One of the great joys of writing, as in science, is the accidental discovery. To wit: penicillin. And while this entry hardly ranks near Alexander Fleming’s pharmaceutical breakthrough, it does relieve a particular itch that has been nagging my brain. For months I have been vexed by the discrepancy in pricing between crude oil and natural gas. (Wait, I know how tedious commodities can be but I promise you this column is worth sticking with.) Unable to settle on any fundamental market-based explanation, I placed the issue on the mental backburner. It was only when I decided to update a series of articles on the role of speculation in the commodities markets that I happened upon the most plausible solution to this puzzle.
First, a little context. Over the past couple of years New York State has been flirting with the idea of hydraulic fracturing, or “fracking.” The discovery of enormous pockets of natural gas in the Marcellus Shale formation that runs from West Virginia, Pennsylvania and New York to as far as Ohio, has led to a modern-day gold rush in the region, with Pennsylvania several years ahead of New York. While the gas has always been there, it wasn’t until the turn of the millennium when controversial chemical enhancements invented by Halliburton were added to a difficult horizontal drilling technique that accessing this gas became feasible.
Almost immediately, however, environmental concerns began to mount. Stories of contaminated groundwater, intense air pollution and, most recently, a ruptured fault line and mini-earthquake in Youngstown, Ohio, on Dec. 31, have begun leaking into public consciousness. Gasland, a documentary by Josh Fox, increasingly agitated environmental organizations, and high-profile activists such as actor Mark Ruffalo have helped fracking reach the tipping point in the media. Once seen as a panacea for rural land owners in depressed parts of the country, fracking has become a pariah in the environmental community, setting the stage for yet another battle between the oil and gas industry and environmentalists. Caught in the middle of the entire fiasco at the moment is Gov. Andrew Cuomo, who is cautiously moving toward legalizing fracking in New York, though his public reticence highlights how tenuous this decision truly is.
Early on, I came down firmly against fracking in New York, and the Long Island Press was in the vanguard of reporting on it downstate. So I’m on record quite clearly as to why I believe fracking to be a disaster for New York, or anywhere else for that matter. No need to rehash this position. Still, one piece of the broader issue was missing—until now.
Here’s the issue: Fracking is expensive. The prolonged low market price of natural gas is the most logical deterrent to increasing drilling because it barely pays to pull the gas out of the ground. Moreover, the U.S. Energy Information Administration projects that natural gas demand in the United States should rise only 11 percent over the next 25 years compared to a projected rise of more than 300 percent in China over the same period.
Here’s where the market rationale gets murky. Analysts point to increased demand for fossil fuel in developing economies as the primary reason behind the steady rise in oil prices. Goldman Sachs’ most recent forecast of Brent Crude Oil, commonly known as “sweet light crude,” is $120 a barrel for 2012, with most market analysts following suit. A weak dollar, the ongoing crisis and uncertainty in the Eurozone, a burgeoning conflict between the U.S. and Iran, and continued growth in China, India and Brazil are the oft-given reasons behind these prognostications.
Historically, natural gas and oil prices have generally moved in tandem, and with natural gas gaining momentum as the fossil fuel of choice, it only makes sense that they would continue their mirrored trajectory. Instead, the opposite has occurred. Crude oil remains stubbornly high and creeping ever higher while natural gas remains depressed.
A closer look reveals that the world has record stockpiles of both fuels, and has developed incredible potential for new sources such as the Marcellus Shale play or the tar sands in Canada. Then there are the yet-to-be-developed fields in Iraq that, according to the New York Times, are “expected to ramp up oil production faster than any other country in the next 25 years, with a capacity…more than traditional leaders like Saudi Arabia.” Or, if you prefer, the real reason we went to war in Iraq.
Excess supply, new discoveries, and sluggish demand—and yet only natural gas is acting appropriately in the markets. This behavior is undeniable proof that the invisible hand of speculation is at work, which naturally begs the question as to why traders would suppress the price of gas but not oil.
For this answer we must turn back the clock once again and revisit several acts in Congress over the past two decades that made it possible for banks to merge with investment banks and trade commodities without limits and without transparency. Much of this trading is done on the Intercontinental Exchange, a trading platform that was founded and owned by Morgan Stanley, Goldman Sachs and BP. When you understand that markets today are dominated by investment banks and oil companies, who are at times one in the same (Morgan Stanley’s direct holdings in oil companies, fossil fuel infrastructure and transportation companies make it one of the largest oil companies in America), it is possible to fully comprehend the psychology behind natural gas pricing. Oil companies and investment banks have the ability to move the market by forecasting prices and investing in their own products through opaque exchanges that they own, so no matter where prices are they are making money.
Now you’re ready for the secret behind the fracking con job.
As previously mentioned, domestic natural gas is difficult to procure. The process is devastating to human health and the environment, and the effects are irreversible. To gain momentum and influence public opinion, the oil and gas companies have launched an ingenious propaganda assault on America. By touting natural gas as the clean-burning fossil fuel that is cheaper to use and helps reduce our dependence on foreign oil, the industry has nailed the PR trifecta: cheaper, cleaner and patriotic. And with an earnest pitchman like T. Boone Pickens, who wouldn’t believe it?
The problem is none of the above is true. First, natural gas might burn cleaner than oil but the process to extract it is so harmful it doesn’t matter. And second, because the same companies who are in control of the product are in control of the pricing, once they sew up the drilling rights they can simply jack up the price. This leaves the final argument that is wrapped in the American flag and served with a side of apple pie: reducing dependence on foreign oil for the sake of the union.
For the truth, let’s check in with the rest of the world to see what they say. (This was the happy accident that prompted this column.)
According to India’s leading daily business newspaper, the Business Standard, “the increasing shale gas production in the U.S. has led to a surplus, likely to increase in the coming years. The U.S. is, therefore, eyeing export to countries like China, Japan, Korea and India… In the past, the U.S. has been an importer of gas.” The article goes on to quote A. K. Balyan, chief executive officer of Petronet LNG, India’s largest liquefied natural gas importer, who states, “With an increase in U.S. gas production, the gas receiving terminals need to be converted to exporting terminals.”
The average life of a fracking site is seven years. At best. The environmental and human health catastrophe is forever. All of the current talk of job creation and reducing dependence on oil is a sham. Our natural gas stockpiles are higher than ever and the demand for natural gas, by our own country’s admission, will remain basically flat until 2035. The oil and gas companies are planning to export gas from the Marcellus Shale region to the same developing economies we’re supposed to be competing against. How’s that for homeland security?
The real insult? American oil and gas companies are willing to risk the health and welfare of our own citizens by fracking on our land in order to export fuel they claim is more beneficial to the environment. Normally, our companies are busy screwing up other countries in pursuit of their natural resources for our own consumption. As if this isn’t bad enough, they are finally committing the cardinal sin of shitting where they eat.
Let’s do the right thing for once: Ban fracking now. There’s no other way.
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Main Photo Image: Photograph from AP. April 22, 1970, the first Earth Day.
Long Island Press cover image. Original art by Jon Sasala
T. Boone Pickens. AP Photo.
This article was published in the January 5th, 2012 edition of the Long Island Press.