“Snake Oil” by Richard Heinberg

Heinberg_Snake_OilISBN-13: 978-0976751090. “Snake Oil – How Fracking’s False Promise of Plenty Imperils Our Future” by Richard Heinberg was published by the Post Carbon Institute in 2013. Heinberg is now the author of ten books of which we have reviewed seven at Post-Carbon Living. [What were the other three? We assumed we had a complete set?] Snake Oil is quite the light-weight of the set weighing in at only 124 pages in a threadbare font allowing a quick and easy read. This is nothing more than a quick primer on the topic of shale oil and gas. It focusses primarily on the USA with the barest mention of the rest of the world. However, its arguments are familiar and are playing out in the UK today.

This is Richard Heinberg so… those of us familiar with his back catalogue will pretty much know what to expect. He formed the habit in “Black Out” of covering fossil fuel regions in excessive detail and you spot a similar approach here. If you want a digest of every one of the USA’s continental shale plays then here it is in gratuitous detail – right down to the companies working the fields. This sounds excessive, and it is, but bear with Heinberg – he is making important points.

The book kicks off with an update on the topic of Peak Oil. We had this too from the last book we reviewed which was Jeremy Leggett’s excellent “Energy of Nations“. The two books are quite complementary and it is no coincidence that we read them back-to-back. Leggett touches on the topic of the fracking boom and potential for a shale bubble. His is the easier read but if you want some more depth about what is happening on the ground (and underground) then Heinberg has supplied that here.

Up front Heinberg attempts to re-invigourate his devout peak oil brethren. This happy few, who have been holding a candle for the Peak Oil narrative since 2006, have taken one hell of a beating. We feel like we bet the farm on red when the roulette wheel chose black. We too have been through that phase so have adopted a slightly more philosophical attitude since, let’s be frank, the world DIDN’T end. No shock there for the cornutopians for whom all such talk is simply neo-Malthusian nonsense. For the rest of us, we learnt to hold our tongues. For us Heinberg writes that “Snake Oil” is for:

“…readers who learned about peak oil during the past decade, took the information seriously, and made extraordinary efforts to reduce their personal petroleum dependency and to prepare their communities for the end of the era of cheap oil – only to see their credibility erode as a result of oil and gas industry disinformation and spin.”

(Emphasis mine.) Yes, we recognise ourselves. Somehow we felt let down that the end of the world didn’t happen and even now we continue to find excuses. Whether or not you can pin this on the “spin” of the fossil fuel industry is a matter of debate. Peakists were too dramatic in their portrayal of outcomes even though there was nothing technically wrong with the thesis. Peak Oil is happening like an incredibly slow-motion car-crash. There is no drama, it just unfolds over a long period of time. Hence at any given moment you would be forgiven for saying it isn’t happening although it demonstrably is. Hence the naysayers can always feel justified for as long as the peakists feel the need to over-play their cause. The transition is a long distance jog driven by the imperative of climate change not resource limitations.

I would take issue with Heinberg on just one issue however. He pitches the argument as being of just two kinds: environmental and economic. This is his perspective yet in reality the “environmental” argument is merely a subset of the economic one. Since you cannot pin a cost/benefit analysis to the beauty in a sunrise, then there is only an immeasurable aesthetic to nature for which we have no tools to value meaningfully. Everything else is economics. Climate Change is an economic and cultural predicament. The environment has nothing to do with it. We now live in a world where the likes of old-school environmentalists like Tony Juniper can write a magnificent book like “What has nature ever done for us?” that really pitches the economic case. Why Heinberg wishes to use such a retro argument seems odd.

However, for the rest, Heinberg is spot on. The clue is in the title: what are the opportunity costs of pursuing fracking? Where does it lead to?

“In the best instance, the fracking that has already been accomplished could provide us a bonus inning in which to prepare for life without cheap fossil energy.”

