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For years now we've been covering the false promise of the American shale oil “miracle”.

Yes, it has extracted a lot more oil out of American soil that most thought possible. But at an economic loss. And at great environmental cost.

If the shale drilling companies can't make any profit, either when oil prices are high or low — why are we still pursuing shale deposits so aggressively?

To shed further light on this paradox, this week we welcome journalist Bethany McLean to the program. McLean is editor-at-large at Fortune Magazine and a contributing editor for Vanity Fair and Slate magazines. She is also author of the excellent book: Saudi America: The Truth About Fracking And How It's Changing The World.

McLean warns that the hype, the hucksterism, and the geological shortcomings of the deposits themselves, are setting up both investors and American society for tremendous disappointment:

The real catalyst of the shale revolution was the Great Financial Crisis and the era of unprecedentedly-low interest rates that followed.

And that had two effects. One was that it made debt cheap. So these companies that are heavily dependent on being able to raise capital could raise debt at low prices. And without that, I’m not sure there would’ve been a shale revolution because they needed such immense amounts of capital to fund their drilling.

But it had a second impact, which is that when pension funds were no longer able to earn a return in traditional fixed income markets, they’ve increasingly put their money into riskier assets like hedge funds that invest in credit and private equity firms. Those entities, in turn, have increasingly invested in shale.

I got an estimate from one source that said 1/3 of the drilling, a third of the fracking, being done in the country today is being done by private equity-backed companies. So we’ve had this derivative effect of the era of low interest rates.

Now there’s a lot of money that believes believes the story that technological improvements are going to make this industry profitable in the long run. But there are lots of ways that private equity firms and other investors can make money even if the companies themselves don’t. And what I mean by that is that for a long time, a shale company that was publicly traded was valued not on its profits but rather, on a multiple of its production or its reserves.

And so, there's an incentive to take these companies public, where it can trade on its growth and production. It doesn't have to produce profits. You can flip your company to the public markets or sell it to an already-public company. So, it’s kind of a big game of musical chairs in many ways.

And I think there's an unacknowledged problem with the shale revolution that feeds into the lack of profits. And that’s that all wells are not created alike.

And so, that gets to the really core question here. How much really good acreage is there? And it’s a reason to believe that even though the industry did get closer to profitable in this last year, that may not last because a lot of companies were drilling the sweet spots first. They were drilling their best acreage. And the question is, “How much of that is there?” And to be frank, nobody really knows the answer.

Some of that is depending on technological changes. If you can get better technology that enables you to get more oil out of the ground more cheaply; then, something that wasn’t the sweet spot could become a sweet spot. Thus far, though, the evidence seems to be mounting that the picture is the opposite of that. And what I mean by that is Wall Street Journal did a really good piece in late December pointing out that actually, production levels are coming in way short of what companies had estimated.

So, it looks like the sweet spots, overall, aren’t even as sweet as they were forecast to be. It’s not coming in better than expected, it’s coming in shorter projections.

there’s a lot of this idea – the idea has shifted from America being energy-poor to America being resource-abundant. And you hear this idea of American energy independence and even President Trump talks about American energy dominance. And I think I read that the IEA – the International Energy Agency – is forecasting that most of the growth in global production in coming years is going to come from US shale. And as a result of that belief, a lot of the big, long-lived projects that take years of investment before they start to produce have been put on hold. So, that oil isn’t going to be coming online. And so, what happens if shale can’t deliver?

Click the play button below to listen to Chris' interview with Bethany McLean (38m:39s).

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Transcript

Chris Martenson: Welcome, everyone, to this Featured Voices podcast. This is being recorded on February 5, 2019 and I am your host, Chris Martenson.

Look, on a recent flight I took to Dallas, Texas, it was a bright, clear day. I could really easily see the land below. And as we began our final approach into the airport, the land below, it just looked so bizarre. It looked like a quilt. It was a checkerboard of scraped-off squares dotting the land just as far as the eye could see. Just grid-like precision. And as we got a little bit lower to the ground, I could easily make out machinery in the center of each one of these blocks. You know, there were pumps in there, there were trucks, there were holding ponds filled with dark liquids, jacks, derricks, pipes, all kinds of stuff. And these, of course, were the drilling pads for shale oil and gas production. And the scope of the impact is so broad, it really can only be appreciated from the air or maybe even from space.

