Despite the recent historic agreement between OPEC, Russian, American and other global oil producers to slash supply by the 1st of May with the hopes of bolstering prices, the United States will still suffer an “unprecedented” economic blow according to the International Energy Agency. With high production costs and deeply in debt, many U.S. producers, especially those extracting from shale fields, are bleeding cash as they try desperately to cut costs. Output is expected to shrink by more than two million barrels per day. Analysts predict waves of bankruptcies, along with thousands of job losses and steep drops in tax revenues for oil-dependent states as the fallout from a monster oil bust ripples throughout America’s already staggering economy. L. Michael Buchsbaum reviews the worsening situation.
Fracking Fever Dream
Since the oil shocks of the 1970s, successive American presidents have championed the dream of energy independence, which was supposed to liberate the country from the world’s oil-rich trouble spots while propping up U.S. economic hegemony. Even as American soldiers bewilderingly invaded Iraq, the dream seemed unattainable — until breakthroughs with shale-oil fracking technology unleashed a torrent of crude beginning around 2005. Fifteen years later, U.S. shale producers accounted for over two-thirds of domestic output as America became the world’s largest producer of fossil fuels, surpassing both Saudi Arabia and Russia. Reveling in the rhetoric, Trump boasted that under him, it hadn’t merely achieved independence, but rather “energy dominance.”
As 2020 started, the U.S. economy was being buoyed by an ocean of petrochemicals. Then came Covid-19, and, on March 8, the sudden and vicious end to the truce between Saudi Arabia and Russia, under which both countries limited production to prop up prices. On March 9, the price of oil plunged by almost a third, from nearly $60 to under $20 per barrel, its steepest one-day drop in almost 30 years. On April 20, West Texas crude was being traded at an unprecedented -$37.50 per barrel (Note: a barrel translates to roughly 160 liters or 42 US gallons).
A generation ago Americans would celebrate such a plummet since it translated into tumbling fuel costs at the pump for drivers. In “pre-dominant” America, cheaper gas meant cheaper everything. But todayocal and state governments share in the revenue from oil production. Now the highest taxpayers in their districts, throughout the last decade, many states have become dependent on fossil fuel production to keep their budgets balanced as well as their citizens employed.
This risk of this dependency is acerbated by the fact that fracking has never been financially viable. In a New York Times op-ed by Bethany McLean, author of “Saudi America: The Truth About Fracking and How It’s Changing the World,” points out that America’s energy independence was built on an industry that “is the very definition of dependent: in this case, dependent on investors continuing to pour billions upon billions in capital into money-losing companies to fund continuous drilling projects.” Investors went along with this only while oil prices–which are not under America’s control–were consistently high — and only as long as they believed that one day profits would materialize. But to date, they haven’t.
The basic reason fracking isn’t viable is that the amount of oil coming out of a fracked well declines steeply after the first year — more than 50 percent in year two. To keep growing, companies have to keep plowing billions back into the ground, pumping, fracking, re-stimulating; an endless unsustainable and unprofitable cycle of deplete and repeat.
A pile of junk
To keep propping them up and finance their expansion, Wall Street happily supercharged America’s fracking boom by making it easy for oil companies to finance growth with cheap, borrowed money. Deploying a familiar raft of complex financial instruments like derivatives, collateralized debt obligations (CDOs) and other assorted “junk bonds” repurposed after wrecking Real Estate markets back in 2008, the “too-big-to-fail” banks responsible for 2008’s Great Recession have fracked up again. According to an analysis from JP Morgan Chase, in 10 of the last 11 years, energy companies were the single largest junk bond borrowers. But the billions Wall Street has riding on shale is based upon a business model predicated upon oil prices not seen in the last five years, and not expected to return anytime soon—if at all.
And that was the situation America’s fossil fuel industry was in before the coronavirus pandemic hit. Their collective $200 billion plus in debts marks the difference between an industry able to survive a major downturn and one which could fall into an economic death spiral—indeed Trump is promising the legendarily libertarian industry bailouts.
Nevertheless, as markets overflow with unneeded oil and billions shelter in place, crude prices, in particular in Texas, have fallen below zero, crashing through a floor few traders ever assumed was penetrable. Individual investors and major institutional pension funds that poured their money into private equity firms are taking major hits.
As drilling and producing companies close shop and fire their employees en masse, oil-dependent states and communities will soon see tax revenues dry up. With unemployment levels already unseen since the 1930s, hunger spreading and America’s thin social safety nets fraying, no one knows how this will end. But what’s certain, according to McClean, is that the fracking company executives and private equity financiers who made their fortunes by touting the myth of energy independence “won’t be the ones who have to pick up the pieces.”
A Texas sized bust
Leery of sinking more into a money-losing industry, Wall Street investors earlier this year pulled back, leaving producers with limited options for refinancing. In Texas, where about 40% of the America’s oil and gas is produced and industry directly employs more than 361,000, companies have already axed at least $8 billion from their 2020 capital budgets and laid off tens of thousands.
Nationwide, contractors and roughnecks in North Dakota, Oklahoma, Pennsylvania and other fracking hotspots are also facing major job cuts. Oil producers generally employ service companies to do their drilling and fracking, in the absence of new drilling, the downturn will be particularly painful for businesses like General Electric’s Baker Hughes or Schlumberger.
At its Houston headquarters, top fracking service provider Halliburton has furloughed over 3,500 employees through at least May. Even executive salaries have been cut. “There is no more lifeline,” said chief finance officer, Lance Loeffler.