Mr. Speaker, I rise today to express my growing concern about the economic issues of fracking. The once booming oil fracking market could be headed for a bust. If a bust in the oil fracking sector does happen, it could create massive…
Mr. Speaker, I rise today to express my growing concern about the economic issues of fracking. The once booming oil fracking market could be headed for a bust.
If a bust in the oil fracking sector does happen, it could create massive losses on Wall Street and for investors on Main Street in two ways. First, fracking oil drillers issued massive amounts of debt to construct the necessary wells. With the price of gas falling, many oil fracking drillers now face cash shortfalls. As a result, it is becoming more and more difficult for frackers to meet their debt servicing obligations. If the debt servicing obligations are not met, investors on Main Street and Wall Street could be left holding billions of dollars of worthless bonds.
Second, many companies took out derivatives contracts against market fluctuation, insuring stable cash flow. Losses are mounting on these contracts as oil prices fall. Wall Street banks that own many of these contracts will have to absorb massive losses. The unexpected shock of falling oil prices may destabilize the balance sheet of these big banks, creating the conditions for another financial crisis.
Below is an article from Truthout.org that further explains this issue.
[Truthout.org]
Russia Blamed, U.S. Taxpayers on the Hook, as Fracking Boom Collapses
(By Ben Ptashnik)
As Congress removes restrictions on taxpayers bailing out
the too-big-to-fail banks, the right is blaming
environmentalists and Russia for the demise of the fracking
boom. In reality, the banks' junk bonds and derivatives have
flooded Wall Street, and now the fracking bubble threatens
another financial crisis.
Collapsing crude oil prices due to oversupply are reaching
tsunami proportions, threatening Wall Street banks, investors
and a dozen countries, foremost Russia, Iran and Venezuela,
where revenue losses have caused severe financial
degradation, and economies are about to implode. While
Americans are today enjoying $2 per gallon gasoline, Wall
Street's analysts predict that an imminent energy market
collapse will bring financial institutions to their knees
once again, and taxpayers are being set up for another
mandatory bailout.
At the heart of these tectonic shifts in the entire energy
sector is the recent expansion of the hydraulic fracturing
(fracking) industry, a boom cycle that began in earnest when
Congress and the Bush administration passed the Energy Policy
Act of 2005, which exempted the new horizontal drilling
technology from the Clean Water Act, the Safe Drinking Water
Act and the National Environmental Policy Act. By tapping
considerable quantities of new oil and gas resources from
shale deposits, the fracking boom promised U.S. energy
independence, upending the world's prevailing paradigms
around renewable energy and peak oil expectations.
Environmentalists fought against the huge Keystone pipeline
infrastructure that would deliver the fossil fuels to foreign
markets, fearing that exploiting these resources would
undermine the struggle for the curbing of carbon emissions.
Fracking also threatened the dominance of Russia and Saudi
Arabia as the fossil fuel suppliers of Europe when it became
evident that the United States would soon become a net
exporter. In the United States, fracking was hyped on Wall
Street as a get-rich-quick opportunity, attracting massive
capital input, and creating an investment bubble. Bloomberg
reported this year that the number of bonds issued by oil and
gas companies has grown by a factor of nine since 2004.
``There's a lot of Kool-Aid that's being drunk now by
investors,'', Tim Gramatovich, chief investment officer and
founder of Peritus Asset Management LLC, told Bloomberg in an
April 2014 article. ``People lose their discipline. They stop
doing the math. They stop doing the accounting,'' he
continued. ``They're just dreaming the dream, and that's
what's happening with the shale boom.''
When gas fracking first popped onto the scene, grandiose
claims were made that the United States had 100 years of gas
supply in shale, or 2,560 trillion cubic feet. And Wall
Street rode that initial estimate. The only downside (beside
the environmental disaster left by this toxic industry) was
that, like the housing bubble which depended on ever-growing
home values to maintain profitability, shale gas wells had to
deliver consistent or growing production and profitability to
pay back heavy debt interest loans on well driller companies:
$3 to $9 million per well. Fracking wells require not just
drilling, but also huge injections of energy, water, sand and
chemicals to fracture the rocks that hold the oil and gas
deposits.
