Alternative Facts

Its all part 

of my rock and roll fantasy

Its all part 

of my rock and roll dream

     -Bad Company

This is not my beautiful house

       -Talking Heads

Greetings

      Well, we apparently have moved into the "truth free" area.    Here is a funny ( I think)  take on how the founding fathers might react to our current way of doing things.

"Two hundred years ago no one would have thought sheer volume of available facts in the digital information age would fail to produce informed Americans. Founders of the republic, steeped in the Enlightenment as they were, and believers in an informed citizenry being vital to freedom and democracy, would be delirious with joy at the prospect. Imagine Jefferson and Franklin high on Google. 

The fatal assumption was that Americans would choose to think and learn, instead of cherry picking the blogs and TV channels to reinforce their particular branded choice cultural ignorance, consumer, scientific or political, but especially political. Tom and Ben could never have guessed we would chase prepackaged spectacle, junk science, and titillating rumor such as death panels, Obama as a socialist Muslim and Biblical proof that Adam and Eve rode dinosaurs around Eden. "  (from here)

      So, where am I going with this?    As far as energy and the environment are concerned, we are caught between two visions of the future, neither of which seem to be particularity likely to occur.  On the one hand we have the views of the current administration.  This used to be called "Drill Baby Drill" ,but is now known as   "The "America First Energy Plan", .  

    This plan has three desired goals,  all of which were met in the 1950's, but unfortunately in today's energy world, only two could be realized at the same time. 

Two out of three

To close, let’s look again at the three goals of Trump’s America First Energy Plan:

• Abundant fossil fuel

• Profitable fossil fuel

• Cheap fossil fuel

With remaining resources increasingly represented by unconventional oil such as that in the Permian basin of Texas, there is indeed abundant fossil fuel – but it’s very expensive to get. Therefore if oil companies are to remain profitable, oil has to be more expensive – that is, there can be abundant fossil fuel and profitable fossil fuel, but then the fuel cannot be cheap (and the economy will hit the skids). Or there can be abundant fossil fuel at low prices, but oil companies will lose money hand-over-fist (a situation which cannot last long).

It’s a bit harder to imagine, but there can also be fossil fuel which is both profitable to extract and cheap enough for economies to afford – it just won’t be abundant. That would require scaling back production/consumption to the remaining easy-to-extract conventional fossil fuels, and a reduction in overall demand so that those limited supplies aren’t immediately bid out of a comfortable price range. For that reduction in demand to occur, there would have to be some combination of dramatic reduction in energy use per capita and a rapid increase in deployment of renewable energies.   (for more details see  here.)

           On the other side we have our shiny new renewable plan which also has three goals. - cheap abundant energy, universal prosperity, and no significant environmental impact.

     Once again we find these goals to be internally inconsistent, as illustrated by Professor  William Reese, the creator of the ecological footprint analysis.  In In a nice review of the situation , Chapter 4 of the  Worldwatch Institutes,  "State of the World" 2013 , Professor Reese explains  how thoroughly unsustainable our current situation is, and that on average we are using the "ecological income " from  1.5 planets, each year.   Carbon emissions are of course, a major part of the unsustainable situation, but other population dependent factors such top soil loss,  over fishing and forestry also continue the increase..

  

        But, of course, the  current lavish, energy rich lifestyles of the "developed nation" , exists overwhelmingly as a result of the use of fossil fuels.   Reese provides a  recipe for sustainability for the west.,  First he punctures the "sustainability through efficiency " meme noting that ..". total resource and energy demand in most of the world’s industrial countries has increased in absolute terms over the past 40 years despite efficiency gains of 50 percent in materials and 30 percent in energy use".

       He then explains what it would take:

Clearly, lifestyle choices have a significant impact on our Ecological Footprint. However, even if average Vancouverites followed a vegan diet; avoided driving or flying and only walked, cycled, or used public transit;lived in a passive solar house that used almost no fossil-based energy; and cut their personal consumption by half, they could only reduce their per 

capita Ecological Footprint by 44 percent (from 4.96 to 2.8 gha per capita).That seems like an impossible challenge already—and yet it is still a full global hectare beyond the one-planet threshold.

       In case you skipped that quote, here is the takeaway,  in order to return to sustainability, , we  in the "west" need to do the following things :No driving, no flying, and  little buying.  Oh,yeah, and become a vegan.   And even then, its pretty iffy. 

