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Fracking’s fundamental flaw

The arguments for and against fracking have been so rehearsed as to be clichéd.  For its proponents, fracking is an energy miracle that will simultaneously cut energy prices and save us all from climate change.  To its opponents it is an environmentally dangerous practice that will result in pollution, earthquakes and damage to human health.  More recently, a third issue around the economics of fracking has made its way into the mainstream as even the pro-fracking UK Tory government has been obliged to seek financial safeguards before giving companies permission to frack.

There is, however, a deeper danger from fracking that has gone almost unseen on all sides of the debate… its consequences for the wider economy.

The fundamental flaw in fracking is that it is too energy-intensive.  Broadly, the geological processes that “cooked” conventional oil and gas over millions of years are incomplete in shale formations.  Fracking seeks to artificially complete that natural process.  But this comes at a cost in terms of the energy and materials that are required to substitute for the pressures and heat deep within the earth’s crust.  This is why a small number of critics of fracking talk about it having a very low Energy Return on Energy Invested (EROEI) compared to conventional oil and gas.

The difficulty with abstract EROEI calculations is that it is not readily obvious how the excess energy demand of an industry like fracking will manifest in the real world.  In theory, shifting from high-EROEI to lower-EROEI fuels should result in higher prices.  However, since the economy as a whole cannot withstand high energy prices, the result is as likely to be recession, over-production and lower prices.  This appears to have been borne out by the collapse in oil and gas prices from mid-2014 through to mid-2017.

Superficially, this appears correct… except that demand for oil didn’t fall.  As Stephen Leeb, Chief Investment Strategist of The Complete Investor, Real World Investing, and Aggressive Trader points out:

“For the five years ended in 2017, U.S. gross domestic product (GDP) grew at an average annualized rate of 2.17%. This covers the period beginning in 2012, when fracking took off, adding about 4 million barrels a day to U.S. production. During the same period, oil consumption increased at a lesser rate of about 1.7% a year.”

The point, however, is that the additional oil consumption didn’t find its way into the US economy or into the gas tanks of ordinary US consumers:

“As a result, during this five-year period, 78% (1.7/2.17) of a barrel of oil equates to about 1% of GDP growth. That may sound like good news, but it is not. The U.S., as a highly developed economy (in the tertiary, i.e., more service-oriented, stage) should need much less oil than that to power growth. During the same period many European countries, with admittedly somewhat less growth than the U.S., saw oil consumption decline. The developing world – including China and India – mostly has oil consumption relative to GDP on a par with the U.S.”

So where did the additional oil go?  In one word: “Fracking:”

“No matter how you adjust for growth, the rise in U.S. oil consumption over the past five years is a massive outlier… The usual suspects don’t make a dent in explaining this. For example, Americans have been driving a bit more this decade, but more fuel-efficient cars compensate for the additional miles.

“A full analysis would entail a near impossible level of complexity. But in gross terms the biggest additional guzzler of energy has been energy itself in the form of fracking. Fracking uses up enormous amounts of energy. Massive quantities of liquids and sand must be transported to fracking sites, wells must be cemented, waste disposed of, and huge amounts of diesel brought in to run the heavy equipment.”

Leeb’s argument appears to be borne out from another angle too.  In an article for Market Watch, Jeffry Bartash warns:

“If the nine-year-old U.S. expansion finally grinds to a halt, a lack of truck drivers is likely to be a culprit in fouling up the gears of the economy.

“A shortage of truck drivers has been building for several years, but now the problem is especially acute. Companies increasingly complain about longer delivery times for supplies and rising transportation costs — costs that could lead to higher prices for consumers and more inflation.”

Bartash’s explanations for this state of affairs are superficially plausible – too many younger workers with college degrees and too many baby-boomers leaving the workplace.  However, given the high levels of under-employment and problems paying off student debt among US graduates – many of whom have several part-time jobs to make ends meet – these factors do not fully explain what is happening.  It is very likely that one unforeseen consequence of the “US shale miracle” is that it has deprived the wider US economy of a large proportion of the trucks and truck drivers that it depends upon to function.  As the price of oil goes up, the fracking industry is prepared to pay more for trucks and truckers just at the point where the rest of the economy is struggling to afford them.

We have already seen the threat fracking poses to water supplies and to sand stocks.  It now appears that we can add an increasing proportion of road transport to the list of things fracking will gradually deprive us of.

Leeb draws a parallel with the Easter Islanders chopping down increasing numbers of trees to provide for their immediate energy and resource needs even though this was ever more visibly undermining their civilisation.  In effect, in our vain attempt to maintain a way of life based on cheap fossil fuels that no longer exist in the quantities we need, we find ourselves turning to increasingly expensive substitutes.  Our alternative would be to undergo a planned simplification and localisation of our economies to bring them into line with the amount of energy available to us in future.  Instead, we are merely allowing the “hidden hand of the market” to carry out the localisation and degrowth chaotically on our behalf – by gradually undermining the broader economy in order to squeeze the last drops of economically viable hydrocarbons out of the earth’s crust.

Fracking’s fundamental flaw is that it is a road to nowhere.  The alternatives, however, are too difficult and unpopular to be seriously considered.  Which is why I believe that the modern equivalent of the last tree being felled on Easter Island will be a final fracking well, bored into the last piece of pristine forest, to recover hydrocarbons that nobody will be able to put to any useful purpose.  And when we’re done, we’re done.

As you made it to the end…

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