Big Oil’s Iranian Scare Tactic

On nearly every level, this is a terrible bill. And Senator Inhofe and his co-sponsors likely understand this fact.

Republican bill uses Iran as bogeyman to benefit Big Oil donors and neuter environmental law

By Jed Morey
Twitter: @jedmorey

This column originally appeared

A couple of weeks ago, Sen. James Inhofe (R-OK) put forward a bill (S.965) with the title “Iran Sanctions Implementation Act of 2013.” It’s a ridiculously worded and speciously reasoned piece of legislation that calls for the expansion of domestic oil production in an effort to overtake and choke off Iran’s remaining crude oil supply. According to the bill, “by expanding oil production in the United States by 1,250,000 barrels per day” (the amount Sen. Inhofe estimates to be the current level of Iranian crude oil exports), “the United States will displace all oil exports from Iran on the world market.”

Inhofe accomplishes this in the bill by granting the president of the United States authority to “designate any area of Federal land that the President determines appropriate as an ‘Iranian Oil Replacement Zone,’” and that “Each Zone shall include any area of Federal land necessary for the transportation… of the oil produced in that Zone.” Moreover, Inhofe’s legislation would grant exclusive management of these zones to the individual states, thereby circumventing the federal agencies designated to protect and manage these territories. Finally, as a kicker, he exempts the entire act from both judicial review and environmental oversight under the National Environment Policy Act (NEPA) of 1969.

On nearly every level, this is a terrible bill. And Senator Inhofe and his co-sponsors likely understand this fact. But before we delve into the rationale behind floating a bill with almost no chance of succeeding, let me explain why it is so off-target.

First off, it’s important to know that this is not how the global crude oil market operates. By making the assumption that increased U.S. oil production can displace another country’s production ignores market fundamentals. As Gene Guilford, an expert in the field of energy policy, explains, “The Saudis, Libya and Iraq have already increased their output to some extent for this purpose. The excess crude oil production capacity that exists in the Middle East to take the place of Iranian production for export is already available.”

To most of us, the crude oil and gas market is a complex world. From drilling and transporting and buying and selling, it’s a murky realm of oil barons and commodities traders that speak a different language. But election cycles provide enough of a window inside to inform most Americans of this basic fact: The oil business is booming.

“We’re basically bursting at the seams with supply,” says Michael Masters, president of Masters Capital Management, an Atlanta-based hedge fund that specializes in the commodities sector. When oil prices spiked in 2008 and the derivatives market began to unravel, Masters provided important congressional testimony that gave U.S. lawmakers insight in to the inner workings of the commodities business. U.S. production has been so robust in recent years that Masters says, “I imagine in the second half of this year we won’t import any oil.”

This is a sentiment shared by Guilford, who talked about the remarkable turn of events in the U.S. fossil fuel industry. “In 2007 we were talking about peak oil,” says Guilford; “today we speak of the very real potential of the U.S. being the world’s leading crude oil producer by 2015 and U.S. energy independence.”

When I asked Masters specifically about Inhofe’s notion of displacing Iranian oil, he said, “It’s sort of a ridiculous theory because you’re not going to take it out of the market.”

In fairness, sanctions on Iran have lead to a serious decrease in Iranian crude oil exports. It’s estimated that Iran exported nearly 4 million barrels per day when President Obama took office. Today that figure is estimated to be anywhere between Inhofe’s proposed 1.25 million and 2 million per day. Either way, it’s a precipitous decline. But the decline has less to do with the supply of oil and more to do with pressure the U.S. brought to bear on those who purchase Iranian oil. So the question of whether or not the U.S. has the strength to convince the few remaining Iranian oil customers has less to do with availability and more to do with diplomatic ability.

To the extent that this is possible, the United States doesn’t necessarily hold all of the cards.

Because oil is a commodity that is traded globally it is obviously most responsive to price. According to Guilford, “Iran’s customers may well not care about alternative sources that are more expensive than Iran and that is one very likely reason Iran still has customers.” Knowing that Iran’s customers include nations such as China and South Africa, Guilford naturally questions our ability to drive the final nail in Iran’s coffin through sanctions asking, “Does the U.S. have the diplomatic ability to convince Iran’s buyers to pay more in order to isolate Iran?”

Nevertheless, this opens an important dialogue about the nature of sanctions themselves. There is no question that U.S.-lead sanction policy has been extremely effective in isolating Iran and wreaking havoc on its economy. Kate Gould, a lobbyist for Middle East Policy at the Friends Committee on National Legislation, believes that sanctions sometimes have the opposite of the desired effect by serving to “punish civilians, embolden hardliners and foreclose diplomatic options.” She explains her economic position saying, “We’ve seen huge growth in the black market, which is controlled by the Iranian Revolutionary Guard, so Iranians become dependent on going through these channels instead of legal channels.” Gould is quick to point out that despite decades of crippling sanctions against Iraq, “Saddam Hussein never missed a meal.”

Despite the backward logic inherent in Inhofe’s rationale, the bill currently has 11 other cosponsors, all Republican. Most hail from states with large swaths of federal land such as Arizona, Utah, North Dakota, North Carolina, Idaho, Kentucky and Missouri. Not surprisingly, Sen. Inhofe’s top campaign contributors between 2007 and 2012 are from the oil and gas industry, with Koch Industries being his single-largest donor.

Not surprisingly, the idea of manipulating federal regulations regarding drilling rights and ceding these rights to individual states is dangerous territory for the environmental community.

“Senator Inhofe would auction off America’s national parks and public lands to big polluters just so we could mimic Iran’s all-oil energy policy,” blasts Athan Manuel, Director of the Sierra Club’s Lands Protection Program. “We’d be better off embracing job-creating clean energy projects that protect our wild legacy and our future rather than selling off our nation’s crown jewels to the highest bidder.”

Legislative affairs specialists for the Bureau of Land Management (BLM), which controls the largest amount of federally protected land, did not respond to my request for an interview as of press time.

But Gould believes Inhofe’s bill is little more than a Trojan horse for U.S. oil and gas companies to gain access to land that is currently difficult to obtain.

“I think it’s a political stunt to try to disguise getting around environmental laws with sanctions,” she says, adding that sanctioning Iran, “generally has broad bipartisan support.”

Guilford sees it this way as well, but takes more of an academic approach to Inhofe’s proposal. He calls the “goal of increased domestic production a sound idea,” but says the “removal of judicial review and NEPA” would have “opposition that is only exceeded by those trying to stop the Keystone pipeline.”

The chances of Inhofe’s bill making it out of committee and eventually becoming law are slim. To put it into perspective, of the 3,716 Senate bills proposed between 2011 and 2013, only 449 (12 percent) made it to the floor. Of those, only 71 were enacted, or less than 2 percent. The fact that this particular bill was referred to the Senate Committee on Energy and Natural Resources, led by Sen. Ron Wyden (D-OR), means it will almost assuredly die in committee.

So why go through the machinations of compiling the language and amassing support for a bill that is practically dead on arrival?

The best way to view Inhofe’s bill is as a trial balloon—a way to test the effectiveness of certain angles and particular language.

“Perhaps for some the theory would be that U.S. domestic energy security isn’t reason enough to increase current production,” muses Guilford, “so the issue needs to be recast into a foreign policy and security debate about shutting down the remainder of Iranian production.”

Gould puts it more bluntly, saying it’s, “using the Iran bogeyman to advance an extreme agenda on another issue.”

No matter how you slice it, all roads lead back to Big Oil.

The Original Occupy

Americans maintain a somewhat outdated vision of Canada as a nation of tree huggers and environmentalists. To wit, unlike every other industrialized nation in the world, Canada has regressed on climate change initiatives.

