When Gas Bubble Explodes, Economy Could Implode All Over Again

If you thought the housing bubble was bad, wait until you hear about the oil and gas bubble.

If you haven't already, now would be a good time for you to go buy Matt Taibbi's book, "Griftopia". In the book, he explains with absolute clarity how bubbles are made and how they burst, and how Wall Street manufactures them in order to relieve ordinary people of their hard-earned money.

It is with Matt's book in mind that I read two reports released today about fracking and Wall Street by the Post Carbon Institute and the Energy Policy Forum.

DeSmogBlog boils it down:

Together, the reports conclude that the hydraulic fracturing ("fracking") boom could lead to a "bubble burst" akin to the housing bubble burst of 2008.

While most media attention towards fracking has focused on the threats to drinking water and health in communities throughout North America and the world, there is an even larger threat looming. The fracking industry has the ability - paralleling the housing bubble burst that served as a precursor to the 2008 economic crisis - to tank the global economy.

Playing the role of Cassandra, the reports conclude that "the so-called shale revolution is nothing more than a bubble, driven by record levels of drilling, speculative lease & flip practices on the part of shale energy companies, fee-driven promotion by the same investment banks that fomented the housing bubble..." a summary details. "Geological and economic constraints – not to mention the very serious environmental and health impacts of drilling – mean that shale gas and shale oil (tight oil) are far from the solution to our energy woes."

I'm certain these reports will be dismissed as the left-wing answer to right-wing climate change deniers. Before naysayers do that, they should consider the sources behind the report.

The Energy Policy Forum is run by Deborah Rogers. Here's part of her bio:

Deborah Rogers began her financial career in London working in investment banking. Upon her return to the U.S., she worked as a financial consultant for several major Wall Street firms, including Merrill Lynch and Smith Barney. Ms. Rogers then struck out on an entrepreneurial venture in 2003 with the founding of Deborah’s Farmstead, an artisanal cheese-making operation, and quickly established the company as one of the premier artisanal dairies and cheese makers in the U.S., the cheese having won several major national awards.

Not exactly what you'd call an anti-Wall Street type, right? What she has to say in the intro to the full report is stunning:

It is highly unlikely that market-savvy bankers did not recognize that by overproducing natural gas a glut would occur with a concomitant severe price decline. This price decline, however, opened the door for significant transactional deals worth billions of dollars and thereby secured further large fees for the investment banks involved. In fact, shales became one of the largest profit centers within these banks in their energy M&A portfolios since 2010. The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets and to provide cash flow to support operators’ imprudent leverage positions.

As prices plunged, 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 of the obvious lack of sophisticated knowledge by many of these 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.

That second paragraph highlight should be quite familiar to anyone who has done even the most cursory reading on the housing bubble.

The Post Carbon Institute has been in existence since 2003, and seeks to influence policies for social, economic and environmental sustainability. Their report, entitled "Drill, Baby, Drill", argues that the US does not have the resources to be energy-independent, or to export oil and gas at the rate it's being done now.

The U.S. is a mature exploration and development province for oil and gas. New technologies of largescale, multistage, hydraulic fracturing of horizontal wells have allowed previously inaccessible shale gas and tight oil to reverse the long-standing decline of U.S. oil and gas production. This production growth is important and has provided some breathing room. Nevertheless, the projections by pundits and some government agencies that these technologies can provide endless growth heralding a new era of “energy independence,” in which the U.S. will become a substantial net exporter of energy, are entirely unwarranted based on the fundamentals. At the end of the day, fossil fuels are finite and these exuberant forecasts will prove to be extremely difficult or impossible to achieve.

The fundamentals are not sound and Wall Street investment bankers are playing games with the markets to keep us thinking they are while people like the Kochs pocket profits hand over fist.

If you don't believe the reports, consider this: The oil and gas statistics President Obama cited in his State of the Union address came from a known hired gun for the oil and gas industry.

These reports are game-changers, in my view, because even if you think it's just fine for oil companies to continue fracking their way to prosperity, they could well plunge the rest of us into a deep, dark hole where 2008 will seem like heaven.

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