This is an extract from ‘Boom: Bubbles and the End of Stagnation’, which is published this week.
For the past 70 or so years, oil has been the most important commodity in the world. Cars burn oil and drive over it, since asphalt is a hydrocarbon. Fabrics created from oil keep us warm in the winter and cool in the summer. Oil-based lubricants keep machinery working, while oil-based cleaning products keep our homes pristine. Oil is an ingredient in plastic, perhaps the most ubiquitous synthetic material in modern life.
On one level, it’s an almost magical substance, the product of inert materials buried deep under the Earth for millions of years, brought to the surface to power our world. But the task of unearthing it has been a story of science, engineering, and financial and physical risk-taking. Since 1859, when a down-on-his-luck railroad worker first decided to drill for oil in Titusville, Pennsylvania, the oil and gas industry has continually reinvented itself to increase production. While total oil production has grown slowly compared to other industries—about 1 percent per year since 1980—this increase has occurred against a backdrop of steady depletion, estimated at around 7 percent annually. In other words, maintaining the current oil consumption trend requires gross production to increase at about twice the growth rate of real GDP to offset natural declines. Moreover, the first sites to be drilled were low-hanging fruit in terms of discovery and extraction. Each year, we use roughly 35 billion of the most accessible barrels of oil; the following year, we start on the next best sites. Holding technology constant, production should relentlessly decline. And yet, it hasn’t.
How have we been able to not just maintain the pace of but increase oil production? Fracking plays a central role. Like every bubble we’ve documented, fracking reveals how the risk-taking and ingenuity of a small group of speculators, engineers, and entrepreneurs can radically alter an industry’s entire trajectory.
A miracle of petroleum engineering or financial engineering?
Fracking has extracted an impressive amount of oil from Texas, Oklahoma, and North Dakota. It has extracted an equally impressive amount of capital from New York, London, Tokyo, and other financial centers. A 2020 Deloitte estimate put the total amount of cash raised by fracking at more than $300 billion. Over that period, the investing public effectively provided drivers and other energy consumers with generous subsidies—precisely the overinvestment a successful bubble requires.
In the 2000s, optimists observed that fracking was able to produce oil and gas in fields previously thought to be exhausted. Its production curve was also different from the conventional well stimulation technique. Both methods would hit peak production in the first year, but where a conventional oil well would still be producing at 50 percent six years later, a fracked well would lose up to 80 percent of its production by year three. This shorter time frame meant fracking was a more flexible and predictable source of energy profits. In contrast, conventional oil companies were saddled with decisions they’d made several years prior, which left them vulnerable to price changes. They could find that the investments they’d underwritten at $100 a barrel were delivering most of their oil at $50.
When fracking companies describe their business, they often use the term “manufacturing” rather than “oil exploration.” This is a public relations decision, but it’s also a fairly accurate descriptor. Fracking was able to achieve more predictable returns and economies of scale than standard drilling. By contrast, the traditional oil industry experienced rising costs over time and diseconomies of scale. The first projects were typically in places where oil and gas were visibly near the surface and located conveniently close to consumer demand. As those sources were exhausted, energy companies had to move further afield—from Pennsylvania and then Texas and Oklahoma to Saudi Arabia, Iran, Iraq, Libya, Venezuela, Brazil, and the North Sea. The entry into harsher geographic and political climates increased operating costs and raised the probability that a project would fail. A low point for the US oil industry’s morale might have been 1984, when Standard Oil of Ohio announced that after spending $1.5 billion drilling at Mukluk Island in Alaska, the well turned out to be a dry hole, with no oil to be found.
At the same time, morale and narrative fueled more cynical views of the fracking business. From this perspective, fracking wasn’t so much a story of entrepreneurs discovering a new source of energy as it was a story of con artists inventing a new sales pitch. There’s a long history of exaggerated claims prompting investments in the mining and energy industries. Bre-X, a fraudulent Canadian gold miner, was worth $4 billion at its peak, and “Dad” Joiner, the promoter who financed the Spindletop well that set off Texas’s oil boom in the early 1900s, was accused of having sold some of the same acreage to multiple investors as part of a scheme to raise funds. An old joke, sometimes attributed to Mark Twain, is that a mine is “a hole in the ground with a liar on top.”
