In a New York Times Sunday Review op-ed, Bethany McLean, who helped expose the corruption that brought down Enron in 2001 and irresponsible banking practices that contributed to the 2008 financial collapse and the Great Recession, issued a new economic warning. McLean believes the United States and the global economies are teetering on the edge of an enormous downturn. She argues the pin that will prick the current economic bubble is a debt crisis in the energy industry.
McClean is not the only one projecting a looming economic collapse. In another New York Times article Neil Irwin expressed concern with rising corporate debt over the last decade spurred by low interest rates and the opportunity to increase returns for shareholders, including corporate officers. The rise in debt loads overseas, especially in emerging markets, is even greater than it is in the West and their economies are more fragile.
Fracking is a relatively new process that allows energy producers to create cracks deep below the surface, inject high pressure liquids underground, and force out natural gas and oil. In the last decade it has transformed the United States from an energy importer to an energy exporter. It has also been blamed by environmentalists for earthquakes and water pollution.
McLean reports that Wall Street is home for some of the biggest fracking skeptics, not because of environmental concerns, but because of a poor profit line. The sixty largest fracking exploration and production companies do not earn enough to cover their operating and capital expenses. In a five-year period from mid-2012 to mid-2017 they had a negative free cash flow of $36 billion a year. In 2015, hedge fund manager David Einhorn reported that between 2006 to 2014, leading fracking companies spent $80 billion more than they received from sales.
The fracking companies have survived so far on borrowed money and stock market speculation. Between 2001 to 2012, Chesapeake Energy, one of the earliest fracking companies, borrowed $15.5 billion and raised additional funds through $16.4 billion in stock sales and never showed an operating profit. McClean believes that this negative balance sheet understates Chesapeake’s vulnerability because it was forced to raise another $30 billion selling off its assets. She also accuses Chesapeake of “Enron-esque deals,” repaying loans with promised future sales of natural gas, sales whose profitability is hardly guaranteed based on past performance.
Fracking is dependent on low interest rates and high oil prices. Amir Azar of the Columbia University Center on Global Energy Policy calculates that the industry’s net debt increased by 300% from 2005 to 2015, largely fueled by super-low interest rates following the 2008 economic collapse. The industries problems were partly generated by a 2014 decision of OPEC ministers to maintain high production levels for their countries, despite falling energy prices.
McClean believes stock market valuation of fracking companies is “reminiscent of the dot-com bubble of the late 1990s, when internet companies were valued on the number of eyeballs they attracted, not on the profits they were likely to make. As long as investors were willing to believe that profits were coming, it all worked — until it didn’t.”
Donald Trump takes personal credit for any uptick in an economic indicator. When the media or economists express concern, Trump shouts: “Fake News.” It is impossible to predict how he will react to a severe downturn, but we can be sure he will blame everyone else for his mismanagement of the economy.
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