       

       But that's not picture we get from our leaders, or environmental activists.  They assume, we can have more of the same, with no major changes. How can we have such irrationality on both sides.?  It seems that both on the right and left are able to forget facts when they conflict with dreams.   Here's an interesting article on the appeal of "fake news" to both sides of the political spectrum.  One study found  that both sides were happy not to question or analyze,  and that liberals, were only " slightly more predisposed to think critically than conservatives ."

"Daniel Kahan, a Yale professor of law and psychology, says his research has found that people on the right are no more vulnerable to political bias than those on the left.

""Bottom line," Kahan said in an email, "there's ample evidence of politically biased information processing across the entire ideological spectrum."

         So, one might argue that humans are often  basically irrational, and believe what makes them feel good.  see here  When confronted by opposing facts, they will often, not change their minds , but will even hold their original position more strongly See e.g. The Back fire effect.

         OK, so, how is this likely to play out?

         For one possible future, lets look at John Micheal Greer, who recently wrote,

The Earth’s economically accessible reserves of fossil carbon dwindle day by day; with each year that passes, on average, the amount of coal, oil, and natural gas burnt exceeds the amount that’s discovered by a wider margin  (ed  see above); the current temporary glut in the oil markets is waning so fast that analysts are predicting the next price spike as soon as 2018.  (ed. see here) Talk of transitioning away from fossil fuels to renewable energy, on the one hand, or nuclear power on the other, remains talk—I encourage anyone who doubts this to look up the amount of fossil fuels burnt each year over the last two decades and see if they can find a noticeable decrease in global fossil fuel consumption to match the much-ballyhooed buildout of solar and wind power.

The industrial world remains shackled to fossil fuels for most of its energy and all of its transportation fuel, for the simple reason that no other energy source in this end of the known universe provides the abundant, concentrated, and fungible energy supply that’s needed to keep our current lifestyles going. There was always an alternative—deliberately downshifting out of the embarrassing extravagance that counts for normal lifestyles in the industrial world these days, accepting more restricted ways of living in order to leave a better world for our descendants—but not enough people were willing to accept that alternative to make a difference while there was still a chance.

Meanwhile the other jaw of the vise that’s tightening around the future is becoming increasingly visible just now. In the Arctic, freak weather systems has sucked warm air up from lower latitudes and brought the normal process of winter ice formation to a standstill. In the Antarctic, the Larsen C ice shelf, until a few years ago considered immovable by most glaciologists, is in the process of loosing an ice sheet the size of Delaware into the Antarctic Ocean. (ed. see here I look out my window and see warm rain falling; here in the north central Appalachians, in January, it’s been most of a month since the thermometer last dipped below freezing. The new administration has committed itself to do nothing about anthropogenic climate change, but then, despite plenty of talk, the Obama administration didn’t do anything about it either.

There’s good reason for that, too. The only way to stop anthropogenic climate change in its tracks is to stop putting greenhouse gases into the atmosphere, and doing that would require the world to ground its airlines, turn its highways over to bicycles and oxcarts, and shut down every other technology that won’t be economically viable if it has to depend on the diffuse intermittent energy available from renewable sources.  (ed.  see above).  Does the political will to embrace such changes exist? Since I know of precisely three climate change scientists, out of thousands, who take their own data seriously enough to cut their carbon footprint by giving up air travel, it’s safe to say that the answer is “no.”

So, basically, we’re in for it.

 "In for it" is a short hand way of saying that the feedbacks will eventually make it impossible for the industrial system to continue.   Some people might say "It's about time!   Now perhaps we can give the biosphere a chance to heal itself.!  Maybe we can pick up the pieces and start again on a sustainable basis" .  See e.g  Surviving The Future    But what about between now and when we "pick up the pieces"?   Greer's prognosis for that era is not all that appealing 

" From the early days of the peak oil movement in the late 1990s on, a remarkably large number of the people who talked eagerly about the looming crisis of our age seemed to think that its consequences would leave them and the people and things they cared about more or less intact. That wasn’t universal by any means; there were always some people who grappled with the hard realities that the end of the fossil fuel age was going to impose on their own lives; but all things considered, there weren’t that many, in comparison to all those who chattered amiably about how comfortable they’d be in their rural doomsteads, lifeboat communities, Transition Towns, et al.