Given this history, energy investors are primed to be suspicious. As a result, energy entrepreneurship attracts good storytellers. For conventional energy companies, each attempt to drill has a cost, and companies sometimes need to raise funds after a series of dry holes. While they could raise more capital up front, doing so would mean giving away more of the upside if they were to get lucky early. The companies that survive this dynamic are often those that operate in a chronically under-capitalized way, and are therefore good at convincing investors to take the risk and fund one last effort.
Entrepreneurial hypomania induced spending that wasn’t strictly justified at the time. A four-decade decline in American oil production was reversed by companies that persistently spent more than they made in the hopes that they’d eventually produce enough cheap oil to justify those earlier investments. But the frackers were ultimately vindicated, both from a broad economic perspective and from that of narrow investor interests. Fracking led to cheap, plentiful oil and gas, with US production of both hitting all-time records long after American energy production was thought to have peaked. The technique also reversed the long-term trend of new oil sources growing increasingly risky and expensive to extract. Fracking meant that the supply of oil and gas fluctuated more in line with demand, so the industry’s highs and lows weren’t quite so extreme.
Meanwhile, the story eventually worked out for the companies’ financial backers. In 2021 and 2022, fracking companies produced immense profits, as a recovery in oil demand and their own restraint in growing production meant they captured high prices without immediately spending the money on more drilling. The energy company EOG Resources, for example, had reported cumulative negative cash flow of almost $10 billion from 2006 through 2012; its free cash flow just for the years 2021 and 2022 totaled more than $11 billion. Frackers did eventually manage to get their costs down, and they also ended up with a much more certain model than that of other oil and gas companies, for whom drilling was less of a roll of the dice and something closer to running an effective card-counting strategy.
Cheaper energy is hard to notice in the short term, for two reasons. First, while energy is an input into just about every economic activity, it’s rarely the largest single cost. This means that cheaper energy shows up as a sort of pan-economic quality dividend, where everything is slightly more cost-effective than it otherwise would be. Another reason is that even with the more responsive supply from frackers, energy prices remain volatile from day to day; high prices at the pump produce headlines, while a change in the compounded rate of oil price growth over decades doesn’t. And we certainly don’t have headlines about counterfactuals, like a world where oil and gas are more expensive and acquiring them requires more entanglements with volatile parts of the world. Ultimately, the fracking dividend made the world richer in energy, and made some of the frackers very wealthy indeed.
Fracking today
The subsequent history of fracking has involved consistent improvement in techniques and the repeated discovery that once-ignored oil and gas sites possessed significant amounts of resources trapped in the tiny gaps between rocks. The fracking boom was further accelerated by the development of horizontal drilling. Engineers discovered that instead of drilling straight down, they could slowly bend the well bore until it’s roughly horizontal to the level at which most of the oil and gas are stored. As a result, instead of fracking a well just once, a driller can continuously inch forward, fracture local rock, and repeat the process multiple times. This reduces some of the economic and environmental costs of drilling, as it involves less activity on the surface for a given amount of resource extraction below.
That said, fracking is hardly a green technology. The process pumps vast amounts of sand and fluid into the ground (although, as the fracking industry points out, this happens about a mile below where aquifers are found). And injecting sand and water deep into the earth is itself energy intensive. In 2012, when fracking accounted for a relatively small fraction of global oil and gas output, the energy used in fracking already exceeded that used in conventional oil and gas production. There are also controversial claims that fracking causes earthquakes and pollutes groundwater, although the industry argues that neither of these is likely, at least assuming safe operations—an assumption that doesn’t necessarily hold.
