The fracking industry is looking more and more like a typical economic bubble.
Based on data compiled from quarterly reports, for the year ending March 31, 2014, cash from operations for 127 major oil and natural gas companies totaled $568 billion, and major uses of cash totaled $677 billion, a difference of almost $110 billion.
Of course the EIA was quick to dismiss the debt spiral of fracking companies.
that piling on debt “to fuel growth is a typical strategy, particularly among smaller producers.” And besides, this ballooning debt would be “met with increased production, generating more revenue to service future debt payments.”The obvious problem with this statement is the nature of fracking - there win't be "increased production" coming.
More and more wells are being drilled. More capital/debt is being used to get at that oil and gas. But production has stalled because the low-hanging fruit has already been picked. Unlike traditional oil drilling, shale oil taps out very quickly. That is simple geology.
the average decline of the world's conventional oil fields is about 5 percent per year. By comparison, the average decline of oil wells in North Dakota's booming Bakken shale oil field is 44 percent per year. Individual wells can see production declines of 70 percent or more in the first year.
Shale gas wells face similarly swift depletion rates, so drillers need to keep plumbing new wells to make up for the shortfall at those that have gone anemic.
With the extremely high decline rates in production, within a few years the same well might only be producing 10% of when they produced in the first year. That means that the debt used to make the well will still exist after the well has gone dry.
Not only does that mean a build-up in debt-laden oil and gas companies, but also an industry that will increasingly be unable to find productive wells worth drilling.
Just look at this chart below of fracking companies and interest they pay on existing debts.
This is the second-to-last step in a investment bubble. The last step is when those companies have to borrow just to pay the interest on existing debts. Judging by the charts above, that day will arrive soon.
This will be followed by c) the search for scapegoats, and there is only one scapegoat here - environmentalists.
The fracking business will go under because those evil environmentalists didn't allow us to drill under national parks, and poison everyone's well water. So if we just toss environmental regulations aside, the industry will return to profitability.
This media campaign will happen sooner rather than later, so you might as well get ready. Investors with money-losing ventures will toss campaign donations at greedy politicians, because those donations will be just a small percentage of the money they stand to lose on their bad investments.
Congress’s likely response: “Poor you! What can we do to help? How about some further exemptions to the Clean Air and Clean Water acts? Maybe a preemption of local fracking ordinances with a new industry-friendly national rule? Would you care for some drilling leases on millions of acres of federal land as an appetizer, while you’re waiting? They’re on the house.”The fracking model is hopelessly short-term and doesn't stand a chance of returning to profitability, but people might not realize that if the media campaign from step "a" is convincing.
There will be a real economic cost when the fracking bubble bursts. Hundreds of thousands of jobs will be lost and many rural communities will lose their tax base. However, that is what is supposed to happen according the rules of capitalism.
What we should be doing is using this short-term bump in energy production to develop greener, cleaner energy solutions so we can better withstand the end of this bubble and not to go back to being dependent on middle east oil, an increasingly unstable region.
So where are those political leaders with vision? I'm not speaking of 20-years in the future vision. This bubble will probably burst within the next five years.