Now, as discussed earlier in this post, we’ve gotten a very modest helping of decline and fall, and people who were enthusiastically discussing the end of the industrial age not that long ago are freaking out six ways from Sunday. If a relatively tame event like the election of an unpopular president can send people into this kind of tailspin, what are they going to do the day their paychecks suddenly turn out to be worth only half as much in terms of goods and services as before—a kind of event that’s already become tolerably common elsewhere, and could quite easily happen in this country as the dollar loses its reserve currency status?

What kinds of meltdowns are we going to get when internet service or modern health care get priced out of reach, or become unavailable at any price?  How are they going to cope if the accelerating crisis of legitimacy in this country causes the federal government to implode, the way the government of the Soviet Union did, and suddenly they’re living under cobbled-together regional governments that don’t have the money to pay for basic services? What sort of reaction are we going to see if the US blunders into a sustained domestic insurgency—suicide bombs going off in public places, firefights between insurgent forces and government troops, death squads from both sides rounding up potential opponents and leaving them in unmarked mass graves—or, heaven help us, all-out civil war?

This is what the decline and fall of a civilization looks like. It’s not about sitting in a cozy earth-sheltered home under a roof loaded with solar panels, living some close approximation of a modern industrial lifestyle, while the rest of the world slides meekly down the chute toward history’s compost bin, leaving you and yours untouched. It’s about political chaos—meaning that you won’t get the leaders you want, and you may not be able to count on the rule of law or even the most basic civil liberties. It’s about economic implosion—meaning that your salary will probably go away, your savings almost certainly won’t keep its value, and if you have gold bars hidden in your home, you’d better hope to Hannah that nobody ever finds out, or it’ll be a race between the local government and the local bandits to see which one gets to tie your family up and torture them to death, starting with the children, until somebody breaks and tells them where your stash is located.

It’s about environmental chaos—meaning that you and the people you care about may have many hungry days ahead as crazy weather messes with the harvests, and it’s by no means certain you won’t die early from some tropical microbe that’s been jarred loose from its native habitat to find a new and tasty home in you. It’s about rapid demographic contraction—meaning that you get to have the experience a lot of people in the Rust Belt have already, of walking past one abandoned house after another and remembering the people who used to live there, until they didn’t any more.

More than anything else, it’s about loss. Things that you value—things you think of as important, meaningful, even necessary—are going to go away forever in the years immediately ahead of us, and there will be nothing you can do about it.  It really is as simple as that. People who live in an age of decline and fall can’t afford to cultivate a sense of entitlement. Unfortunately, for reasons discussed at some length in one of last month’s posts, the notion that the universe is somehow obliged to give people what they think they deserve is very deeply engrained in American popular culture these days. That’s a very unwise notion to believe right now, and as we slide further down the slope, it could very readily become fatal—and no, by the way, I don’t mean that last adjective in a metaphorical sense.

That gives the "transition"  a different perspective.  And when might this happen?  Well, Greer suggest that in some sense it is happening; i.e. social and political conflicts are coming to the fore.  I'd suggest that we wont really notice until the next "Great Recession", which at least one pundit , Dr. Nafeez Mosaddeq Ahmed, suggests that it's around the next corner.  See  here.     Who knows?

Back on the road

You gassed her up

Behind the wheel

With your arm around your sweet one

In your Oldsmobile

      -Tom Waits  (The Heart of Saturday Night)

Everybody had to pay and pay

     -Lou Reed (Take a Walk on the Wilds Side)

Greetings

         Well gas prices are back to "normal" - below $3!   Looks like things are finally going our way!   And Americans are taking it to the road!  SUV sales are up.   So are trucks.     So, why should we be at all concerned about peak cheap oil?

      Here's a nice piece on the recent drop in the price of oil, by John Michael Greer..  Many of us have heard various narratives explaining this phenomenon.  The most fun are the ones involving  the conspiracy between the US and Saudi Arabia, working together to harm Russia and Iran.     Which is an appealing story given thee emnity between the US and Russia.   Another story is the main stream view -  that  thanks to American ingenuity and technology,  we created a fracking boom, and energy independence. !!  USA  !!  USA !!  