Even ignoring the impact of fracking gone wrong, there’s the problem of fracking going right. Fuel extracted by fracking gets burned, adding CO₂ to the atmosphere. That’s true of conventional oil and gas, too, of course, so one way to look at fracking’s impact is that it extends the life of the hydrocarbon economy. The finite nature of natural resources can do the work that legislation can’t in making climate-impacting energy extraction economically untenable. But the arc of progress is also a long series of unsustainable practices that eventually lead to more sustainable ones. Urbanization was a rolling health crisis until the advent of modern sanitation and medicine; artificial nitrogen fixation reached production scale just as the world was running out of its next-best fertilizer, millennia-old accumulations of guano on various small islands; coal averted deforestation in early industrial England. Every technology advancement couples finite natural resources with infinite human creativity, and pivots to a new finite input when the older one runs down. In a way, fracking deals with one sustainability problem—dwindling oil and gas reserves in an energy-intensive economy—by replacing it with another: the consequences of even more hydrocarbon extraction. Whether or not that turns out to be a good trade depends on what we do with the extra time this buys us.
There are a couple of important points in fracking’s favor. In terms of electrical generation, natural gas is the closest substitute for coal and produces only 56 percent of the emissions. By accelerating the transition off of coal, natural gas fracking has thus extended humanity’s atmospheric runway, even as it adds carbon to the atmosphere. At best, fracking is a transitional technology, but it could still play an important role in the shift to climate technologies, including negative emission technologies that could help remove carbon dioxide from the atmosphere, which our oil-fueled industrial system will continue to produce for the foreseeable future. And, while the US regulatory environment is imperfect, American companies are more sensitive to pollution risk than many countries in the developing world. For natural gas in particular, the impact of methane leaks on climate can be immense—methane has about 20 times the warming impact per molecule as CO₂ (albeit over a shorter period of roughly 12 years instead of a century), and can leak from both improperly drilled wells and decommissioned ones. For a global market like oil, enabling more production in countries with stricter rules doesn’t change the net amount of fuel extracted, but it can reduce the unneeded environmental impact. The World Bank estimates that middle-income countries produce 50 percent more emissions per dollar of GDP than the US, and that China produces two and a half times the emissions for a given level of economic activity. For natural gas, the impact is hazier, because shipping represents a higher share of total costs compared to oil. But that industry has also gotten more globalized, and relatively more natural gas is being produced in countries with stricter environmental laws.
Fracking’s most significant impact, however, is energy abundance. Oil and natural gas prices have yet to return to the highs of 2008, even though the world economy is 23 percent bigger in dollar terms. But fracking has had another beneficial impact that’s worth considering: The US and its allies are no longer dependent on the Middle East and can therefore refrain from intervening in the region to the same extent. The history of US involvement in the Middle East is long and depressing, and much of it can be explained by the fact that Saudi oil was the only way to keep the US economy functioning. Oil is a fairly fungible resource, but it’s fungible precisely because the US makes it so by protecting shipments around the world and protecting countries like Kuwait from invasions, as it did during the First Gulf War. A need for oil has repeatedly required the US government and American companies to deal with governments they’d prefer to avoid. Because of fracking, the best opportunity for energy switched from oil and gas that was inconveniently placed around the globe to oil that was inconveniently placed in the US’s own backyard.
There will be blood: Fracking and memes
At their core, all of the bubbles and technologies we’ve discussed share a fundamental narrative that influences public perception. The development of nuclear energy, for example, was shaped by perceptions of its promises and perils. In the decades following the discovery of radium in 1896, radiation was perceived as a form of “alchemy” and “transmutation” that could lead to utopian civilizational renewal. In the wake of Hiroshima and Chernobyl, nuclear energy became irreversibly linked with the dystopian imagery of “contamination,” “mutation,” and “destruction,” immortalized in the pop culture iconography of mutants and monsters like the zombies in 1968’s ‘Night of the Living Dead’ and Godzilla. Growing fear of nuclear energy—which has, paradoxically, resulted in policies that have hindered the adoption of a lower-emission energy technology—illustrates how a shared narrative has the power to influence technological adoption and diffusion.