And there are now nearly 2,000,000 wells – shale wells and gas wells and oil wells – in the United States. Tens of thousands more being drilled each year. And in many cases, the pace of development is so rapid that there is no place to put the stuff that comes out of the ground. So, natural gas is simply burned into the air, lighting the night sky with this hellish flickering glow. And this is why I’ve often described the shale oil miracle as an under-the-radar scandal and maybe even a financial scam. But is it? That’s my view.

Today, we’re going to be talking with an expert on this, the author of a book I know many of you are going to want to read. Our guest today is Bethany McLean, an American journalist, who is a contributing editor to Vanity Fair Magazine and who is well-known for her work on the Enron scandal and on the 2008 financial crisis. She’s been an editor-at-large and columnist for Fortune and a contributor to Slate. The book we’re going to be discussing today is her latest and it’s titled Saudi America: The Truth About Fracking and How It’s Changing the World. We’re really quite fortunate to have her with us today. Bethany, welcome to the program.

Bethany McLean: Thanks for having me.

Chris Martenson: Now, Bethany, in Saudi America, you’ve delved into what has to be one of the most convoluted stories possible. It’s a tale of bravado, risk, debt, success, geology. What drew you to write this book?

Bethany McLean: So, a few things. I’m always fascinated by characters and looking for those larger-than-life characters that literally prove that old adage of “Truth is stranger than fiction” and Aubrey McClendon, the former CEO of Chesapeake, is one of those characters. Many people give him credit – which is perhaps not the right word – but for the shale revolution. Not because he was the technological pioneer but because he was the guy who sold this to investors around the globe. He was the guy who figured out how to raise the capital that is needed to fund this because it has required immense amounts of capital.

Which leads to the second reason I was interested in this, which is that a source of mine would always say – he would tell me about these debates that happened with his partner. And his partner would say, “The oil and gas are real.” And my friend, John, would say, “Yeah, but the economics don’t work.”

And so, it gets to this larger idea that the shale revolution as heralded as game-changing, as everything else as it is, the companies aren’t profitable. They’ve never proven they can make money.

And so, I’m always fascinated by these really big things that are happening but exist on this very shaky financial ground.

Chris Martenson: Well, I think that’s very well said. Because I have the same view, which is that the oil and gas is real but the profits haven’t been there. And it’s been something of a mystery to me because I’ve been tracking this for ten years now. And when oil was 70 a barrel, when it was 100, when it was 110, when it was 30; it turned out that no matter what the price of oil was that the cost of extracting it seemed to be just a little bit higher than that. It’s like farming but in the oil business, you know?

I never quite understood that and it’s been going on for a really long time. Is that an unfair characterization?

Bethany McLean: No, I think that’s an absolutely accurate characterization. And it’s interesting because industry proponents will say two things and one of those is that, “Well, if oil prices were higher, we’d make money.” Except they didn’t. That wasn’t true.

And then, the second, which may be more true, is that technological improvements are going to change the financial firmament of the industry such that it will make money. But I’m not sure about that. It’s a promise on the come and it hasn’t proven to be true yet.

Chris Martenson: Well, and that’ll be an interesting development if it happens. But my critique there would be that there’s already debt and equity out the door that has been used to drill all the wells that are in place already. And so, if it turns out there’s a new revolution of technology that, going forward, makes it profitable; by my best guess, there’s probably $400 billion of debt and equity outstanding to be paid back. If you said we were getting $40 a barrel, well, wouldn’t that be 10 billion barrels of production just to pay back a prior investor?

So, what I’m wondering about is after you’ve really scoured through this, is this a thing where shale, in order to become profitable, would have to somehow jettison all of the past debt and equity? Is this like a – are there giant losses lurking there? Or is there a way to turn this story around?

Bethany McLean: I think were the industries – were the amount of bullish people in the industry to be right and this idea that improvements in technology are going to make the industry profitable; then, no, there won’t be enormous losses because the companies will be able to raise more money and slowly pay back the existing debt over time.

That said, a lot of existing equity holders have lost a lot of money because the publicly traded companies haven’t performed well, given this kind of new-founded investor doubt over whether the industry will ever be profitable.

But if that proves to be true, if it proves to be an industry that does work in the end financially; then, no, there won’t be huge losses.

Chris Martenson: I guess that all depends on the price of oil at some point.

Bethany McLean: Well, it depends on the price of oil but you know, one reason why this industry hasn’t worked, even when the price of oil has been higher, is that a big chunk of the costs of drilling a well are the service costs. And the service costs are cyclical. They escalate when the price of oil goes up. And that’s why companies weren’t able to produce a profit, even when oil was over $100 a barrel because there’s so much more demand for service equipment. And that’s when the service companies make their money so, they jack up their prices.