But in fact, no statistical evidence confirmed the hyped
claims of a l00-year shale gas supply. In 2011, a study
downsized this estimate from 2,560 trillion cubic feet to 750
trillion cubic feet, and by 2013, the U.S. Geological Survey
refined that down to 481 trillion cubic feet--less than a 19-
year supply based on 2013 rates of production. Nevertheless,
huge amounts of capital poured into increasingly marginal
operations, and the fracking market was flooded with junk
bonds and derivatives as investors piled in.
Meanwhile oil fracking, which is separate from gas
fracking, also needed huge injections of capital, but more
importantly, oil frackers needed oil prices to stay at $85 a
barrel or higher on average to break even. Many of the shale
oil wells that have sucked up a huge amount of investment
have also turned out to have short lives and their operators
required continued infusions of capital to drill new wells to
keep afloat, even as prices tumbled due to the glut they
themselves created. The Bakken, one of the largest oil
fracking plays, is a typical example. It grew exponentially
after environmental protections were removed. But since 2008,
Bakken has required increasingly larger numbers of wells just
to maintain level production and service debt. The industry,
already in trouble in 2013, has now endured plunging revenues
through a year of oil selling at $60 to $70 per barrel, on
average, instead of $90 to $100.
Everyone had expected that in 2014 the Saudis would move to
limit supply and maintain stable oil prices by cutting back
production, as OPEC has done for decades. But an unexpected
shockwave hit the industry in November 2014: The Saudis laid
down the gauntlet and announced their intention to continue
full production and let oil prices drop.
For the Saudis, this serves two purposes: First, it
undermines the expansion of U.S. shale oil by forcing prices
down so low that many of the wells have to be shut down or
lose money. Second, it punishes their enemy, Iran, whose oil
export-based economy has been savaged by the lower prices.
The Saudis are sitting pat, with a trillion-dollar war chest
savings account accumulated over a decade of $100 per barrel
oil. Oil Minister Ali al-Naimi has publicly admitted that the
Saudis will wait as long as needed to retain market share,
even if prices plunge further.
Falling oil prices will place a huge stress on the world's
junk bond market as energy companies now account for 15
percent of the outstanding issuance in the non-investment
grade bond market. The plunge in the prices of crude could
trigger a ``volatility shock large enough to trigger the next
wave of defaults,'' according to Deutsche Bank.
This explains why the Obama administration--with complicity
of both congressional Democrats and Republicans--managed in
the wee hours of the morning to slip a loophole into the
supposedly ``must-pass'' cliff-hanger omnibus budget bill.
This toxic Trojan horse, passed in December 2014, now
includes a minor footnote provision that might cause
taxpayers to pick up the tab on more than a trillion dollars
(yes, trillion) if the energy market bubble implodes, which
it must if oil stays at half the price it fetched just six
months ago.
After last minute, heavy lobbying on the budget bill by
Jamie Dimon of JPMorgan Chase and an army of 3,000 Wall
Street lobbyists, it appears that once again sufficient
insecurity and fear had been spread among the political class
regarding destabilization
of the financial markets (or withdrawal of campaign
financing). They allowed a last minute amendment that killed
Dodd-Frank protections, and allowed U.S. taxpayers to be
shaken down to cover Wall Street's shale gambling debacle.
The heavy-handed move by the financial industry has
outraged progressives and libertarians alike. It seems that
these Wall Street criminals, like junkies attached to their
drugs of choice, just could not resist the high of easy cash
from Ponzi scheme market bubbles, and so they have stuck it
to the U.S. public once again: Preposterously huge bonuses,
Porsches, pricey call girls, and million-dollar Manhattan
condos were at stake. So hey, why should they kick the habit?
After all, not a single one of those con artists went to jail
last time.