Ah, the Great White North. America’s attic. Uncle Sam’s hat. The land of self-deprecation, Tim Hortons donuts and ice fishing. Less notably, it is the land of my birth. Although I became a U.S. citizen in the fifth grade, my Canadian roots were always a source of pride, despite precluding me from ever becoming president.

It has always amazed me how little we Americans think of our sister nation to the north. With the occasional exception of the tabloid coverage that accompanies “Bieber Fever,” the media here are devoid of Canadian news. Perhaps it shouldn’t be surprising there hasn’t been a single article devoted to the indigenous Idle No More movement that has taken hold in Canada. As we witnessed during the early days of Occupy, corporate media are indifferent to dissent unless it’s displayed in a faraway nation by throngs of angry Arabic men. (Congrats again on winning Best Picture, Ben.) Recall that it took weeks for any established media to begin covering Occupy in any meaningful way, and when they finally did, they were largely dismissive of it.

Yet the American news media do spend a good deal of time and ink discussing the relationship between the United States and China. Any news of civil unrest in China is worrisome to corporate America because of our obsession with our mutual economic interests. After all, we are the global champions of human rights so long as we’re not stripped of our fundamental economic right to slave labor.

Missing from this equation is the fact that China is America’s second top trading partner. The first is Canada. Yes, the land that calls its one- and two-dollar coins “loonies” and “toonies” is our number one trading partner on the planet. This is why the lack of coverage of the Idle No More movement is rather astounding given that our economic interests are involved. Not only have Canadian Indians disrupted commerce, they are providing the strongest resistance on the Canadian side to the controversial Keystone XL Pipeline project that would run from Canada through several U.S. states.

In December of 2012, four Canadian activists named Jessica Gordon, Sylvia McAdam, Sheelah McLean and Nina Wilson founded Idle No More to protest the Canadian government’s passage of C-45—a massive omnibus bill containing anti-environmental provisions that might surprise many Americans. Since December, native people across Canada have disrupted major events and even gained international attention from a hunger strike waged by Attawapiskat Chief Theresa Spence. Protestors have closed off roads, blockaded bridges, cut off a road to a De Beers diamond mine and generally raised hell by attacking this bill for moving Canada further away from the path of sustainability.

Americans maintain a somewhat outdated vision of Canada as a nation of tree huggers and environmentalists. To wit, unlike every other industrialized nation in the world, Canada has regressed on climate change initiatives. In January, Global Legislative Organisation (GLOBE), an environmental NGO, issued its third report on the legislative initiatives of 33 nations. Of the 33 countries, which include China and the United States, GLOBE gave 32 of them credit for making progress in enacting and adopting beneficial environmental legislation. The only nation to go backwards? Canada.

John Kane, a native activist and writer who hosts a show on Indian affairs on WWKB-AM in Buffalo, says that Idle No More “is about water, land and sovereignty.” Like many who have observed Canadian politics of late, Kane laments that the dominion has been besieged by a warped conservative agenda, characterizing Canadian Prime Minister Stephen Harper as a “cross between Bush and Cheney.” Relations between the tribes and her majesty’s government, strained as they are, worsened as C-45 set off alarms among tribal leaders almost immediately.

“Harper initiated a suite of legislation,” says Kane, “that would lower the threshold to invade native lands and take streams, rivers, minerals, you name it.” Reading between the lines of a “jobs act” in the bill, Kane says that “job creation” is a euphemism for “the opportunity for other countries like China to participate in mineral extraction.”

Idle No More intersected with other activist movements in February when its members joined the massive rally in Washington, D.C., organized by the Sierra Club and, to call for President Obama to continue the U.S. obstruction of the Keystone XL Pipeline project. An estimated 30,000 to 40,000 protestors descended upon the National Mall. Michael Brune, head of the Sierra Club, was even arrested at the rally, breaking the organization’s longstanding prohibition against civil disobedience. (The rally was also woefully under-reported by corporate media.) President Obama is clearly important in the process and the U.S. has to clear far more regulatory hurdles to move the Keystone project forward. But the pressure to begin construction is coming more from the Canadian government than anywhere else. The Harper administration, with tremendous support from Canadian petro companies, is hell-bent on exploiting the Alberta tar sands, no matter how environmentally catastrophic the process is.

“This is an area the size of Florida,” says Kane. “The bottom line is Canada can make a lot of money by raping Alberta.”

Idle No More goes beyond the Keystone Pipeline. This week I spoke with Yoni Miller, who is the president of Occupy Wall Street—an intentionally ironic title as Occupy continues to be an amorphous, leaderless and volunteer movement. I reached out to him because the Occupy outlets were among the relatively few areas to obtain any information outside of native publications. Regarding C-45 and the potential toll on native territory, Miller said, “We all know it’s more than that—it’s about the ongoing and existing process of colonialization.” He also believes the tribes have better insight to environmental issues because of “their unique relationship to the land.” 

On Jan. 5 of this year Yoni was invited to Akwesasne, the Mohawk territory that straddles the St. Lawrence River between New York and Ontario. For several hours Iroquois members of Idle No More shut down the Seaway International Bridge between the U.S. and Canada—an experience Miller called “humbling.” When I asked him whether he felt Occupy had fueled any of the confidence in Idle No More, he was reluctant to take anything away from what had been accomplished.

“It may not have been possible without the energy from Occupy,” he said, but then quickly added, “but these people were activists before we were even born.  Indigenous resistance has been going on since 1492. It’s what makes this different.”

Both Occupy and Idle are relatively quiet at the moment. But John Kane and Yoni Miller independently expressed the same sentiment that spring is the season of awakening and that both groups will be on the move. Perhaps they will jolt the mainstream media from their hibernation as well, though I doubt it. These particular bears appear to be idle, forever more. 


Illustration by Jon Moreno

In Sprecher We Trust. Hopefully.

Jeffrey Sprecher built a better mousetrap. But a mousetrap big enough to catch a whale? Apparently so.

Jeffrey Sprecher built a better mousetrap. But a mousetrap big enough to catch a whale? Apparently so. Sprecher is the founder and president of the Intercontinental Exchange (ICE) based in Atlanta. For all practical purposes he is the poster-boy of electronic trading and the man responsible for the meteoric rise of commodities trading. He’s also about to become the owner of the New York Stock Exchange. Do I have your attention yet?

In little more than a decade the commodities market has gone from $10 billion– a speck on the trading horizon – to more than half a trillion dollars. Nathaniel Popper’s front-page story in the business section of the New York Times today pulls the veil back on Sprecher the man and describes how he grew a little-known southern exchange into a juggernaut capable of purchasing the vaunted New York Stock Exchange. As Popper himself writes, “It sounds preposterous.”

That’s because it is.

Popper’s piece brings forward a story that few people know. Most have no idea that trading exchanges are even for-profit businesses. And while he does a worthy job demystifying the business of exchanges he overlooks the planet-sized regulatory loopholes that allowed Sprecher to convert a small energy futures trading exchange into a global Franken-exchange that is buying the biggest, most well known exchange on Earth.

Sprecher was even a bridesmaid recently when he nearly scuttled a merger between the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange by coming in with a higher bid for the CBOT. The Chicago trading establishment was so freaked out by Sprecher’s surprise bid that they put their legendary differences aside and came to a deal faster than might otherwise have occurred had he not been breathing down everyone’s neck.

Though he was unsuccessful in his last minute bid, Sprecher moved deftly like a great white shark through the rocky financial seas in search of his next prey. Never sleeping, always moving, forever hungry.