And that is the crux isn’t it? We are in the twilight years of the fossil fuel bonanza. Anything we yield now should be invested in a future where there simply are no fossil fuels in the energy sector. That bounty should be kept for feed stock where the energy return on energy invested (EROEI) is less of a problem. An energy abundant world can use oil for what can be made with it. Yet if we continue to delude ourselves that fossil fuels are abundant, and are meant to be burnt, then we will never replace the infrastructure created to perpetuate them in the energy sector. You end up in ever decreasing circles chasing your tale as the EROEI dwindles and society collapses. At some point you have to reach for the eject button and pursue renewables. Therefore we live on borrowed time and must make best use of that new reality. We must stop pretending that some other reality is in play. Otherwise we would still be hankering after whale oil and be living in caves right now. Time to move on.

Like Leggett, Heinberg has correctly identified that our Financial and Energy systems are forever embraced in the grip of death.

“The end of the era of cheap oil and inflation and collapse of history’s biggest debt bubble are historically intertwined.”

The Shale Bubble is no different from the real estate and dot com bubbles that went before it. It promises very little but the energy companies lie to the financial markets as they seek capital investment. Like a Ponzi scheme only the early investors are the winners. Most of us are losers – especially if our Pension Funds are the ones loosing their shirts when the bubble bursts. There is no difference between a sub-prime mortgage and a shale play. Same logic.

Fracking is not new and there is nothing special about this technology. It is as old as the oil industry itself.

“…it’s clear that it was the bringing together of several technological innovations in the context of high oil and gas prices and changes in government regulations that made large-scale commercial exploitation of shale gas and tight oil reservoirs possible.”

Peakists, of course, do not discount the effect of technology & price. It is expected that higher prices will drive exploration and technological innovation. It is expected that prices will ricochet around. It will be boom and bust for the economy for many years along the peak plateau for as long as it is addicted to fossil fuels. The short term arguments are simply between pessimists and optimists. In the long term mother nature wins and finite resources deplete. It doesn’t matter how deregulated the market nor how high the price. If it takes the energy in two barrels of oil to get a barrel of oil out of the ground you stop drilling… The substitution effect of the market drives alternatives. The only problem is that we are still at the cross-over point between renewables and fossil fuels. The EROEI for oil and gas was phenomenal for many years making renewables irrelevant. But now that has all changed. Renewables get better and better and cheaper and cheaper. Fossil fuels are travelling in the opposite direction. It is only an outdated cultural fondness for the kinds of wealth that oil created that perpetuates the system. That and investments sunk into long-lived capital.

The bombshell hits you when you realise that shale makes no money. Like all good asset bubbles it is not the economics that makes it exciting to the markets – it is the potential to get rich off the expectation of future profits. Future profits that are unrealistic. But realism has nothing to do with it. Bubbles are driven by unrealistic expectations. You just hope the other guy blinks first and you get out before it all goes down. There has to be losers. In the USA it might take up to $20million to get a shale rig producing product which you then sell for $15million. This will crash and when it does somebody will get hurt. Chesapeake [well known American fracking company] have stayed afloat for years simply by speculating on land with fracking potential. The business actually loses money hand over fist on its operations.

So the financial markets talk the shale investments up and up and up. But fracking is no new miracle that can return us to some bygone era of cheap fossil fuels. That is not how the market works. Fossil fuels will be expensive forever. They have to be in order for there to be any fossil fuels in the market. Simple supply and demand. So if everybody is lying to each other over the fracking bubble where does that leave the UK? Well it does leave us in an awkward position. It is like having political leaders standing up in 2005 and telling UK Mortgage lenders that the sub-prime mortgage market is the next big thing to create unbelievable wealth in the UK. Yet that is exactly what is happening in the UK right now.