Wall Street is now flooded with fracking industry
derivatives contracts that protect the profits of oil
producers from dramatic swings in the marketplace.
Derivatives are essentially insurance policies taken out by
the oil industry to guard against fluctuations in the cost of
fossil fuel supplies. Dramatic swings rarely happen, but when
they do they can be absolutely crippling.
Derivatives taken out to ensure prices don't go down are
now creating billions in losses for those who sold such bets
on the market; someone is going to have to absorb massive
losses created by the sudden drop in oil on the other end of
those insurance contracts. In many cases, it is the big Wall
Street banks, and if the price of oil does not rebound
substantially they could be facing colossal losses.
The big Wall Street banks did not expect plunging home
prices to implode the mortgage-backed securities market in
2008, but their current models also did not have $60 oil
prices included in projections. The huge losses may send a
shock wave into the entire financial industry. It has been
estimated that the six largest ``too-big-to-fail'' banks
control $3.9 trillion in commodity derivatives contracts,
those same gambling instruments that brought us the 2008
housing collapse. And a very large chunk of that amount is
made up of oil derivatives. Combined with the huge flood of
shale junk bonds on the market, the derivatives could
initiate a bubble burst that could turn into a financial
market implosion.
Meanwhile, the global climate change issue and energy
market turbulence have morphed into geopolitical tensions
over European fracking. Unsubstantiated allegations in a New
York Times report by Andrew Higgins claim that the Russians
are funding anti-fracking protests to maintain their hegemony
over gas markets.
The allegations have infuriated environmentalists and
climate justice activists. The last thing they want is to be
made scapegoats for the fracking collapse and be played as
the neo-Cold War dupes of the Russian empire. But memories of
red-baiting suddenly hang in the air as (by seemingly
coincidence) dozens of right-wing media sites regularly
devoted to anti-Soviet slanders or climate change denial
immediately picked up Higgins' Times piece, as if on cue.
There are now dozens more of such published reports. Even
as the U.S. fracking industry collapses and tensions over
control of Ukraine and other former Soviet satellites re-
emerge, there seems to be a concerted right-wing effort to
label fracking opponents Russian agents.
Vague innuendos dominate this narrative. In the Times
piece, for example, former NATO Secretary General Anders Fogh
Rasmussen is quoted: ``I have met allies who can report that
Russia, as part of their sophisticated information and
disinformation operations, engage actively with so-called
non-government organizations.'' Others write, ``Some in
Sophia believe'' or ``Those who suspect Russian involvement''
or ``There's no smoking gun, yet . . . ''
Critics in Romania accused the Times and Higgins of
scapegoating environmentalists and acting as partisan players
in a renewed Cold War.
``What, exactly, is the grand total of evidence that Russia
is financing these anti-fracking protests?'' asks American
blogger in Romania, Sam C. Roman, in his article, ``Pot vs.
Kettle,'' pointing out that the first anti-Russia allegation
came from a politician who owned land that Chevron planned to
frack, and is thus losing money from the protests. ``Not one
allegation against Russia in the entire article is proven by
a single document, piece of evidence or other direct proof.
All that exists are shadowy insinuations and allegations.''
He asserts that accusations by Lithuanian, Romanian and NATO
officials against Russia have not yet to be backed up by any
proof.
``Add it up,'' Roman writes. ``You've got two former NATO
[secretary generals] stumping for Chevron (which competes
with Gazprom, a Russian energy company that also conducts
fracking operations in Europe) blaming the Russian government
for protests. . . . And all of this tied up in a neat little
bow by an American journalist who has already been caught
publishing anti-Russian propaganda in his newspaper before.''
This all leaves the United States somewhat schizophrenic.
On the one hand, the United States and NATO's foreign policy
hawks are delighted by the oil price collapse; it serves to
isolate and subdue Russia, expand NATO's influence in Eastern
Europe, and puts pressure on Iran to negotiate on nuclear
aspirations. Not to mention that with gasoline at $2 per
gallon, consumer spending and economic growth will be
enhanced. The U.S. economy grew by a comparatively robust 5
percent in the third quarter of 2014.