To call Sprecher an opportunist would be technically accurate but cheap and intellectually dishonest. He understood the inevitability of electronic trading and the superior potential it held. If the Bloomberg terminal revolution was in providing information quickly and precisely then the Sprecher ICE revolution was in giving traders (and the houses they worked for) the ability to act upon information in the same fashion. My criticism of Sprecher – and Popper for that matter – is the way in which the story of the ICE has come to be told and accepted.

Missing from the brief history of the ICE are the loopholes that gave it life and the ability to flourish beyond imagination. It was the oft-spoken of – but rarely understood – “Enron Loophole” that gave corporations the legal right to trade energy futures even if the corporation itself was in the business of energy. This is the simplest way to convey its net result. The second loophole (and more meaningful for the ICE) was a maneuver by the Bush administration that granted the ICE foreign status as an exchange despite being based in Atlanta. This initiated a massive shift of trading dollars, and influx of new ones, onto the ICE for one reason: this singular move placed the ICE outside the purview of U.S. regulators at the Commodities Futures and Trading Commission (CFTC). Essentially, corporations could now trade energy futures electronically through the ICE without oversight or disclosure.

Sprecher has often stated that one of the great benefits of electronic trading is its inherent transparency. Theoretically, performing trades between parties on a screen reduces the likelihood of transactions being rigged. In some ways he’s right. We are unlikely to witness an old school “corner” where one party dupes all others into trading with it until it controls the vast majority, or position, of the item being traded. Electronic trading moves too quickly and there are too many players involved. But speed does not imply market transparency and openness.

Moreover, the mere fact that the founding investors of the ICE are some of the world’s largest investment banks and oil companies (Morgan Stanley, Goldman Sachs and BP) speaks to how little transparency there truly is. The fact that some of these banks (Morgan Stanley in particular) own and control oil companies and oil companies operate trading desks outside U.S. jurisdiction demonstrates how little need there is for small-time corners. Why pull off a two-bit corner when you have already cornered the entire marketplace?

Now, as Sprecher prepares to close on this historic transaction, investors, citizens and the government are about to be one step further removed from any realistic shot at transparency and oversight.

This in no way takes away from Sprecher’s genius as a businessman. It simply illustrates how willfully ignorant we are to the business of Wall Street and therefore how frightfully far away we are from properly regulating it. Everything Sprecher has done is legal and ethical; to the extent there is an ethos on Wall Street. Where all of this hits home for the consumer is at places like the gas pump and supermarket. The most important and direct relationship most of us have to Jeff Sprecher’s mousetrap is the high cost of the gas we pump and food we consume. Banks and oil companies have a vested interest in Sprecher’s success and in increasing their own revenues. Both are perfectly, mutually aligned. So far they have been able to grow profits with alacrity, free from federal oversight and bolstered by our collective ignorance of the process.

We’ve all been caught in Jeffrey Sprecher’s mousetrap. Now the question is will he “catch and release” or dispose of us in search of his next conquest. I hope he’s as nice and down-to-earth as Popper suggests.


Image: From 2008 Long Island Press cover story explaining the rise of the ICE and how Morgan Stanley became one of the largest oil companies in the world. For more on this story view the video below:


Why Gas Prices Are So Damn High (Video)

The investment banking industry, with the assistance of the federal government, has surreptitiously hijacked the oil business over the past decade and caused the price of oil to skyrocket.

To properly explain why oil prices are so high, I enlisted the support of my friends Doug Wood and Rob Bellon to help me tell the story a little differently. In lieu of my normal offering in Off The Reservation, we have produced an 8-minute video called “The Book of Morgan,” which tells how investment banking giant Morgan Stanley came to rule the oil world.

The story itself is an age-old chronicle of greed and corruption filled with intrigue and dirty dealings. It illustrates how Morgan Stanley, among others, took the hidden world of commodities trading from a $10 billion industry to a $450 billion business by maneuvering through generous loopholes created by Congress. It shows how Morgan Stanley not only dominates the trading arena but how it has become a full-fledged Big Oil company from transportation to terminal storage to having an ownership stake in the very exchange that half of the world’s oil is traded on.

So with that, I invite you to watch the video and judge for yourself why the price of oil has skyrocketed. The purpose of presenting it this way is to open more eyes as to how rotten our system truly is and to elevate the dialogue about one of the most crucial economic elements of our daily lives. In the next several months we will be bombarded with finger pointing and accusations with respect to gasoline prices as the presidential campaign heats up. But few of the arguments you will hear will resemble the truth. For the truth, my friends, can only be found in the gospel according to Wall Street−and “The Book of Morgan.”

That 70’s Show

There is no shortage
 of theories as to why Americans are finding themselves staring 
helplessly at rising gas prices, but few of them are real. In fact, much 
of the prevailing wisdom offered by television pundits is false.

He was a relative unknown when he campaigned for president of an America 
that was worn down from foreign intervention, a sick economy and
 Republican rule. His outsider status brought with him a new brand of
 hope that the media devoured allowing his star to rise quickly and shine
 brightly. Upon taking the presidency, however, the beleaguered economy
 stubbornly refused to show signs of life, energy prices rose to 
troubling levels and the Middle East began to spin wildly out of
 control. Things were so bad he even had to step in and bail out an
American car company with government funds.

After only three years, it was all over but for the counting. His star
 faded quickly as the once-media darling became anathema to an
 increasingly conservative American public that spent the last year of 
his term looking for a new “Mr. Right” in every sense.

Such was the fate of Jimmy Carter, who never had a shot at re-election;
 and a good argument can be made that Barack Obama will suffer the same 
fate under nearly identical circumstances.

There is so much involved in the making and unmaking of a president that
 it’s unfair to boil a career down to only a few factors. But in Jimmy
 Carter’s case I believe it is fair to say that three primary issues were
 the undoing of his presidency: the hostage crisis in Iran, stagflation
 and fuel prices at the pump.

Iran wasn’t a military crisis as much as it was an embarrassment to the
United States, though talk of a nuclear Iran was percolating even then.
 Prior meddling in the Middle East came back to haunt us in a situation 
we couldn’t control, with Carter ill-equipped to handle the predicament
 of Americans held hostage in Tehran. Rising oil prices—the result of the 
Iranian revolution in 1979 and the panic that ensued in the trading
 markets—brought about a second shortage within a decade and with it 
hysteria and inflation. This upward pressure from fuel prices in an
 already inflationary environment spurred the Federal Reserve to begin
 chasing inflation with high interest rates.

In his book Currency Wars, James Rickards addresses the impact of 
American monetary policy on the global economy and cites the “50 percent 
decline in the purchasing power of the dollar from 1977 to 1981.” He
 goes on to depict “a world gone mad,” noting that, “A new term, 
’stagflation,’ was used to describe the unprecedented combination of 
high inflation and stagnation happening in the United States.” 
Most people recall the moment when interest rates reached as high as 20 
percent during this period and point to it as the height of insanity
 during the Carter years. In actuality then-Fed Chairman Paul Volcker 
under Ronald Reagan did this as a one-time shock to the system.  It was
 done in conjunction with vigorous tax cuts to spark consumer spending, a 
tightening of the monetary policy to strengthen the dollar and the
 latent effect of increased oil production, both domestic and abroad.
 With the exception of the tax cuts, these policies and factors would 
likely have occurred anyway as Volcker was a Carter appointee and it was
 Carter who loosened the valve on domestic oil production. Furthermore,
 Reagan would go on to reverse many of these initial tax cuts in a way 
that would make conservatives and Tea Party activists blush today.
 Either way, Jimmy Carter was a victim of pitiful economic circumstances 
that will forever be his legacy in the White House.