Clearly there are a few people with enough money to buy enough political backing to talk up the bubble to make it profitable for those people. We might as well be talking up the South Sea Bubble or the tulip bulb industry. If it looks insane it probably is. Take this quote from a report “Shale and Wall Street” by Deborah Rogers (former Wall Street financial consultant) that Heinberg himself quotes at length:

“Wall Street began executing deals to spin assets of troubled shale companies off to larger players in the industry. Such deals deteriorated only months later, resulting in massive write-downs in shale assets. In addition, the banks were instrumental in crafting convoluted financial products such as VPP’s (volumetric production payments); and despite obvious lack of sophisticated knowledge by many… investors about the intracacies and risk of shale production, these products were subsequently sold to investors such as pension funds.”

[Emphasis mine.] VPP’s? Familiar? How about the CDO’s that masked the risk of the sub-prime market? The dance is the same, the tune is the same, the victims will be the same.

So when the economic case is so poor there is always the option to tell everyone that fracking is “green”. Here the debate rages. It swings less on the pollution aspects of drilling operations (to which we return) but also the leaking of gas from the well. The optimists say only 1% might leak, the pessimists say 7%. This means nothing to the short term direct money-making. But it means a lot to the longer-term economic impacts of climate change (that which Heinberg labels as “environmental” impacts). The difficulty lies in the lack of knowledge. Fracking is a young industry and…

“…anecdotes are easy to come by but also easy to brush off as isolated incidents that don’t reflect the actual safety record of the industry. Scientific studies and statistical analyses are crucial but have been slow to appear.”

In the absence of knowledge we have conjecture. What struck us in the reading of this argument was how much of the argument about the environmental impact of fracking relied upon what happened above ground. Heinberg resorts at one point to talking about the “stress” caused to adult birds in breeding season that discouraged mating. Clearly these are the symptoms of the oil and gas industry drilling holes in the ground anywhere for anything. Fracking offers nothing new to this mix apart from one key ingredient: you have to drill an awful LOT of holes in the ground to keep up the field yields. Individual fracking wells may have little more environmental impact than any other regular drilling activity. It is just that there is a lot more above ground activity going on. A lot of well heads, a lot of drilling and a heck of a lot of trucks rolling around the countryside. And that doesn’t even include those countries that simply cannot frack because liquid water is too precious a resource to be used up in pumping it down into the ground to yield a few barrels of oil. You can’t drink oil.

So we should look less towards the problems with the technology and more towards the total volume of drilling. You need drill thousands and thousands of well heads to keep the fossil fuels flowing. That is one thing in the State of Colorado with its ultra-low population density but it is quite a different thing in Northern Europe. Where will all this drilling happen? It simply cannot be far away from people because nowhere in Europe is far away from people. Roads and water resource are already stretched. Fracking doesn’t work economically in the wide empty spaces of North America. How does anyone figure it could work here?

So, “who benefits?” asks Heinberg. This is the most pertinent question, especially so in Northern Europe where this debate is underway. As we have already pointed out; there is benefit for a small portion of the political and economic elite in talking-up the impending bubble. Today it is shale. Yesterday it was sub-prime mortgages. The world keeps turning. All we need is another fad to crash and burn and a minority will make money at the expense of a majority. In a democracy we have a political elite who is meant to see through this and protect the population that elected them. However this protection scheme no longer works when the elites are in bed with each other. Hence it has fallen to individual communities to fight back against fracking. It may well be that their reasoning and understanding of the problem is incomplete. True, but they must fight.

Fossil fuels resulting from fracking will only be an economic curse. This we pointed out in our blog “All Out?” in January 2014 in response to the ludicrous claims by our Prime Minister that fracking would create cheap gas that would tempt back manufacturing industry to Britain. Wealth is created in the places that use energy, not the places that produce it. Of the local benefits to communities this ends up being squandering. Heinberg quotes several examples from the USA where tax revenue increases have been completely over-whelmed by the cost of repairing the road damaged caused by drilling operations. Not only is fracking a giant Ponzi scheme it is also a false economy of massive proportions. Local communities will see a net flow of money OUT not in.