Similarly, even as the fracking industry has grown, it has faced pushback from voters because of a bleak narrative involving the violent penetration of the Earth’s surface to extract an alien dark matter that is inexorably linked with environmental destruction, pollution, and war. This contrasts sharply with narratives surrounding energy technologies characterized as “clean” and “renewable,” with their quasi-mystical connotations of purification, healing, and renewal. The cleantech bubble emerged during the mid-2000s with investments in solar, biofuels, batteries, and other renewable energy sources, and is perhaps one of the purest examples of a bubble driven by narrative. “Salvation (and Profit) in Greentech,” a talk given by the venture investor John Doerr in 2007, perfectly encapsulates the core narrative of the cleantech bubble. In it, Doerr describes climate change as “the largest economic opportunity of the 21st century, and a moral imperative.” This simultaneous belief in profits and salvation fueled the cleantech bubble, which burst just a year after Doerr’s speech, when the financial crisis simultaneously led to a collapse in oil prices and a dramatic reduction in investors’ appetite for high-risk projects. The subsequent high-profile problems at companies like Solyndra further intensified investor skepticism of clean energy, at least in the US.
While cleantech represented a new and massive market—an opportunity Doerr characterized as “bigger than the internet”— its rise cannot be fully understood without an appeal to its narrative of salvation. As the behavioral economist Robert Shiller notes, an emotionally resonant narrative can act as a contagion. Doerr, for example, began his talk by describing a conversation he had with his daughter about how climate change will impact her generation. Moved to tears as he recounted this exchange, Doerr said it made him view addressing climate change as a “moral imperative.” Likewise, Elon Musk, a cofounder of the electric vehicle maker Tesla, mobilizes references to climate change and impending catastrophe when describing the company’s mission. “Why does Tesla exist? Why are we making electric cars? Why does it matter?” Musk said when he unveiled the Model 3 in 2017. “It’s because it’s very important to accelerate the transition to sustainable transport. . . This is really important for the future of the world.” Musk doubled down on these pronouncements in 2018, telling CNBC, “If we do not solve the environment, we’re all damned.” The impending climate crisis creates a personal and emotional connection to the narrative, which makes it more contagious, and therefore more effective at fueling a speculative bubble.
A bubble continually reinforces the narratives and imagery that drive it. In the context of speculative financial bubbles, memes—understood as self-replicating, mutating symbolic units of cultural transmission and imitation—can help investors and traders process information and navigate markets. While memes sometimes produce irrational exuberance (Beanie Babies are perhaps the most notorious example), imitation in markets can be rational for individual investors faced with either too much or too little information. Rather than acting on private information or signals, investors often imitate the behavior of other investors, which can lead to so-called informational cascades or mimetic contagions. Memes, which compress information and evoke emotions, can encode valuable information for investors and speculators. The self-organizing dynamics of memes and narratives can therefore lead to spectacular busts and crashes.
In the case of fracking, the negative emotional reactions associated with fossil fuels have often outweighed geopolitical considerations about energy autarky, leading to fracking bans in Vermont, New York, Maryland, and Washington. This sentiment is beautifully captured by a scene in Paul Thomas Anderson’s 2007 film ‘There Will Be Blood’, in which the protagonist watches a fire from a gas blowout engulf an oil drilling rig against a gloomy sky. The scene not only allegorizes the film’s prophetic title, which seems to warn of the military conflicts and natural catastrophes that will ensue once the lifeblood of our material prosperity and economic growth dries up, it also provides a perfect visual distillation of the pessimistic social mood toward fossil fuels.
For anyone financially or emotionally invested in clean or renewable energy, fracking is the obvious apotheosis of a bad bubble that envisions the future essentially as a continuation of the present— a world where extractive energy remains the norm. On its surface, it seems to be a pure example of a mean-reversion bubble fueled by sin instead of virtue. However, while the motivations to frack have been mostly profane—that is, purely profit-driven—the technique nevertheless realized an aspirational vision. Unintentionally or not, the fracking bubble helped the US achieve energy independence. This may not sound as impressive as sending a man to the Moon, but energy independence has similarly large-scale geopolitical effects. As recent trends toward deglobalization, industrial onshoring, and geopolitical fragmentation have made clear, oil is more than a barbarous relic of a fossil-powered past. “Black gold” remains a strategic geopolitical reserve that continues to dictate the rise and fall of the wealth of nations.
‘Boom: Bubbles and the end of Stagnation’ is published by Stripe Press. You can order a copy here.
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