Rickards draws some comparisons between the ’70s and today, most notably
 deriding Federal Reserve Chairman Ben Bernanke’s actions of Quantitative 
Easing, a fancy name for printing money—the same currency devaluation
 scheme employed by Nixon—calling them “runaway fiscal and monetary 
policies, which were flooding the world with dollars and causing global
 inflation in food and energy prices.”

This is an interesting point to hang on for a bit. There is no shortage
 of theories as to why Americans are finding themselves staring 
helplessly at rising gas prices, but few of them are real. In fact, much 
of the prevailing wisdom offered by television pundits is false. It’s
 not Obama’s refusal to “drill baby drill” or increased demand from 
China. It’s not Libya or Iran, either. It’s the abundance of liquidity 
in the markets matched with the ability of investment banks, hedge funds
 and oil companies to trade energy futures on commodities exchanges
 without any limits or transparency. And this is the result of 30 years
of deregulation beginning with Carter and continuing through Obama.

Before the commodities exchanges were deregulated there were few safe 
places to “park” excess capital during volatile periods. Today these
 exchanges are the perfect shelters for investors with excess liquidity
 because many of them are allowed to stand on all sides of the 
transaction. An investor such as an investment bank or an oil company 
can be the buyer, seller, broker and manufacturer, and can therefore
more easily predict the future behavior of pricing by both forecasting 
the future price of a commodity it owns while moving the market with
 enormous capital infusions. It’s more than the ultimate hedge. It’s a

With a crisis brewing in Iran, the markets and pundits are once again in 
a tizzy, and consumers are bracing for the worst. This brings us to what 
might be the nail in Barack Obama’s coffin: inflation.
 When fuel prices rise, even for a brief period, it shows up within
 months in our food and other consumables. It’s a necessary evil in the
 production of nearly everything we consume on the planet, which is why
 it’s so utterly dangerous to leave the process of trading energy futures 
unregulated. Oil doesn’t have to reach $200 per barrel to destroy any
 hope of economic recovery and, worse, force mass starvation around the

If the price is sustained at $100-plus per barrel without relief
 while we continue to suppress interest rates and flood the market with
 the dollar, Bernanke and Co. will have difficulty stemming the natural
 tide of inflation as it works its way around the globe in the things we
 buy and the food we eat.
 Bernanke’s announcement that the Fed will continue to artificially 
suppress interest rates through 2014 and the government’s steadfast
 refusal to implement any reasonable regulation in the markets is a 
self-fulfilling prophecy as investors continue to seek safe harbor for
 their funds in the only market they have any ability to control. This
 will prevent any crash in oil prices that would naturally occur, as we
 witnessed in 2008 when oil hit $147 per barrel then plummeted shortly

Further fracture in relations with Iran and high oil prices 
will also crush any hopes the European Union has of recovery. And with 
the determined stance that austerity is the EU’s chosen path to
 prosperity, the United States faces the additional problem of having its 
No. 1 consumer of U.S. exports absolutely cash-strapped and constricting
 even further.
 Barack Obama’s re-election hopes are really a matter of timing more than 
anything because the conclusions above are simply common sense and

Any chance he had to calm this gathering storm has already
 passed, leaving him at the mercy of the global markets, which are
 teetering on a gigantic bubble. His oratory and confidence are outgunned
 by a conservative media machine pouring on the pressure by falsely 
blaming his energy policy for high oil prices and stoking the fire with
 Iran, thus creating all the necessary traps for his demise. Even if he 
were able to truly force real change in the oversight of the financial
 markets, it would spook Wall Street and could incite panic. And any 
attempt to quiet the saber-rattling between Washington and Tehran would
 make him appear weak compared to a bloodthirsty slate of GOP opponents.

Obama’s only option is to pray the storm doesn’t touch down between now
 and Nov. 6. If it does, instead of occupying the White House in January, 
he’ll be building houses with Jimmy Carter, while Mitt Romney tries to 
figure out where to park all of Anne’s Cadillacs.

The Grammy’s, Lin-Sanity, Jon Stewart (and Iran)

This is another column about the burgeoning crisis between the US and Iran. Since I have yet to gain any traction with this issue I have decided to sprinkle gratuitous pop-culture references throughout the piece to generate interest.

This column first appeared in the February 16th, 2012 edition of the Long Island Press.

Over the past couple of weeks my frequent collaborator, Dorian Dale, and I have set the burgeoning conflict between Iran and the United States in our sights, determined to bring this potential disaster further forward in our nation’s collective consciousness. But while Whitney Houston’s body is in search of an arena large enough to hold her mourners, talk of the next Great War generates barely enough interest to fill a teacup.

Therefore, I have decided to shamelessly sprinkle gratuitous pop-culture references throughout this column in order to reach a larger audience. (References are bolded for navigational ease.)

Iran is the slow moving accident you can’t take your eyes off of. It’s LIN-sanity. For that matter, so is the global economy, the crisis in the Eurozone and the price of oil. Let’s add in the GOP primary season for good measure to bring this tainted stew to a boiling point because the decision-making process in America this year will be guided by partisan politics rather than practical policies.

New Yorkers would be wise to look up from their smartphones for a moment to see what’s really happening. Not only is New York home to the United Nations and ethnic communities from around the globe, it bears visible scars of terrorism. Many of its residents’ livelihoods are directly or indirectly tied to the world financial district, and don’t forget that The Daily Show with Jon Stewart is also taped in the city. Moreover, conventional wisdom (if there is such a thing) has it that should the wheels come off the Obama train, our current governor will be a top Democratic contender to challenge whichever GOP dipshit is lucky enough to hoodwink America into voting for him.

One way for Obama to lose the upcoming election is if oil prices continue to get out of hand. As it is, we are already experiencing higher-than-normal pricing during the winter months. Analysts are already warning that if the trend continues and conflict with Iran steers toward the inevitable, oil could hit $200 per barrel this year, translating into approximately $6 at the pump. If this were to happen, Barack Obama’s chances at re-election would be slimmer than Adrien Brody.

Many in the media have dismissed the likelihood of confrontations between the U.S. and Iran as “saber rattling,” but there have been some very real world occurrences that are beyond rhetoric. The attempted bombing of the Israeli embassy in Bangkok this week by an Iranian man and successful assassinations of nuclear engineers within Iran over the past few months have heightened tensions between Israel and Iran. For its part, the United States is positioning itself to defend against the threatened closure of the Strait of Hormuz, a key “choke point” for oil tankers in the Middle East. Along the way, the United States rescued Iranian fishing vessels twice in one week—events that garnered brief, but small international attention as opposed to George Clooney’s performance in “The Descendants,” which has received international acclaim and Oscar nominations.

While the world does its familiar dance of deadly brinksmanship, consider for a moment the case of Morgan Stanley. Never has one company had so much to say about, or perhaps to gain, from the pressing issues at hand. Morgan Stanley embodies the intersection of finance, politics, oil and war more than any other corporation on Earth. If ever there was an example of the “corporatization” of America, this is it. I’m reviving my frequent criticism of Morgan Stanley so we may, in the words of Belgian-born artist Gotye, “Walk the plank with our eyes wide open.”

First off, trying to drill down into Morgan’s structure is like jumping down the rabbit hole in search of Johnny Depp.  The list of Morgan Stanley subsidiaries is a 25-page, single-spaced document with 207 corporations registered on the Cayman Islands alone. What most people, and even some savvy investors, don’t realize is that among them you will find a host of companies directly related to or involved in the oil industry.