       Greer points out that there is a far simpler explanation; the inevitable"demand destruction" that comes high rpices, caused by peak cheap oil.  Economies everywhere are slowing.    Such a slow down affects more than the price of oil.   Look at the price of other commodities;  here Coal (down 20-25%);  Aluminum down 17%; Iron ore down 46%; rubber down 34%. .  Given that type of slow down in economic activity, its no big surprise that oil is down 25%.  ( see also Prof James Hamilton's analysis.  - global economic weakness responsible for 45% of drop) 

      The fracking boom was a product of  high price of oil plus the low price of money.  The Fed's low interest rate policy has left investors in a tough spot.    . Folks like like pension funds, insurance companies, and as Greer points out - college endowments - .these folks need income, and ordinary bonds couldn't deliver..  So, they moved to riskier investments     173 billion dollars went into the junk that supported that boom.    Of course they aren't called junk bonds for no reason.  They were risky.   And , now they are really risky.    No one knows what the break even price for the fracked oil is.  Some say $75, some say $60.  Today's price for oil is $59.  

 ( It's been ten years since the  famous prediction by Danial Yergin , the oil price "guru" the networks always turn to.  In . 2004, he called for a long term price of $38.  .     Who knows, we may hit it yet. )

    Of course the price will bounce around some more.   There will be booms and panics.    But rust never sleeps.  And neither does decline..    

      One helpful way to look at the situation is through this chart.    The amount of cheap oil production - the oil that fueled the boom we've experienced since the WWII.  -   will continue to decline.   During the next boom, we will be able to afford some of the more expensive oil.   Eventually we'll spend too much on oil and the economy will tank  again.  Rinse and repeat.

     

 

____     

Bonus feature:  How much longer will fracking boom last?   :   Kunsler talks with Art Berman.  Martensson talks with David Hughes.  

  

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Déjà Vu All Over Again

by John Michael Greer, originally published by The Archdruid Report  | TODAY

Over the last few weeks, a number of regular readers of  The Archdruid Reporthave asked me what I think about the recent plunge in the price of oil and the apparent end of the fracking bubble. That interest seems to be fairly widespread, and has attracted many of the usual narratives; the  blogosphere is full of claims that the Saudis crashed the price of oil to break the US fracking industry, or that Obama got the Saudis to crash the price of oil to punish the Russians, or what have you.

I suspect, for my part, that what’s going on is considerably more important. To start with, oil isn’t the only thing that’s in steep decline. Many other major commodities—coal, iron ore, and copper among them—have registered comparable declines over the course of the last few months. I have no doubt that the Saudi government has its own reasons for keeping their own oil production at full tilt even though the price is crashing, but they don’t control the price of those other commodities, or the pace of commercial shipping—another thing that has dropped steeply in recent months.

What’s going on, rather, is something that a number of us in the peak oil scene have been warning about for a while now. Since most of the world’s economies run on petroleum products, the steep oil prices of the last few years have taken a hefty bite out of all economic activities.  The consequences of that were papered over for a while by frantic central bank activities, but they’ve finally begun to come home to roost in what’s politely called “demand destruction”—in less opaque terms, the process by which those who can no longer afford goods or services stop buying them.

That, in turn, reminded me of the last time prolonged demand destruction collided with a boom in high-priced oil production, and sent me chasing after a book I read almost three decades ago. A few days ago, accordingly,  the excellent interlibrary loan service we have here in Maryland brought me a hefty 1985 hardback by financial journalist Philip Zweig, with the engaging title Belly Up: The Collapse of the Penn Square Bank. Some of my readers may never have heard of the Penn Square Bank; others may be scratching their heads, trying to figure out why the name sounds vaguely familiar. Those of my readers who belong to either category may want to listen up, because the same story seems to be repeating itself right now on an even larger scale.

The tale begins in the middle years of the 1970s, when oil prices shot up to unprecedented levels, and reserves of oil and natural gas that hadn’t been profitable before suddenly looked like winning bets. The deep strata of Oklahoma’s Anadarko basin were ground zero for what many people thought was a new era in natural gas production, especially when a handful of deep wells started bringing in impressive volumes of gas. The only missing ingredient was cash, and plenty of it, to pay for the drilling and hardware. That’s where the Penn Square Bank came into the picture.

The Penn Square Bank was founded in 1960. At that time, as a consequence of hard-earned suspicions about big banks dating back to the Populist era, Oklahoma state banking laws prohibited banks from owning more than one branch, and so there were hundreds of little one-branch banks scattered across the state, making a modest return from home mortgages, auto loans, and the like. That’s what Penn Square was; it had been organized by the developer of the Penn Square shopping mall, in the northern suburbs of Oklahoma City, to provide an additional draw to retailers and customers. There it sat, in between a tobacconist and Shelley’s Tall Girl’s Shop, doing ordinary retail banking, until 1975.

