ACTIONABLE ADVICE FOR FINANCIAL ADVISORS: Newsletters and Commentaries Focused on Investment Strategy

Is Fracking a 'Happy Solution' to our Energy Needs?

January 2nd, 2013

by Richard Vodra, JD, CFP

Further, studies by Arthur Berman, David Hughes, and Rafael Sandrea have analyzed well-by-well data from existing mature oil and gas shale fields and concluded that the ultimate production from these sources is likely to be much more limited than optimists claim. While fields are large, covering many counties or even states, most production comes from a few “sweet spots,” where drilling opportunities are limited by quality acreage. While the Bakken field in North Dakota is producing about 750,000 barrels per day now, and common projections are for production to reach two million bpd in a few years, both Hughes and Sandrea project a maximum of less than one million bpd within five years, and a sharp decline after that.

That is disheartening, since a lot of current policymaking assumes that abundant and cheap gas and oil will be ours for many years to come, and the problem is what we will do with it all. Oil companies are lobbying to lift restrictions on exporting American crude oil and to build gas-exporting facilities. It has been suggested that one purpose of those proposals is to link our market to the (higher-priced) world market. By contrast, companies building new electricity generating facilities and designing new trucks are counting on cheap gas (under $6) in the future, and they are likely to be disappointed.

The shale boom has enabled – or perhaps, some say, was itself enabled by – financial wizardry on Wall Street. Recent changes in how the SEC allows corporations to report their oil and gas reserves have made shale holdings a valuable tool for supporting stock prices, leading to a wave of fee-generating M&A activity. Additionally, some firms are securitizing packages of leases, bringing back memories of subprime mortgages. With low interest rates, capital is plentiful, and those who wanted to explore these newly productive oilfields did not have trouble raising money, at least to get the shale boom started. Once again, the opportunities for gain in the financial economy overrode the realities of the “real” economy.

Thus, shale oil and gas may be both less plentiful and less affordable than many assume, and should not form the basis for long-term assumptions about energy independence or a new economy.

Environmental issues

Between ongoing droughts in the Midwest and superstorm Sandy in New York, more Americans are accepting the idea that the climate is changing for the worse, and that human beings and our fossil fuels are largely responsible. One attraction of natural gas is that it produces less CO2 at the point of use than coal does, so replacing coal with gas seems to many people like prudent change.

But since a lot of methane is released in the fracking process, there is considerable dispute about what the net benefit of gas really is. Moreover, the growing use of gas in the US is not reducing the production of coal but rather is facilitating more exports of coal to China, India, and Europe. While this helps our trade balance, it does not do much for climate control.

One long-term strategy for limiting climate change is to replace fossil fuels with “renewable energy,” mostly wind and solar-based systems, while also using the energy we have more efficiently. But such alternatives are not as attractive as fossil fuels from either a cost or reliability perspective (if they were, we would already be using them), even though they may be necessary in the future. It normally takes decades for a society to transition to a new energy system, and cheap gas is making it hard to get support for these new technologies (or for nuclear, which is even more expensive than renewable energy sources).

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