Take, for example, Heidmar, a global oil shipping company with 120 vessels. Or TransMontaigne, which controls a third of the oil terminal business in the United States. Both are wholly-owned subsidiaries of Morgan Stanley. Furthermore, Morgan owns $1.2 billion in shares of ExxonMobil and $900 million in shares of Chevron. Oh, and many of the oil futures contracts are traded on the Intercontinental Exchange in Atlanta, which was founded by Jay-Z. No, jk, lmfao. It was founded by Morgan Stanley, Goldman Sachs and BP.

Piece this together and you will quickly understand that there are two things of critical importance to Morgan Stanley where the oil business is concerned: price and volatility. When you add to the equation that the leading energy analysts in the world who predict the future price and volatility of oil are from… you get the point.

To borrow from the Occupy Wall Street movement—This is what democracy doesn’t look like.

Now let’s get our conspiracy freak on for a moment and take a look at whom Morgan Stanley is backing for president of the United States. No, it’s not Steven Colbert. Morgan is steadfastly behind Willard “I support military action in Iran” Romney. In fact, it is Romney’s third top contributor in the 2012 election cycle behind only Goldman Sachs and JP Morgan, two companies that also know a little bit about gaming the financial markets.

Allow me to go one step further. Conflict in the Strait of Hormuz would be the best thing to happen to Morgan’s oil interests, as they deal mostly in the Western Hemisphere and would benefit greatly from their own prognostications of skyrocketing oil prices. Because the United States is officially now a net-exporter of oil, the American petroleum business and those financial companies that profit from it would experience a boom like never before.

The very thought of gas and oil prices going even higher sends chills down the spine, especially here in New York where we rely so heavily on home-heating oil and transportation in our daily lives. But don’t worry, New Yorkers, we’re in good hands there, too: Morgan Stanley owns the majority stockpile of home-heating oil reserves in the Northeast. Charlie Sheen can only dream of “winning” as much as Morgan Stanley.


All photos from the Associated Press. 

Iran From 10,000 Feet

Simultaneously clutching his Nobel Peace Prize in one hand and George W. Bush’s preemptive strike doctrine in the other, Obama has straddled this no-man’s land about as well as any president possibly could.

This column appears in the February 2nd, 2012 edition of the Long Island Press.

Trunk to tail the elephants circle the ring while the four remaining clowns in the circus vamp, weep and honk their noses to the delight of the audience. The train travels from Iowa to New Hampshire, and then makes its way down the coast to Florida where the most recent performance went off without a hitch. With dozens more appearances planned for the upcoming weeks, the greatest show on Earth promises to keep the masses entertained for months to come.

Outside the alternate reality that is the American election season, however, a gathering storm is rapidly approaching, threatening to rip the stakes from the ground and bring the tent down upon all of us.

The deadliest game of chicken in history is being played in dark alleys with no headlights. Two cars careen toward each other, Iran in one and Israel in the other, while the world huddles close to see which one of them blinks first. But we are all more than spectators in this deadly contest, we are participants. The ever-expanding concentric circles of conflict that began with the Mossad and Hezbollah, extended to neighboring nations such as the United Arab Emirates and Syria, now encapsulate the United States, Europe, Russia and China.

In short, the stage is set for World War III. Damn, those Mayans were good!

Because the economy is still in the center ring, however, it’s the primary show the audience focuses on. We can see shadowy figures moving about in the periphery. We know they’re there, but our attention is diverted for the moment. Humanity be damned, it’s still the economy, stupid. It’s why every pronouncement of war, every threat to prevent a nuclear Iran, includes references to the disruption of the global oil supply.

But exactly how do you quantify the potential ramifications of a complete breakdown in both production and supply of oil in the Middle East, and more specifically Iran? The second oil shock of the 1970s, beginning with an Iranian oil-workers’ strike in 1978 and continuing through the Iran-Iraq War in 1980, is a useful portent of financial catastrophe. This two-year flare-up resulted in skyrocketing oil prices that reached $38 per barrel in 1980. Adjusted for today’s dollars, that’s around $90 per barrel.

Think about that for a moment. If the equivalent figure of $90 today thrust the global markets into utter chaos and drove the world deeper into recession in 1980, what effect would a new shock today have on the global economy, considering oil is consistently trading around $100 per barrel today? Obama doesn’t need to ask Jimmy Carter how that would work out.

This is why Europe and America have been rallying support to increase economic sanctions on Iran while Israel continues its effective covert assault on the power structure in Tehran. Treasury Secretary Timothy Geithner recently visited China to ask for their participation in a global embargo on trading with Iran. The problem there, of course, is that China receives approximately 10 percent of its oil from Iran—a figure projected to grow steadily over the next couple of decades as China attempts to break the coal habit. Geithner’s reception was as chilly as it was when he asked the Chinese to adjust their undervalued currency in an effort to stabilize the balance of trade between our nations. Add to the mix that China has no moral or political allegiance to Israel, and it’s easy to understand why Geithner would have had better luck talking to the Great Wall of China than its ruling class.

The political calculus in Washington is as complicated as ever. Obama has been able to walk the tightrope between America’s hawks and isolationists by surging our forces in Afghanistan while withdrawing them from Iraq, and allegedly killing Osama bin Laden while entertaining the possibility of dialogue with Tehran. Simultaneously clutching his Nobel Peace Prize in one hand and George W. Bush’s preemptive strike doctrine in the other, Obama has straddled this no-man’s land about as well as any president possibly could. But time is running out as the election draws ever nearer, which is why the war rhetoric is beginning to intensify. This diplomatic squeeze is lost only on mouth-breathing Americans whose eyes are glued to the spectacle in the center ring, as they await the outcome of each GOP primary as if it matters. The rest of the planet has adjusted to the darkness as it watches these war preparations very, very closely.

Here’s the current score. Europe has taken a decidedly aggressive stance by leading the way with harsh economic sanctions on Iran forcing the United States to follow suit perhaps more than it might have otherwise. China and Russia have little to gain by punishing Iran as they trade openly. Israel is not above taking matters into its own hands and striking Iran’s nuclear facilities but it requires more assurance from the United States that we will back its play. The less-than-cozy relationship between Obama and Israeli Prime Minister Benjamin Netanyahu thwarts Israel’s next move, because acting unilaterally without U.S. support is as suicidal as doing nothing may someday prove to be.

 Saudi Arabia, which shares access to the strategically important Strait of Hormuz, also has little patience for Iran’s shenanigans; but it, like Iran’s allies in the area, has its own political and economic issues, and can hardly afford a conflict with any of the region’s stakeholders.

We are witnessing one of the greatest standstills of all time. The deciding vote, however, will likely come from none of the nations mentioned here because a new, more powerful force has emerged in the global landscape with the ability to tip the scales: the people.

From Occupy to the Arab Spring, the past year has shown that the most influential voice in world politics is that of the people. In this new interconnected world, the Iranian government’s clandestine policies and shadowy behavior are anachronistic. That’s not to say Israel and the United States don’t understand this potential, as both admit to stoking tensions within Iran to mobilize its youth in the hopes that they will lead to yet another revolution. If a fruit vendor in Tunisia can set off a series of events that changed the Arab world forever, the same can even happen in a nation as mysterious and closed-off as Iran. Dictators can be ousted and regimes can be toppled without deploying the U.S. military.

It’s why an untimely show of force against Iran would undermine the Iranian people’s naturally occurring dissatisfaction, shown by their willingness to protest the regime’s fraudulent elections and its hard-line stances that have wrought such economic hardship. This phenomenon has been occurring even before the most recent round of rigorous sanctions. In practice, imposing more stringent sanctions or military action may have the opposite of the desired effect by coalescing support for the Iranian government from within. Given the Iranians’ already poor economic circumstances, they may in fact see little distinction between enduring harsh sanctions and a blistering show of force.