In that year it was bought by a group of investors headed by B.P. “Beep” Jennings, an Oklahoma City banker who had been passed over for promotion at one of the big banks in town. Jennings pretty clearly wanted to prove that he could run with the big dogs; he was an excellent salesman, but not particularly talented at the number-crunching details that make for long-term success in banking, and he proceeded to demonstrate his strengths and weaknesses in an unforgettable manner. He took the little shopping mall bank and transformed it into a big player in the Oklahoma oil and gas market, which was poised—or so a chorus of industry voices insisted—on the brink of one of history’s great energy booms.

Now of course this involved certain difficulties, which had to be overcome. A small shopping center bank doesn’t necessarily have the financial resources to become a big player in a major oil and gas market, for example. Fortunately for Beep Jenkins, one of the grand innovations that has made modern banking what it is today had already occurred; by his time, loans were no longer seen as money that was collected from depositors and loaned out to qualified borrowers, in the expectation that it would be repaid with interest. Rather, loans were (and are) assets, which could (and can) be sold, for cash, to other banks. This is what Penn Square did, and since their loans charged a competitive interest rate and thus promised competitive profits, they were eagerly snapped up by Chase Manhattan, Continental Illinois, Seattle First, and a great many other large and allegedly sophisticated banks. So Penn Square Bank started issuing loans to Oklahoma oil and gas entrepreneurs, a flotilla of other banks around the country proceeded to fund those loans, and to all intents and purposes, the energy boom began.

At least that’s what it looked like. There was a great deal of drilling going on, certainly; the economists insisted that the price of oil and gas would just keep on rising; the local and national media promptly started featuring giddily enthusiastic stories about the stunning upside opportunities in the booming Oklahoma oil and gas business. What’s more, Oklahoma oil and gas entrepreneurs were spending money like nobody’s business, and not just on drilling leases, steel pipe, and the other hardware of the trade. Lear jets, vacation condos in fashionable resorts, and such lower-priced symbols of nouveau richesse as overpriced alligator-hide cowboy boots were much in evidence; so was the kind of high-rolling crassness that only the Sunbelt seems to inspire. Habitués of the Oklahoma oilie scene used to reminisce about one party where one of the attendees stood at the door with a stack of crisp $100 bills in his hand and asked every woman who entered how much she wanted for her clothes: every stitch, then and there, piled up in the entry. Prices varied, but apparently none of them turned down the offer.

It’s only fair to admit that there were a few small clouds marring the otherwise sunny vistas of the late 1970s Oklahoma oil scene. One of them was the difficulty the banks buying loans from Penn Square—the so-called “upstream” banks—had in getting Penn Square to forward all the necessary documents on those loans. Since their banks were making loads of money off the transactions, the people in charge at the upstream banks were unwilling to make a fuss about it, and so their processing staff just had to put up with such minor little paperwork problems as missing or contradictory statements concerning collateral, payments of interest and principal, and so on. 

Mind you, some of the people in charge at those upstream banks seem to have had distinctly personal reasons for not wanting to make a fuss about those minor little paperwork problems. They were getting very large loans from Penn Square on very good terms, entering into partnerships with Penn Square’s favorite oilmen, and in at least some cases attending the clothing-optional parties just mentioned. No one else in the upstream banks seems to have been rude enough to ask too many questions about these activities; those who wondered aloud about them were told, hey, that’s just the way Oklahoma oilmen do business, and after all, the banks were making loads of money off the boom.

All in all, the future looked golden just then. In 1979, the Iranian revolution drove the price of oil up even further; in 1980, Jimmy Carter’s troubled presidency—with its indecisive but significant support for alternative energy and, God help us all, conservation—was steamrollered by Reagan’s massively funded and media-backed candidacy. As the new president took office in January of 1981, promising “morning in America,” the Penn Square bankers, their upstream counterparts, their clients in the Oklahoma oil and gas industry, and everyone else associated with the boom felt confident that happy days were there to stay. After all, the economists insisted that the price of oil and gas would just keep rising for decades to come; the most business-friendly and environment-hostile administration in living memory was comfortably ensconced in the White House; and investors were literally begging to be allowed to get a foot in the door in the Oklahoma boom. What could possibly go wrong?

Then, in 1981, without any fuss at all, the price of oil and natural gas peaked and began to decline.