So, it’s unclear how much the rising price oil really benefits the bottom line.

Chris Martenson: Alright. So, you took this story and you go through and you – I learned a lot of things about Aubrey McClendon I did not know. I mean, I knew he was a character but just not quite how much.

So, this character, how common is sort of the necessary level of bravado and risk-taking and sort of larger-than-life? Was Aubrey really an unusual character in this story? Or is this somehow indicative of the kind of people that we find in the shale space?

Bethany McLean: Well, it’s both. You do find these larger-than-life entrepreneurs in the shale space and you could write stories about many of them. But Aubrey, even with that said, Aubrey stood out. One way in which he stood out is that he was incredibly charismatic and regarded as just an incredible salesman, just an ability to captivate people in a room and bring even skeptics over to his point of view. When I was starting my reporting, a guy who works for an investment firm in New York had told me he was a skeptic of the shale revolution and certainly, a skeptic of Chesapeake. But he said, “I never brought Aubrey McClendon in here for a meeting because if he had come in, we would’ve ended up buying a ton of stock and it would not have ended well.”

Chris Martenson: [Laugh] So, he was just that good at the sales side of this. And still, Chesapeake did some amazing things in terms of opening up new vistas and really pushing forward. But did they make money at it?

Bethany McLean: They never made money. So, this, I think, always helps sort of put numbers around McClendon’s salesmanship. During the years he ran Chesapeake from 2001 to 2012, the company raised over $60 billion in debt and equity and through various forms of asset sales and other kinds of complicated financing transactions. And the company never produced a positive free cash flow before – or asset sales – over those years. So, it never became financially sustainable.

Even after that – and part of the story I tell in the book is how McClendon got kicked out of the company as investors began to figure out all the ways in which the company had been set up to benefit him but not necessarily them.

Anyway, he gets kicked out. He leaves this company that is still fighting for its life behind him. And he goes on to be able to raise another $15 billion for round two, what he called American Energy Partners. And that, to me, is just testament to an incredible, incredible salesmanship, right?

Chris Martenson: Oh, that’s amazing.

Bethany McLean: You crash and burn once and you know, forget about the F. Scott Fitzgerald line, “There are no second acts in American life.” There was a second act for McClendon and right on the heels of the first one.

Chris Martenson: So, let’s talk about that for a minute. Because raising $15 billion is not easy. But as I started, I mentioned this is a tale of bravado. It’s risk, it’s debt, it’s all this other stuff, geology. But it also seems to be true that central banks have to factor in here to some extent. Because if they had not flooded the world with money and driven what we call “yield-hungry investors,” including pensions and endowments and other normally risk-averse players, to have to chase yield, they may not have chased the shale debt directly. But because of what they were chasing, that other money came to shale. It was just flooded with money. Is this story possible without the great financial crisis as the mother of the liquidity?

Bethany McLean: No, it actually isn’t. I found this really interesting research report by a guy at Columbia’s Energy Institute. And he says the real catalyst of the shale revolution was the financial crisis and the era of unprecedentedly low interest rates that followed.

And that had two effects. One was that it made debt cheap and so, these companies that are heavily dependent on being able to raise capital could raise debt at low prices. And without that, I’m not sure there would’ve been a shale revolution because they needed such immense amounts of capital to fund their drilling.

But it had a second impact, which you get to, which is that when pension funds were no longer able to earn a return in traditional fixed income markets, they’ve increasingly put their money into riskier assets like hedge funds that invest in credit and private equity firms. Those entities, in turn, have increasingly invested in shale.

So, I got an estimate from one source that said a third of the drilling, a third of the fracking, being done in the country today is being done by private equity-backed companies. And so, you’ve had this really sort of derivative effects of the era of low interest rates, too.

Chris Martenson: Well, now, that’s interesting. So, this is something I was unable to divine and I’m hoping you can shed some light on this. 2015, you know, oil prices collapsed in 2014. So, 2015/16, I was reading about billions and billions of restructurings and wipeouts and I forget, I lost count, 80, 90 companies filed for bankruptcy.

Bethany McLean: Yeah, and I think more like 150. It was a lot.

Chris Martenson: It was a lot, I lost count. But you know what I never quite heard, Bethany, was who actually ate those losses? Who was holding the bag in that story?