Critics of the Obama administration have likened his stance on Iran as akin to that of British Prime Minister Neville Chamberlain’s appeasement of Hitler with the Munich Pact in 1938. They claim that the United States is being hoodwinked by Iran’s leadership who will immediately use nuclear weapons against Israel once they possess the capability to do so. Most who have written about the subject, however, believe this is folly, but that it’s better to have an Iran without nukes than one with them. In the meantime, the theory of Mutually Assured Destruction might take a backseat to the mutually assured production of oil. In my mind, the specter of nuclear warfare is a singular endgame issue, not an ongoing strategic battle that dismisses the Chamberlain/Hitler analogy in favor of Kennedy/Kruschev. When both men drew their lines in the sand and realized the lines were in exactly the same spot, everyone knew where they stood during the Cuban Missile Crisis in 1962.

Because the current leaders of Iran have publicly stated that they are committed to annihilating the state of Israel, they have legitimized the world’s fear of a nuclear Iran. But I would submit that the world doesn’t have an Iran problem, it has an Ahmadinejad problem. Were the U.S. to declare unequivocally that we will use force if Iran’s president denies UN inspectors in Iran or we discover that they have developed the capacity to use nuclear technology beyond domestic energy production, we would hardly be blamed for being the aggressor. But perhaps we should re-examine the role of sanctions and look at things differently because a free and prosperous people have a much greater ability to dictate policy in Iran than we outsiders ever will.

A desperate population with nothing to lose alters the equation of Mutually Assured Destruction and interrupts the natural evolution of the Arab Spring. It’s time to reverse the antiquated notion that a forcibly impoverished nation is ultimately obsequious to those nations that suppress it. President Obama should call upon the Congress and the world to lift all economic sanctions on Iran because sanctions starve the people, not the government. Moreover, the people have proven they know how to seize the opportunity for self determination.

Then we can all go back to watching the circus.


Main Photo: Associated Press

Fracking: The Ultimate Scam Revealed

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.

gas mask hydrofrackingOne 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.


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.

Fracking in Canada

As furious debate over fracking continues in the United States… Canada struggles to balance the economic benefits drilling has brought with the reports of water contamination and air pollution that have accompanied them.

Oh, Canada’s Become a Home for Record Fracking

by Nicholas KusnetzProPublica, Dec. 28, 2011, 11:09 a.m.
Photo Credit: Associated Press

Early last year, deep in the forests of northern British Columbia, workers for Apache Corp. performed what the company proclaimed was the biggest hydraulic fracturing operation ever.

The project used 259 million gallons of water and 50,000 tons of sand to frack 16 gas wells side by side. It was “nearly four times larger than any project of its nature in North America,” Apache boasted.

The record didn’t stand for long. By the end of the year, Apache and its partner, Encana, topped it by half at a neighboring site.

As furious debate over fracking continues in the United States, it is instructive to look at how a similar gas boom is unfolding for our neighbor to the north.

To a large extent, the same themes have emerged as Canada struggles to balance the economic benefits drilling has brought with the reports of water contamination and air pollution that have accompanied them.

The Canadian boom has differed in one regard: The western provinces’ exuberant embrace of large-scale fracking offers a vision of what could happen elsewhere if governments clear away at least some of the regulatory hurdles to growth.

Even as some officials have questioned the wisdom of doing so, Alberta and British Columbia have dueled to draw investment by offering financial incentives and loosening rules. The result has been some of the most intensive drilling anywhere.

“There definitely is concern on the part of people living in northeast B.C. on the scale of developments, which are quite significant already and are only in their infancy,”said Ben Parfitt, an analyst with the Canadian Centre for Policy Alternatives, a research institute that promotes environmental sustainability. “We are seeing some of the largest fracking operations anywhere on earth.”

Canada’s eastern regions have proceeded more cautiously. In March, Quebec placed a moratorium on shale development [1] pending further study. Protesters have taken to the streets in New Brunswick [2] demanding the same.

Public opposition, coupled with low gas prices, has slowed drilling over the past year. Still, the Canadian Association of Petroleum Producers expects production from shale and other unconventional sources to more than triple in the next decade.

The industry’s aggressive plan for growth has drawn an ambivalent response from the nation’s top environmental officials.

In March, Canada’s deputy minister of the environment sent an internal memo warning that more work was needed to assess the risks from shale gas drilling [3]. The memo, obtained by an Ottawa-based newspaper and addressed to Environment Minister Peter Kent, said water use and contamination top a list of environmental concerns including air pollution, greenhouse gas emissions and the use of unknown toxic chemicals. Kent subsequently ordered two studies looking at the safety and environmental impacts of shale drilling.

Yet, in a written response to questions from ProPublica, the environment ministry affirmed its commitment to continued development.

“Our Government believes shale gas is an important strategic resource that could provide numerous economic benefits to Canada,” the ministry’s statement said. Gas is an important part of a clean energy future, the ministry added, saying that “a healthy environment and a strong economy go hand in hand.”

B.C., Alberta Lure Drillers

Canada’s current drilling boom dates to the late 1990s, when Encana began using fracking to extract gas from dense rock in northern British Columbia.

The second-largest gas driller in North America, Encana also started fracking shallow coal seams, or coalbed methane, in Alberta in the early 2000s, using nitrogen rather than water to free the gas. Coalbed methane drilling generally requires less fluid than fracking shale but occurs much closer to drinking water. In some cases, Encana and other companies have drilled wells directly into aquifers, injecting fracking fluids into groundwater suitable for drinking.

In the middle of the last decade, Encana and other operators started exploring northern British Columbia’s shale gas reserves. The formations were promising, holding at least 200 trillion cubic feet of gas, according to industry estimates.

But drillers faced formidable hurdles to get to it. Unlike the Barnett and Marcellus shales in the U.S., Canada’s best shale basins are far from most markets and existing infrastructure. Soggy ground slows drilling in the spring and summer, and the average high temperature hovers around zero degrees Fahrenheit in January.

To encourage development, British Columbia enacted a series of incentives, including reduced royalties for deep drilling and credits for building roads and pipelines in the remote regions.

These changes, combined with the area’s severe conditions, spurred companies to concentrate and scale up their operations in British Columbia in an effort to cut costs, industry experts say. The result: a string of record-breaking fracks.

In a written response to questions from ProPublica, Apache said this approach reduces surface disturbance. It also can heighten the risk of air and water pollution, said Bruce Kramer, an expert in oil and gas law with McGinnis, Lochridge and Kilgore, a Texas-based law firm.

In both western provinces, the regional authorities responsible for regulating drilling have passed rules to allow more intensive drilling.

In Alberta, drillers can now pack wells closer together and pump more water out of shallow coal seams to free gas more efficiently. British Columbia issued detailed regulations last year that limit where and when companies can drill and set rigorous environmental standards but also gave its Oil and Gas Commission the authority to exempt drillers from virtually all of these provisions.

The commission referred an inquiry from ProPublica to its parent organization, the Ministry of Energy and Mines. In written responses to questions, the Ministry said the new regulations adequately address environmental concerns over drilling activity in the province. Pointing to an upcoming health study and new rules that compel companies to disclose chemicals used in fracking, officials said they would continue to review and revise standards as necessary.

Still, the regulatory shifts have prompted environmental advocates in Alberta and British Columbia to question whether officials are prepared to cope with rising concerns about water use, contamination and unchecked development.

“We just don’t have a clue how big this issue is from a public policy perspective,”said Bob Simpson, a member of British Columbia’s legislative assembly and an outspoken critic. “We really don’t know what we’re doing.”

