New York Times Explodes Natural-Gas Bubble

The thing about a gas bubble is, it's flammable. (Photo by Andrew Kuznetsov/Flickr)

Once in a great while a newspaper (“The few. The frail. The fading.”) reminds us why we need newspapers, and why we are going to miss them. There are no other institutions left whose purpose (speaking here of the practitioners, not the investors) is to seek the facts and tell the truth. On Friday, the New York Times published the results of an exhaustive review of America’s natural-gas industry, which has been energized by the discovery of a new way to unlock gas from shale, and has pronounced it to be — to paraphrase — a fraud.

Okay, that’s going too far. The Times didn’t call it a fraud, they merely quoted several people who are gas-industry and investment-bank insiders who think it’s a fraud. Like the analyst from IHS Drilling Data who said in a 2009 email, “The word in the world of independents [independent oil and gas producers] is that the shale plays are just giant Ponzi schemes and [that] the economics just don’t work.” Or the former Enron employee who waxes nostalgic about “the education I got at Enron with these type people.” There’s lots more, you can read the leaked documents here.

For well over a year, I’ve been writing about the false promises of the natural-gas industry. If you need to get up to speed on hydraulic fracturing — the industry’s new miracle drug — the claims they’re making for it and the many ways they are screwing up, we can do that.

So the news in the New York Times piece is not that the industry has been lying to us — we knew that, their lips were moving — or that they were not making good on their promises that they would deliver an abundance of cheap, clean energy — we knew that, they’re industrialists. The news flash is that many people inside the industry were deceived by the industry, and now know it!

To summarize what the Times discovered and documented as the judgment of many industry insiders:

  • most shale-gas fields are proving to be much less productive than expected;
  • most shale-gas (fracking) wells are more expensive and less productive than claimed;
  • most of these wells are playing out much faster than expected.

We’re not going to shed a tear here for the tribulations of the gas companies and their investors. But there are much wider implications. The industry, in its time-honored way, will respond to these problems by doubling down; more wells must be developed, faster, to replace the wells that are playing out or not turning a profit (just as, in a Ponzi scheme, you have to find new investors faster and faster in order to keep the old investors happy). This will mean more pollution of more groundwater by the noxious fluids used in fracking and by the unexpected consequences of blindly and explosively manipulating the gas far underground.

Honest public policy always involves a cost-benefit analysis. If people are delivering energy independence, and clean fuel, and a better future, maybe we should tolerate a little dirty water. But if they are a bunch of get-richer-quicker con men? Different deal.

And there is a consideration even beyond that. There are many ways in which complex social and economic systems can destabilize to the point of self-destruction. When people at the bottom of the economic ladder get too hungry, they will bring the system down. But what we are seeing increasingly in the US is instability at the very top of the food chain.

In the midst of chronic unemployment, declining wages and increasing poverty, we have in this country an ocean of unearned wealth controlled by a handful of people that is sloshing around the world inflating and deflating bubbles. The problem for the owners and managers of this unearned wealth is to first, keep it safe, and then make it bigger. You can’t keep a gazillion dollars safe under the mattress — too lumpy — and you can’t double it in a savings account — the vaunted power of compound interest is not so impressive when the interest rate and the inflation rate are about the same.

Give these folks a reason to believe they can make easy money with their easy money — with Enron-managed power companies, say, or in startup dot-com companies, or in collateralized debt obligations based on a prime tranche of sub-prime mortgages — and they respond with a tsunami of cash that first blows the bubble up (as in inflates it), and then blows the bubble up (as in destroys it).

The natural gas bubble is blowing up.


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