The fracking boom is ending with a bust

screen shot 2015-02-14 at 10.06.10 am

screen shot 2015-02-14 at 10.07.42 amSource: Business Insider.

Business booms are followed by busts—the interaction of overconfidence, oversupply and diminishing returns.

That’s not just a law of the free-market system, it’s a law of human nature.

As the chart above indicates, hydraulic fracturing for natural gas is an industry entering the bust part of its cycle.

The glut of natural gas probably will continue for some time.   Gas companies would continue to pump gas even if they’re losing money.

They’ve already paid for the drilling equipment, and they’d lose less money by continuing to pump than by walking away from their sunk costs.

It’s good that New York state didn’t jump into fracking just now.   We’d have had all the problems associated with fracking and none of the benefits the come with getting in on the ground floor.

The wise thing to do just from a business point of view, aside from all environmental and climate considerations, is to keep natural gas in the ground as long as we can.  If there comes a time when we desperately need it, it will be there.

LINKS

Fracking has collapsed by Wolf Richter of Wolf Street for Business Insider.

Keystone XL, Cold War 2.0 and the GOP Vision for 2016 by Michael T. Klare for TomDispatch.  Fracking is a factor in geopolitics.

Update 2/28/15

As Bill Harvey pointed out in his comment, a decline in the number of rigs doesn’t mean a decline in production—that is, not right away.

markets cotd rig count2

Oil rigs and oil production in the United States

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3 Responses to “The fracking boom is ending with a bust”

  1. Bill Harvey Says:

    If only we could be certain that the fracking boom is ending. Yes, a somewhat similar development more than 30 years ago put an end to the onslaught of nuclear energy when it was effectively halted under the pressure of plant construction costs. The Almighty Buck ruled then and no doubt will continue to rule for at least a little while longer.

    However, with regard to fracking, the ringer factor missing from this discussion is the intention to export fracked oil and natural gas. [Michael Klare takes some note of this, but Phil and BUSINESS INSIDER do not bring it into their analysis.] Here in MD we are in the midst of a struggle to get an 8 year moratorium on fracking. There have been a number of reports along the lines of Phil’s, but it would be a mistake for people who understand the devastating environmental and public health impacts of fracking- as well as the social and economic impacts on those who “[got] in on the ground floor” in 30+ states- to believe that the bust is a done deal.

    Right along the industry’s intention has been to export oil and gas. This has been well known for some time w regard to the Keystone XL, and Bakken oil destined for refineries has been the spark of the many struggles (one here in Baltimore) over the transport of oil by rail to refineries that is usually intended for eventual export.

    With regard to natural gas, the currently underway construction of the LNG export terminal at Cove Point, MD and pipelines across the state that will supply it, that gas has been destined for export to lucrative markets in Japan and India all along. With 20+ other such export terminals in various stages of application, approval, and development, it would be premature for us to assume that no more will be pushed through. And, as noted by Klare, natural gas export figures into the US’s (Democratic and Republican) vision of Europe’s future- recall the spate of commentaries, 6 months or so ago, urging stepping up natural gas production here for export to lucrative European markets in order to squeeze Russia out of those markets.

    If they get a half dozen of these LNG export terminals up and running over the next few years, they’ll be fracking til they drop. We’d be foolish to be going on any other assumption.

    IF the capitalist economics of fracking torpedoes the whole project, it’s all good by me. Wrap it up, we’ll take it. The cost factor, after all, is one key to what Klare elsewhere calls this new era of “tough energy.” However, we shouldn’t count on it- indeed, all the more reason to step up our efforts. The only sensible approach: BAN IT.

    Click to access urgent_case_for_ban_on_fracking.pdf

    BH

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  2. Bob O Says:

    Good post, and good first comment by BH. Now what becomes of the hoped-for fracking boom in Southern Illinois? Maybe, like NY state, the benefit is not having invested in a dropping market, in addition to the obvious environmental threats that are delayed.

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  3. philebersole Says:

    I agree that fracking should be banned, and I agree that a zombie fracking industry might well continue beyond any rationale, economic or otherwise, for its existence.

    An oil or natural gas executive might feel compelled for financial reasons to get some return on investment in coal, oil and gas supplies and extraction equipment, even if the investment turns out to be bad.

    But that’s not a compelling rationale for a state or national government to allow fracking to continue, even if you think solely in economic and financial terms.

    From the standpoint of preventing catastrophic climate change, it’s best that all carbon stay in the ground.

    But even if you ignore climate change, and also ignore pollution and environmental destruction, and think solely in terms of economic and national self-interest, the current U.S. drive to extract every last little bit of coal, oil and natural gas doesn’t make any sense.

    Assuming for the sake of argument that it’s not possible to end dependence on fossil fuels anytime soon, why be in such a hurry to burn them up? Why pour more supplies into a glutted market?

    The rational policy, even from that standpoint, would be to keep them in reserve until they are desperately needs and their economic and strategic value would be hugely greater than now.

    I

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