Jessica Ernst’s Water Problems

Over the last five years, there have been several prominent cases in which Alberta residents have said gas drilling contaminated their water.

There are no hard numbers. The government does not track such complaints. But in some instances, residents’ frustration has been exacerbated by their sense that regulators have not properly investigated their claims.

In 2005, Jessica Ernst noticed strange things happening to her water. The toilet fizzed. The faucets whistled. Black particles clogged her filter. Then she began getting rashes.

Ernst, a longtime environmental consultant for oil and gas companies, wondered whether the changes could be connected to drilling nearby. Encana had been drilling shallow coalbed methane wells near her home outside of Rosebud, about 50 miles northeast of Calgary.

She asked Alberta Environment and Water, the agency that oversees groundwater, to test her well. When the well was drilled in 1986, tests showed it had no methane [4]. The new tests, however, showed high levels of the gas, as well as a hydrocarbon called F2 and two other chemicals.

But in 2007, a government research agency concluded it was unlikely that drilling had affected her water [5]. The final report said the chemicals found were not typically used in coalbed methane drilling, and that one had probably come from a plastic tube used to test the water.

Ernst wasn’t satisfied with the province’s response, however. The government’s report concluded that the methane in her well might be occurring naturally because tests showed similar levels of gas in nearby wells. But the tests were conducted after Ernst noticed the changes in her water — she saw the results as an indication that the contamination might be more widespread.

The government’s report also ignored evidence provided by one of its own analysts, a professor of geochemistry at the University of Alberta. When Karlis Muehlenbachs analyzed the gas in Ernst’s well for Alberta Environment and Water, he found ethane, a gas often found with methane, with a chemical signature indicating that it had come from deep underground, below the depth of the well. Muehlenbachs told ProPublica that the ethane’s signature meant that it could not have been there naturally. He said he is convinced that it resulted from drilling.

As Ernst searched for answers to what happened to her water, she unearthed evidence of other problems related to drilling. She found an Alberta Environment and Water report that listed cases in which the fracking of shallow wells resulted in gas or fluid leaking [6] into nearby gas wells or spraying into the air. She also found government gas well records that said Encana had fracked into the aquifer that supplies her water well.

“The community was used as a test tube,”she said. “I was used as a test tube.”

Earlier this year, Ernst sued Encana, Alberta Environment and Water and the Alberta Energy Resources Conservation Board [7], which regulates drilling, alleging that Encana’s drilling was negligent and that the government agencies had covered up the company’s contamination and failed to enforce regulations.

Ernst, who is asking for about $33 million Canadian in damages and return of wrongful profits, has vowed she will not accept a settlement that includes a confidentiality agreement, as others have done.

“Somebody has to do this,”she said.

Alan Boras, a spokesman for Encana, said the company would not comment on the case.

The Energy Resources Conservation Board denied a request for an interview. In written responses to questions, spokesman Bob Curran said he could not comment on the specifics of Ernst’s case, but the agency is confident it has conducted itself appropriately.

Carrie Sancartier, a spokeswoman for Alberta Environment and Water, would not comment on Ernst’s allegations because of the lawsuit but said there have been no confirmed cases of gas drilling contaminating water wells in the province.

Muehlenbachs, whose work has been used in several government investigations, said that is “simply false.” He said he’s analyzed thousands of cases of gas leaking up well bores and knows of at least a dozen cases of water contamination.

Alberta has introduced several measures to safeguard water from shallow drilling. In 2006, it established a buffer zone between shallow gas wells and water wells [8] and required drillers to test nearby water wells before drilling into an aquifer [9].

Nevertheless, last January, as part of a review of drilling regulations, the Energy Resources Conservation Board [10] said shallow fracking poses a risk to groundwater.

Is ‘Communication’ a Risk?

There have been no reports of groundwater contamination related to new drilling in British Columbia.

Increasingly, however, there are reports of something called “communication” — events in which a fracture travels through the ground and connects two gas wells.

Ken Paulson, chief engineer at the province’s Oil and Gas Commission, said these events do not pose a contamination risk. Other experts say their principal impact is to undermine production.

But opponents of expanded shale drilling say instances of communication show that drillers lack a full understanding of what happens when wells are fracked closer together, increasing the risk of contamination. Anthony Ingraffea, an engineering professor at Cornell University, said that if a fracture hit a natural fault, it could allow contaminants to enter aquifers.

Communication has occurred in the U.S. as well: Regulators in Texas, Oklahoma, Michigan and Pennsylvania reported such events to Canadian officials as part of the Energy Resources Conservation Board’s regulatory review [10].

Documents provided to ProPublica show that energy companies have reported 25 cases of communication in British Columbia [11] since 2009. Companies are not required to report such events, so the list isn’t comprehensive, Paulson said.

In May 2010, the province’s Oil and Gas Commission issued a warning when a drilling company inadvertently shot sand from one fracking job into another well [12] being drilled more than 2,000 feet away.

The advisory said the operator contained the resulting jump in pressure within the well but warned of a “potential safety hazard.” When communication occurs, Paulson said, the biggest concern is that an operator could lose control of a well and cause a blowout.

Concerns Over Water Consumption

As the debate over communication continues, Parfitt and other Canadian environmentalists have raised more immediate concerns about water use. Fracking requires lots of water — on their biggest reported fracking job, Apache and Encana used an average of 28 million gallons of water per well.

While the oil and gas industry says it is responsible for 1 percent or less of British Columbia’s overall water use, environmental advocates say that may not reflect the full extent of the industry’s consumption or long-term needs.

Drillers use both surface and groundwater. Access to surface water is regulated by two agencies that issue long-term licenses or year-long permits. Overwhelmingly, energy companies have chosen to obtain permits, which require less regulatory review.

Most groundwater withdrawals aren’t regulated at all. Drillers need permits to sink water wells, but there are no limits on the amount of water that can be taken from them. They can also purchase water from other well owners, so there’s no way to track overall use.

“How much water is actually being used and, more importantly, how much water is projected to be used over next the 10 to 15 years? Because of the scattershot approach of regulation, this isn’t something we can actually answer right now,”said Matt Horne, acting director of the climate change program at the Pembina Institute, an environmental think tank that published a report on the gas industry’s water use.

Last year, in a report focusing on province-wide groundwater oversight, British Columbia’s auditor general [13] said the province was not adequately protecting aquifers from overuse and potential contamination. Agencies lacked the basic data necessary to assess the risks, such as the number and extent of the province’s aquifers, the report said.

The Ministry of Energy and Mines, in a written response to questions, said the province is taking several steps to improve oversight of water use, including a research project studying aquifers. The agency said it can review large groundwater withdrawal projects and that pending changes to the province’s water law would regulate withdrawals.

Drillers themselves are also moving to address water concerns. Encana and Apache have started using saline water not suitable for drinking or irrigation in some of their projects. Alan Boras, the Encana spokesman, said the company uses non-potable water almost exclusively in its main operating area in the Horn River Basin, where the largest frack jobs were reported.

Environmentalists say they welcome the effort, but caution that these projects are tiny compared to the industry’s overall water use.

Governments, Industry Get Cozy

Public backlash to fracking has become such a concern for drillers and provincial governments in western Canada that last year they launched a joint effort to counter it.

In December 2010, the governments of British Columbia, Alberta and Saskatchewan signed a memorandum of understanding laying out a plan [14] to share information and develop standards for hydraulic fracturing and water use. The provinces invited only one non-governmental entity to participate in the project: the Canadian Association of Petroleum Producers.