Bethany McLean: Well, so, in some cases, debt investors were holding the bag. But people made so much money in other areas that they didn’t turn back from shale despite that. And private equity firms are often able to do restructurings in ways that, under the surface, make money for them even if it looks like a wipeout on the surface.

But there were some massive, massive ways in which private equity firms lost a fortune. KKR, the big private equity giant, and Sampson; for one, it was a total wipeout, billions of dollars. But the funny thing is I think in this era where there’s growth in so few places, this didn’t cause the money to leave the shale revolution. And a source of mine said to me about the reasons why shale came back after that wipeout, Wall Street was still there. The capital was still there. And part of that is that rates still haven’t gone up and there’s still all this money looking for a return.

And there’s a lot of money that believes – well, there’s some money that believes the story that technological improvements are going to make this industry profitable in the long run. And then, there are lots of ways that private equity firms and other investors can make money even if the companies themselves don’t. And what I mean by that is that for a long time, a company – a shale company – that was publicly traded was valued not on its process but rather, on a multiple, if it’s production or it’s reserves.

And so, there was this incentive to get a company public. It could trade on its growth and production. It didn’t have to produce profits. But you could flip that company to the public markets or you could build a private company and then, sell it to an already public company. So, it’s kind of a big game of musical chairs in many ways.

Chris Martenson: Well, you know, I’m starting to get a sense of eyeballs as a measure back in the 2000s.

Bethany McLean: Right.

Chris Martenson: Right? There’s just a sense of, “Oh, we’re not going to measure this company by the profits it’s earning. We’re going to measure it by production growth and off and up.”

Bethany McLean: Right.

Chris Martenson: So, I get this sense of an enormous amount of money, somebody like Aubrey McClendon, as a second act, can raise $15 billion with hardly breaking a sweat. I’m sure he worked hard for it but I mean, that’s a big chunk of change. And billions and billions are flowing in, there’s all this mysterious accounting. But ultimately, some of this money’s going to money heaven. How do we get our hands around how those losses are being actually recorded?

Bethany McLean: Well, that’s a really tough thing. You can go through the individual bankruptcy filings and try to figure out who took the loss on specific bankruptcies, whether it was Samson or whether it was Aubrey McClendon’s partner, Tom Moore’s company. There was Halcon that was run by a guy named Floyd Wilson.

But there definitely were losses and investors ate them. But if the same investor made money somewhere else; then, they don’t think of that as a reason to abandon the space, necessarily. And there’s been a lot of money made in this industry, too.

Chris Martenson: Oh, absolutely, there has. So, let’s start with some of the people who absolutely made out, the people who owned the land who were able to have the royalty payments. They certainly made a lot of money. The service companies, to the extent they were operating in a profitable manner, lots and lots of money was coming through.

So, tons of money obviously being made. But still, from a macro sort of a financial perspective, I still – I mean, some companies are run better. I think EOG runs better than others. But you know, when I look at the whole suite of them – and I’m still looking at cash flow statements – I’m not seeing a lot of profits coming out, that’s part one. On free cash flow basis, let me put it that way. Accounting’s a different matter. But from a free cash flow basis, not there. And so, that’s part one of the story.

Part two is that I know that there’s this concept of sweet spots that not all acreage is the same, that Permian is not just one giant basin. It consists of really tasty areas and less good areas and all of that.

Talk to us about that part of the process and where you think we are in this story.

Bethany McLean: Well, I think that’s an unacknowledged problem with the shale revolution that feeds into the lack of profits. And that’s that all wells are not created alike.

And so, the idea that they were was an idea put forth by McClendon, who talked about manufacturing mode. And what he meant by that was that you could just stamp out shale well after shale well and they would consistently produce a certain amount of oil or gas. And people who are expert geologists like the guys at EOG will tell you that’s just not true. The production of a well is incredibly variable, depending on geology, and geology that can be really different a mile away.

And so, that gets to the really core question here. How much really good acreage is there? And it’s a reason to believe that even though the industry did get closer to profitable in this last year, that may not last because a lot of companies were drilling the sweet spots first. They were drilling their best acreage. And the question is, “How much of that is there?” And to be frank, nobody really knows the answer.

Some of that is dependent on technological changes. If you can get better technology that enables you to get more oil out of the ground more cheaply; then, something that wasn’t the sweet spot could become a sweet spot. Thus far, though, the evidence seems to be mounting that the picture is the opposite of that. And what I mean by that is Wall Street Journal did a really good piece in late December pointing out that actually, production levels are coming in way short of what companies had estimated.