In retrospect, it’s not difficult to see what happened, though a lot of people since then have put a lot of effort into leaving the lessons of those years unlearnt.  Energy is so central to a modern economy that when the price of energy goes up, every other sector of the economy ends up taking a hit. The rising price of energy functions, in effect, as a hidden tax on all economic activity outside the energy sector, and sends imbalances cascading through every part of the economy. As a result, other economic sectors cut their expenditures on energy as far as they can, either by conservation measures or by such tried and true processes as shedding jobs, cutting production, or going out of business. All this had predictable effects on the price of oil and gas, even though very few people predicted them.

As oil and gas prices slumped, investors started backing away from fossil fuel investments, including the Oklahoma boom. Upstream banks, in turn, started to have second thoughts about the spectacular sums of money they’d poured into Penn Square Bank loans. For the first time since the boom began, hard questions—the sort of questions that, in theory, investors and bankers are supposed to ask as a matter of course when people ask them for money—finally got asked. That’s when the problems began in earnest, because a great many of those problems didn’t have any good answers.

It took until July 5, 1982 for the boom to turn definitively into a bust. That’s the day that  federal bank regulators, after several years of inconclusive fumbling and a month or so of increasing panic, finally shut down the Penn Square Bank. What they discovered, as they dug through the mass of fragmentary, inaccurate, and nonexistent paperwork, was that Penn Square had basically been lending money to anybody in the oil and gas industry who wanted some, without taking the trouble to find out if the borrowers would ever be able to repay it. When payments became a problem, Penn Square obligingly loaned out the money to make their payments, and dealt with loans that went bad by loaning deadbeat borrowers even more money, so they could clear their debts and maintain their lifestyles.

The oil and gas boom had in fact been nothing of the kind, as a good many of the firms that had been out there producing oil and gas had been losing money all along.  Rather, it was a Ponzi scheme facilitated by delusional lending practices.  All those Lear jets, vacation condos, alligator-skin cowboy boots, heaps of slightly used women’s clothing, and the rest of it? They were paid for by money from investors and upstream banks, some of it via the Penn Square Bank, the rest from other banks and investors. The vast majority of the money was long gone; the resulting crash brought half a dozen major banks to their knees, and plunged Oklahoma and the rest of the US oil belt into a savage recession that gripped the region for most of a decade.

That was the story chronicled in Zweig’s book, which I reread  over a few quiet evenings last week. Do any of the details seem familiar to you? If not, dear reader, you need to get out more.

As far as I know, the fracking bubble that’s now well into its denouement didn’t have a single ineptly run bank at its center, as the Oklahoma oil and gas bubble did. Most of the other details of that earlier fiasco, though, were present and accounted for. Sky-high fuel prices, check; reserves unprofitable at earlier prices that suddenly looked like a winning deal, check; a media frenzy that oversold the upside and completely ignored the possibility of a downside, check; vast torrents of money and credit from banks and investors too dazzled by the thought of easy riches to ask the obvious questions, check; a flurry of drilling companies that lost money every single quarter but managed to stay in business by heaping up mountains of unpayable debt, check. Pretty much every square on the bingo card marked “economic debacle” has been filled in with a pen dipped in fracking fluid.

Now of course a debacle of the Penn Square variety requires at least one other thing, which is a banking industry so fixated on this quarter’s profits that it can lose track of the minor little fact that lending money to people who can’t pay it back isn’t a business strategy with a long shelf life. I hope none of my readers are under the illusion that this is lacking just now. With interest rates stuck around zero and people and institutions that live off their investments frantically hunting for what used to count as a normal rate of return, the same culture of short-term thinking and financial idiocy that ran the global economy into the ground in the 2008 real estate crash remains firmly in place, glued there by the refusal of the Obama administration and its equivalents elsewhere to prosecute even the most egregious cases of fraud and malfeasance.

Now that the downturn in oil prices is under way, and panic selling of energy-related junk bonds and lower grades of unconventional crude oil has begun in earnest, it seems likely that we’ll learn just how profitable the fracking fad of the last few years actually was. My working guess, which is admittedly an outsider’s view based on limited data and historical parallels, is that it was a money-losing operation from the beginning, and looked prosperous—as the Oklahoma boom did—only because it attracted a flood of investment money from people and institutions who were swept up in the craze. If  I’m right, the spike in domestic US oil production due to fracking was never more than an artifact of fiscal irresponsibility in the first place, and could not have been sustained no matter what. Still, we’ll see.

