughts.

No, we don’t match revenues with expenses in the near term, or over the long haul. The energy industry is taking the profits up front, and deferring the knowable costs and plausible long-term contingent risks for others to bear; and in many cases, the ‘others’ bear the costs disproportionately to the benefits they hoped to derive from royalties, or jobs, or tax base or whatever other mirage was flashed in front of them.

Most interesting is how fracking seems to elude serious scrutiny for the economics that underlie the current surge in production.  It is generally known that fracked wells deplete much faster than conventional plays, and that for a company to continue to generate growth in revenue, it must continue to frack new wells faster than the older wells are depleting.  This is often referred to as the Red Queen Syndrome, the need to keep running faster and faster just to stay in place.  It is not a winning game in the long run.  This is a form of ‘kiting’, a term in auditing for a particular type of serial fraud that usually ends badly for the perpetrator and his victims.  Or one could call it a Ponzi scheme and still be close to the truth.

I have to wonder if the major producers backed away from a significant push into fracking because they saw too clearly both the economic folly and the potential long-term contingent liabilities that would befall them with their perceived deep pockets.  Hit-and-run wildcatters don’t worry about the long-term.  So where do the majors go to replenish their depleting reserves?  Deep ocean.  The Arctic.  Russia, a fun place to do business if you don’t have the stomach for Iraq.  Do they take these risks because there’s an abundance of oil and gas to be had under reasonable conditions?  No.

So it may be true that the earth has an abundance of hydrocarbons waiting to be exploited.  But when you add the true costs of exploitation, in every sense of that word, you no longer have cheap and abundant energy.

We have the technical capacity to rape the planet from pole to pole.  That is not in question.  The question is what will be left that is worth the energy.

Onward.

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