As for the potential to drive down the price of gas this is almost mythical. It happened in the North American market because it was initially isolated from global markets. Since there was no initial way to export to China or India the glut formed on the US market and the price nose-dived. This cannot happen in Europe because the markets are joined up with over-land pipelines stretching all around the Eurasian and North African continents. With such an enormous sink for fossil fuels the highest bidder will win the supply and the global market price will rule. In an expanding economy the price is unlikely to go down. It may have quite a trivial effect. All of which delays the inevitable day when we have to ween ourselves off this dependency on cheap oil and gas under any circumstance.

In conclusion we are playing a no-win game with fracking. We are sucking the last remnants of economically viable fossil fuel reserves from the rocks beneath us in a desperate attempt to stave off the inevitable. It takes too much energy to get these modern fossil fuels out of the ground. It costs too much. It makes no sense. EROEI will decline until collapse. On this Heinberg found an ally in Tim Morgan of London-based brokerage Tullet Prebon who reported:

“..the essential conclusion is the same. It is that the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course, some way is found to reverse the trend [of declining EROEI].

[Emphasis mine.] His projections suggest that energy costs will absorb almost 15% of GDP by 2030. That is an EROEI of 7.1:1.

“….David Hughes, in “Drill, Baby, Drill”, speculates that if all the energy inputs are properly accounted for, the EROEI of shale gas in the older plays may be 5:1 or less on average.”

[We noted that the “Drill, Baby, Drill” report constitutes a massive proportion of Heinberg’s work in “Snake Oil”.] Heinberg concludes:

“The promise of economic fossil energy abundance is a mirage. […] With every passing year the fossil fuel industry consumes a larger portion of global GDP, reducing society’s ability to fund an energy transition.”

If you really want to understand what is wrong with fracking then read this book. It might not always be clear but the arguments around fracking have little to do with the environment. Much like the arguments around nuclear technology, the “environmental” narrative serves only to confuse the issue. It may well be the one that most lay-men & women identify within their “gut-feel” – but it is least relevant. It is instinctive for humans to fear that their air and water might be poisoned. Since this “feeling” is so easily dismissed by hard-headed businessmen then it is easily forgotten what the real reasons are for dismissing fracking: it makes no economic sense. It is just another Ponzi scheme, another real estate bubble, another sub-prime mortgage disaster waiting to happen. It benefits a minority at the expense of the majority and it forever delays the day when we will have to REALLY deal with the reality of our predicament. The energy we get back from our investments in fossil fuels are dwindling. It is time to switch horses. It is time to back the new winner not the old loser.

However, until the political and financial establishment ‘buy-in’ to this argument then nothing will change. They are too easily seduced by good old fashioned greed. Oil and gas looks and smells like money. Old habits die hard. The local people who protect against fracking in their area may well by NIMBYs who fear poisoned water. They are likely to be wrong in their fears. But in the absence of any real rational debate on the economics of fracking they will be all we have.

Richard Heinberg has written another book that most people should read. He shows how the economics don’t stack up – even if there was no environmental case to answer: even if the well heads issued nothing more noxious than oxygen, smelling of roses, then we still shouldn’t be throwing good money after bad. This is not the energy transition we are looking for. Not by a long shot. Recommended.

About post-carbon-man

A passionate advocate of a peaceful transition to a sustainable political-economy, Mark hails from a working class farming background. Today he is a Company Director and Chairman of the Low Carbon Chilterns Co-operative. Whilst at University (Engineering Masters) he was active in Conservative Student politics but has had no affiliation since. He has travelled widely on business covering the USA, Europe, Middle East and Central Asian Republics. In 2007 Mark founded Post-Carbon-Living and a year later co-founded Transition Town High Wycombe. He lives with is wife & daughter in a home they retrofitted to be carbon-neutral. Today he blogs about surviving politics on a shrinking planet and is passionate in his rejection of Nationalism.

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