The memo, which was leaked in August and published by the Alberta Federation of Labour, a union group, said the provinces and petroleum producers would work together to develop “key messages” on shale drilling to persuade the public not to fear fracking.

“The project will help to demonstrate that shale gas extraction is viable, safe and environmentally sustainable,” the memo said.

The memo blamed environmental groups for spreading misleading information and stirring opposition to drilling.

“Environmental Non-Government organizations (ENGOs) are supporting a ill-informed [sic] campaign on hydraulic fracturing and water related issues in British Columbia and in other jurisdictions,” it said. “This is expected to grow as shale gas development expands into Alberta and Saskatchewan.”

In a separate memo [14], Alberta Environment and Water reported that the Canadian Association of Petroleum Producers had approached the province to work on a joint public relations campaign.

Ultimately, no campaign materialized.

Janet Annesley, a spokeswoman for the Canadian Association of Petroleum Producers, said the group hadn’t wanted to join forces on PR but was just informing the province of plans to publish voluntary standards for shale gas drilling.

Still, critics saw the memo as proof of an overly cozy relationship between the government and the industry.

Bart Johnson, a spokesman for Alberta’s Energy Minister, said the petroleum producers had suggested a joint PR initiative but dropped the request. Such a collaboration, however, would not have been inappropriate, he said. The government works with industry groups all the time, he said, citing a campaign with education groups against bullying in schools.

“Oil and gas is huge in Alberta. It fuels our economy. Indeed it fuels the economy of Canada,” Johnson said. “Any suggestion that we shouldn’t meet with that industry is ridiculous.”


ProPublica: EPA Confirms Fracking Linked to Contamination

The agency’s findings could be a turning point in the heated national debate about whether contamination from fracking is happening, and are likely to shape how the country regulates and develops natural gas resources in the Marcellus Shale and across the Eastern Appalachian states.

Feds Link Water Contamination to Fracking for the First Time

by Abrahm Lustgarten and Nicholas KusnetzProPublica, Dec. 8, 2011, 8:18 p.m.

In a first, federal environment officials today scientifically linked underground water pollution with hydraulic fracturing, concluding that contaminants found in central Wyoming were likely caused by the gas drilling process.

The findings by the Environmental Protection Agency come partway through a separate national study by the agency to determine whether fracking presents a risk to water resources.

In the 121-page draft report released today, EPA officials said that the contamination near the town of Pavillion, Wyo., had most likely seeped up from gas wells and contained at least 10 compounds [1] known to be used in frack fluids.

“The presence of synthetic compounds such as glycol ethers … and the assortment of other organic components is explained as the result of direct mixing of hydraulic fracturing fluids with ground water in the Pavillion gas field,” the draft report states. “Alternative explanations were carefully considered.”

The agency’s findings could be a turning point in the heated national debate about whether contamination from fracking is happening, and are likely to shape how the country regulates and develops natural gas resources in the Marcellus Shale and across the Eastern Appalachian states.

Some of the findings in the report also directly contradict longstanding arguments by the drilling industry for why the fracking process is safe: that hydrologic pressure would naturally force fluids down, not up; that deep geologic layers provide a watertight barrier preventing the movement of chemicals towards the surface; and that the problems with the cement and steel barriers around gas wells aren’t connected to fracking.

Environmental advocates greeted today’s report with a sense of vindication and seized the opportunity to argue for stronger federal regulation of fracking.

“No one can accurately say that there is ‘no risk’ where fracking is concerned,” wrote Amy Mall, a senior policy analyst at the Natural Resources Defense Council, on her blog. “This draft report makes obvious that there are many factors at play, any one of which can go wrong. Much stronger rules are needed to ensure that well construction standards are stronger and reduce threats to drinking water.”

A spokesman for EnCana, the gas company that owns the Pavillion wells, did not immediately respond to a request for comment. In an email exchange after the EPA released preliminary water test data two weeks ago [2], the spokesman, Doug Hock, denied that the company’s actions were to blame for the pollution and suggested it was naturally caused.

“Nothing EPA presented suggests anything has changed since August of last year– the science remains inconclusive in terms of data, impact, and source,” Hock wrote. “It is also important to recognize the importance of hydrology and geology with regard to the sampling results in the Pavillion Field. The field consists of gas-bearing zones in the near subsurface, poor general water quality parameters and discontinuous water-bearing zones.”

The EPA’s findings immediately triggered what is sure to become a heated political debate as members of Congress consider afresh proposals to regulate fracking. After a phone call with EPA chief Lisa Jackson this morning, Sen. James Inhofe, R-Okla., told a Senate panel that he found the agency’s report on the Pavillion-area contamination “offensive.” Inhofe’s office had challenged the EPA’s investigation in Wyoming last year, accusing the agency of bias.

Residents began complaining of fouled water near Pavillion in the mid-1990s, and the problems appeared to get worse around 2004. Several residents complained that their well water turned brown shortly after gas wells were fracked nearby [3], and, for a time, gas companies operating in the area supplied replacement drinking water to residents.

Beginning in 2008, the EPA took water samples from resident’s drinking water wells, finding hydrocarbons and traces of contaminants that seemed like they could be related to fracking [4]. In 2010, another round of sampling confirmed the contamination, and the EPA, along with federal health officials, cautioned residents not to drink their water and to ventilate their homes [5] when they bathed because the methane in the water could cause an explosion.

To confirm their findings, EPA investigators drilled two water monitoring wells to 1,000 feet. The agency released data from these test wells in November that confirmed high levels of carcinogenic chemicals [2] such as benzene, and a chemical compound called 2 Butoxyethanol, which is known to be used in fracking.

Still, the EPA had not drawn conclusions based on the tests and took pains to separate its groundwater investigation in Wyoming from the national controversy around hydraulic fracturing. Agriculture, drilling, and old pollution from waste pits left by the oil and gas industry were all considered possible causes of the contamination.

In the report released today, the EPA said that pollution from 33 abandoned oil and gas waste pits – which are the subject of a separate cleanup program – are indeed responsible for some degree of shallow groundwater pollution in the area. Those pits may be the source of contamination affecting at least 42 private water wells in Pavillion. But the pits could not be blamed for contamination detected in the water monitoring wells 1,000 feet underground.

That contamination, the agency concluded, had to have been caused by fracking.

The EPA’s findings in Wyoming are specific to the region’s geology; the Pavillion-area gas wells were fracked at shallower depths than many of the wells in the Marcellus shale and elsewhere.

Investigators tested the cement and casing of the gas wells and found what they described as “sporadic bonding” of the cement in areas immediately above where fracking took place. The cement barrier meant to protect the well bore and isolate the chemicals in their intended zone had been weakened and separated from the well, the EPA concluded.

The report also found that hydrologic pressure in the Pavillion area had pushed fluids from deeper geologic layers towards the surface. Those layers were not sufficient to provide a reliable barrier to contaminants moving upward, the report says.

Throughout its investigation in Wyoming, The EPA was hamstrung by a lack of disclosure about exactly what chemicals had been used to frack the wells near Pavillion. EnCana declined to give federal officials a detailed breakdown of every compound used underground. The agency relied instead on more general information supplied by the company to protect workers’ health.

Hock would not say whether EnCana had used 2 BE, one of the first chemicals identified in Pavillion and known to be used in fracking, at its wells in Pavillion. But he was dismissive of its importance in the EPA’s findings. “There was a single detection of 2-BE among all the samples collected in the deep monitoring wells. It was found in one sample by only one of three labs,” he wrote in his reply to ProPublica two weeks ago. “Inconsistency in detection and non-repeatability shouldn’t be construed as fact.”

The EPA’s draft report will undergo a public review and peer review process, and is expected to be finalized by spring.