The more immediate question is just how much damage the turmoil now under way will do to a US and global economy that have never recovered from the body blow inflicted on them by the real estate bubble that burst in 2008. Much depends on exactly who sunk how much money into fracking-related investments, and just how catastrophically those investments come unraveled.  It’s possible that the result could be just a common or garden variety recession; it’s possible that it could be quite a bit more. When the tide goes out, as Warren Buffet has commented, you find out who’s been swimming naked, and just how far the resulting lack of coverage will extend is a question of no small importance.

At least three economic sectors outside the fossil fuel industry, as I see it, stand to suffer even if all we get is an ordinary downturn. The first, of course, is the financial sector. A vast amount of money was loaned to the fracking industry; another vast amount—I don’t propose to guess how it compares to the first one—was accounted for by issuing junk bonds, and there was also plenty of ingenious financial architecture of the sort common in the housing boom. Those are going to lose most or all of their value in the months and years ahead. No doubt the US government will bail out its pals in the really big banks again, but there’s likely to be a great deal of turmoil anyway, and midsized and smaller players may crash and burn in a big way. One way or another, it promises to be entertaining.

The second sector I expect to take a hit is the renewable energy sector.  In the 1980s, as prices of oil and natural gas plunged, they took most of the then-burgeoning solar and wind industries with them. There were major cultural shifts at the same time that helped feed the abandonment of renewable energy, but the sheer impact of cheap oil and natural gas needs to be taken into account. If, as seems likely, we can expect several years of lowerr energy prices, and several years of the kind of economic downdraft that makes access to credit for renewable-energy projects a real challenge, a great many firms in the green sector will struggle for survival, and some won’t make it.

Those renewable-energy firms that pull through will find a substantial demand for their services further down the road, once the recent talk about Saudi America finds its proper home in the museum of popular delusions next to perpetual motion machines and Piltdown Man, and the US has to face a future without the imaginary hundred-year reserve of fracked natural gas politicians were gabbling about not that long ago. Still, it’s going to take some nimble footwork to get there; my guess is that those firms that get ready to do without government subsidies and tax credits, and look for ways to sell low-cost homescale systems in an era of disintegrating energy infrastructure, will do much better than those that cling to the hope of government subsidies and big corporate contracts.

The third sector I expect to land hard this time around is the academic sector. Yes, I know, it’s not fashionable to talk of the nation’s colleges and universities as an economic sector, but let’s please be real; in today’s economy, the academic industry functions mostly as a sales office for predatory loans, which are pushed on unwary consumers using deceptive marketing practices. The vast majority of people who are attending US universities these days, after all, will not prosper as a result; in fact, they will never recover financially from the burden of their student loans, since the modest average increase in income that will come to those graduates who actually manage to find jobs will be dwarfed by the monthly debt service they’ll have to pay for decades after graduation.

One of the core reasons why the academic industry has become so vulnerable to a crash is that most colleges and universities rely on income from their investments to pay their operating expenses, and income from investments has taken a double hit in the last decade. First, the collapse of interest rates to near-zero (and in some cases, below-zero) levels has hammered returns across the spectrum of investment vehicles. As a result, colleges and universities have increasingly put their money into risky investments that promise what used to be ordinary returns, and this drove the second half of the equation; in the wake of the 2008 real estate crash, many colleges and universities suffered massive losses of endowment funds, and most of these losses have never been made good.

Did the nation’s colleges and universities stay clear of the fracking bubble?  That would have required, I think, far more prudence and independent thinking than the academic industry has shown of late. Those institutions that had the common sense to get out of fossil fuels for ecological reasons may end up reaping a surprising benefit; the rest, well, here again we’ll have to wait and see. My working guess, which is once again an outsider’s guess based on limited data and historical parallels, is that a great many institutions tried to bail themselves out from the impact of the real estate bust by doubling down on fracking. If that’s what happened, the looming crisis in American higher education—a crisis driven partly by the predatory loan practices mentioned earlier, partly by the jawdropping inflation in the price of a college education in recent decades, and partly by rampant overbuilding of academic programs—will be hitting shortly, and some very big names in the academic industry may not survive the impact.

As Yogi Berra liked to point out, it’s hard to make predictions, especially about the future. Still, it looks as though we may be in the opening stages of a really ugly fiscal crisis, and I’d encourage my readers to take that possibility seriously and act accordingly.

http://www.resilience.org/stories/2014-12-18/deja-vu-all-over-again