When you add up all the costs — monetary costs, not even environmental — of fracking for shale gas, it turns out the entire business is horribly unprofitable, reports energy analyst Chris Nelder at SmartPlanet. So why are companies engaged in an unprofitable business if it's also a fairly unneighborly way to pollute the local environment with wastewater, noxious fumes, and earthquakes?
One answer to this conundrum is that operators need to keep drilling in order to hold onto their leases. If they don’t actively work the land that they spent the last several years acquiring in a buying frenzy, they lose it. The early operators in these gas formations, or “plays,” aren’t sufficiently well-funded to continue drilling at a loss; they’re simply trying to hold onto their leases long enough to flip them to larger companies at a profit.
If this sounds familiar, it's because it's exactly the same model of "flipping" an asset for profit that brought us the housing bubble.
Even worse, this is a bubble on top of another bubble — the net decline of oil and gas in the U.S. Big oil companies need to pad their portfolios so it doesn't look like they're running out of the resource on which they depend for their very existence.
When production and reserves fall, the stocks of producers fall too and can trigger defaults on loans. Maintaining reserves, even while draining them, is an imperative.
Ha! Wait, did Nelder just say that the entire shale gas industry is the same kind of Ponzi scheme that got us into the most recent economic collapse? I think he did. It's worth reading his full account of the issue.
The questionable economics of shale gas, SmartPlanet.
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