So, it looks like the sweet spots, overall, aren’t even as sweet as they were forecast to be. It’s not coming in better than expected, it’s coming in shorter projections. And I thought that was a really telling piece of evidence in this whole picture.

Chris Martenson: Yeah, and that’s a piece of evidence – I was glad to see the Wall Street Journal get to it. I’ve been talking with geologists like Art Berman and David Hughes and others who’ve been tracking that for a long time. And it’s actually not that hard to get a rough guess of how much oil is going to come out of a well once you have about maybe eight to twelve months of production because you can watch the decline curves and all of that. And the companies were consistently saying that they were going to get oil out of the wells, it was twice as much, in most cases, in areas that I examined pretty carefully, than what the data seemed to be saying.

That looked like a huge disconnect to me. And I wondered, really, where the FCC was, where the industry was. It really looked just startlingly obvious to me that that was the case.

Bethany McLean: Yeah.

Chris Martenson: So, even in the Wall Street Journal article, they mentioned, “Well, you know, it looks like maybe 7% less for this company.” I said, “But even what they wrote, they said that this company was assuming a 50-year life on these wells.” Nobody in the business I know, privately or publicly, will say that they think they’re going to get 50 years out of a well.

So, there still seems to be a lot of hand-waving going on in this area and it feels vitally important that we get it right. Because the title of your book, Saudi America, there are whole branches of thought and policy and strategic decisions that have been made based on Saudi America being a reality. But it’s really not, is it?

Bethany McLean: No. Well, two thoughts on that that are interesting. One is it just amazes me about this story how there are two narratives and they never converge. And I tried to converge them in my book a little bit. But the Wall Street Journal piece pointed out that the numbers aren’t what they are cracked up to be. And Bloomberg did a piece, I think, in the fall talking about the sort of mythical notion of the break-even. You know, companies will say, “$30 break-even, $40 break-even.” But of course, you go to their financial statements and they’re not breaking even. So, what’s happening from this supposed purported wellhead break-even to the corporate financial statement?

But then, just yesterday, the New York Times published this big piece about the Permian and how it’s the world’s greatest oil field. And there was not even a note of skepticism in there and it’s like these two narratives just don’t come together. People write one side of it. And it’s fascinating to me whenever that happens.

But yes, to your point, there’s a lot of this idea – the idea has shifted from America being energy-poor to America being resource-abundant. And you hear this idea of American energy independence and even President Trump talks about American energy dominance. And I think I read that the IEA – the International Energy Agency – is forecasting that most of the growth in global production in coming years is going to come from US shale. And as a result of that belief, a lot of the big, long-lived projects that take years of investment before they start to produce have been put on hold. So, that oil isn’t going to be coming online. And so, what happens if shale can’t deliver? It’s a big issue.

Chris Martenson: Well, it really is. And you’ve touched on what I think is one of the more under-reported aspects of all this, which is that those other global oil projects – deepwater, you know, heavy, expensive stuff – they just haven’t been done. There’s about a trillion missing dollars of FID projects out there in major oil. Because everybody’s sort of, “Well, we’ll just turn to shale,” I guess.

Bethany McLean: Right.

Chris Martenson: But shale may come and go. So, you know, prediction time for me, if we suddenly saw interest rates go up, say, a couple more percent here and we saw oil stay at 50, I think the shale companies would be out of business.

Bethany McLean: Yeah, I think it would put a lot of pressure on them. And I think already, we’re at an interesting time in the business. There was an interesting piece, I think it was written in Zero Hedge, I’m not positive now. But it was pointing out that private equity money has gotten stranded in shale because investors are no longer – the public markets are no longer that tolerant of these companies. There became a big push over the last few years to show returns and investors stopped being willing to reward them for production growth.

And so, that private equity gravy train of sending a company and taking it public based on production numbers is done, at least for now. And if that ends, I think just in that, there’s a lot of risk. Even forget about interest rates. I think just there, there’s a lot of risk to shale production figures.

Chris Martenson: Well, that private equity thing, I know the piece you’re speaking of. They’re reporting that it’s basically, the market just died on them. And they require a lot of movement so, they like to have that money always be in motion and they bring the money in and they get these projects going and then, they sell it off and they keep it moving. Once that market freezes up and you’re just down to being in the business of running these companies, that’s not what the private equity people are actually there to do. And so, that’s terrifying for them is to be the person holding the bag. Like, “Oh, now I’ve got to run this acreage? Uh-oh.”