According to an article by Larry Elliott in The Guardian,
``Stakes Are High as U.S. Plays the Oil Card Against Iran and
Russia,'' the price drop was an act of geopolitical warfare
by the United States, administered by the Saudis. Elliott
suggests that U.S. Secretary of State John Kerry allegedly
struck a deal with Saudi Arabia's King Abdullah in September.
That might explain how oil prices dropped during the crisis
caused by Islamic State in Iraq and Syria, which would
normally have caused prices to rise.
It would also explain why the Obama administration allowed
the financial industry the amendment to Dodd-Frank that
effectively exempts financial institutions from liability
associated with derivatives. Though shale derivatives were
not specifically mentioned by the Wall Street lobbyists as
they pressured their allies in Congress and the White House,
it is becoming increasingly clear that the too-big-to-fail
banks were beginning to panic as dark clouds gathered on the
horizon in the shale derivatives trade.
Most bank customers and voters don't know that Congress has
already written into finance regulations that, in the case of
insolvency, financial institutions could grab the assets of
depositors and ``bail-in''--which means they can save
themselves from their losses in gambling operations at their
investment divisions by grabbing cash assets of depositors,
even those that are FDIC guaranteed, and legally convert them
to bank stocks. That means that in the event of another
market crash, Chase and Citi could take their depositors'
cash in savings accounts or CDs, and give the customers back
a bank stock certificate (of questionable value) instead.
There are also those who scratch their heads and ask, ``Why
did the TBTF banks push for a deletion of the Dodd-Frank
provision now, instead of waiting for the friendlier
Republican-controlled Congress to pass this legislation?''
The only answer that seems to make sense, and explain their
urgency, is that the collapse is imminent.
In the 1990s dot-com craze, every new Silicon Valley start-
up company was advertised as the next Microsoft. What
followed was the crash of 2000, when the NASDAQ dropped 4,000
points (80 percent) in months. This chart below is what the
crash looked like in 2000 to 2002 after the market had
reached 5,000 (almost exactly where it stands today).
Having learned their lesson well from the last bailout, and
knowing that they will have a much harder time coming to
Congress hat-in-hand after a collapse, the TBTF banks
probably decided not to wait, pushing their minions in the
Beltway to inoculate them as soon as possible from the
potential market explosion. In the meantime, they were
probably dumping their own stocks on unsuspecting investors.
Based on year-end reports for March 31, 2014, for 127 major
oil companies, cash input for the fracking industry was $677
billion, while revenues from operations only totaled $568
billion--a difference of almost $110 billion. And this was
before the price of oil started dropping six months ago.
In three out of seven major fracking fields in North
America, companies are already reporting losses, with
closures particularly acute in Canada. It's not clear whether
economists fully appreciate what's about to transpire. This
decline in rig count is just the beginning. Perhaps the end
will come as early as this winter or spring, as fiscal
reports for 2014's fourth quarter are published, operations
shut down, crews are laid off, and many unprofitable oil and
gas rigs are mothballed.
So, whom will the banks, brokers and investors scapegoat
for this upcoming crash? Some predict that they will likely
use every available media outlet to blame community
activists, Democrats and Obama for stopping the Keystone
pipeline and for opposing the fracking industry. And as in
the climate change denier movement, the narrative will
probably use ``communist'' and ``socialist'' rhetoric, which
is why the Russian card is so important to play: Hence the
Higgins article.
The pundits on Fox will likely play on the patriotism of
the right and use their Big Lie ploy (say something enough
times, it becomes the truth) to the hilt. Six months from
now, while studiously avoiding mention of our ``allies,'' the
Saudis, or the Wall Street banks, they will likely be
vociferously defending those poor ``beleaguered U.S. oilmen''
who could have made our country strong and independent again
in energy, but were broken by the Democrats and those
``commie environmentalists'' working for Putin. The market
crash will be blamed on the ``climate hoax.''