Bethany McLean: Right, right, right. That’s the not the way it was supposed to work, right? You were supposed to assemble a team like in the case of this company, Double Eagle, that was backed by Apollo. Assemble a team, have a couple of guys – and they usually are guys – go out and put together great packages of acreage and flip it for $3 billion to another publicly traded company and everybody makes a fortune and isn’t that great? That’s the way it was supposed to work but the public markets are no longer cooperating.

Chris Martenson: Well, Bethany, so, I’m fascinated. Because along with Peter Elkind, you cowrote Enron: The Smartest Guys in the Room, got made into a documentary, a really nice piece of work there. You’ve written about the hidden history of the financial crisis, the US mortgage giants. So, you have a lot of experience in this financial arena and particularly, sort of how things can get a little fast and loose when the story is raging.

I imagine that when you got to looking at Saudi America, leaving aside the geology, but I imagine you found yourself on somewhat familiar financial territory.

Bethany McLean: Somewhat, yes. I always try to be careful not to overreach. So, while the skeptic in me would say, “This is headed to a bad ending,” one; all companies in this industry aren’t created alike. I do think there will be survivors. I think EOG and, ironically enough, EOG is the old Enron Oil and Gas.

Chris Martenson: I know.

Bethany McLean: Which is just funny, is that the companies couldn’t be more different. I mean, EOG has this nondescript headquarters buried in this nondescript office building in Houston that clearly hasn’t been updated since the 70s. They are the embodiment of a cost-conscious, careful company.

So, I think there will be survivors in this, right? I don’t think it’s a total industry wipeout, although even EOG had a slide in its last investor deck saying that at $50 oil, they were barely free cash flow positive. And if EOG can’t make money at $50 oil, what’s the talk about $30 break-even? I’m sorry, I just keep going back to that because it’s just so absurd to me.

But you know, there is the possibility here of technological change, right? There is. That’s real – it might be a pipe dream but you can’t predict it until it happens. And that’s one thing that left me cautious about being able to predict that this was going to be some wipeout.

On top of that, I did find it humbling to realize that the history of people trying to forecast the energy industry, everyone who’s tried to do it has one thing in common, which is that they’ve been wrong. So, this is an industry that over history, has defied prediction and analysis.

So, I do think you have to be cautious about saying, “It will be this way.” But if anything, based on some of the work that the Journal and other people have done, I’ve become more skeptical since my book was published rather than more of a believer.

Chris Martenson: And why is that? What are some of the sources of that greater skepticism?

Bethany McLean: I think I would say the data points like the Journal published about wells coming in less productive than they were estimated. There’s talk coming out of – if you talk to people who are on the ground in the Permian and other places, there seem to be limits to technology rather than breakthroughs in technology. And what I mean by that is there’s talk with parent and children wells that if you drill wells too close to existing wells, you end up mucking everything up.

And so, then, there’s talk from inside the industry that you can’t just make a well longer and put more sand into it and get more out. It’s not working anymore.

So, there’s that, right? There’s a little bit of – there’s skepticism on the ground that I’m hearing that makes me think maybe we’re closer to technological limitations than we are to some gigantic technological breakthrough.

I think on top of that, although my book is not environmental in the sense that it’s a mini-book so, there’s only so much you could cover, I’ve been thinking a lot in the wake of that about for one thing, this oft-repeated notion that, “Well, the only reason wind and solar are at all competitive is because of subsidies.” Well, what about the subsidies we don’t count that we provide the oil and gas industry? And I would say subsidies in the form of healthcare for people negatively affected by living next to fracking sites, water usage, which is going to be a huge issue for this country, and who have to fund the cost of what gets left behind if oil and gas companies go bankrupt either because fracking doesn’t work financially or because the era of renewables comes more quickly than we all expect. Who pays for the cleanup?

And so, if you think about subsidies in that broader sense, it’s the argument that even on just sheer economic terms, that oil and gas are so much more economic than renewables. It’s not as clear anymore.

Chris Martenson: Well, absolutely. And one subsidy that I’ve been harping on for a while – I think it was 2015 – Texas had sort of added everything up and said, “Look, we took in $1.8 billion in severance taxes off of the oil and gas business. That’s awesome.” But they also recorded about $4 billion of bridge and road infrastructure damage due to all these trucks. Because a single fracking operation might have 1,200 80,000-pound tricks that have to visit it. That’s just one.

Bethany McLean: Wow.

Chris Martenson: And so, there’s billions and billions of taxpayer dollars going into infrastructure buildouts.

Bethany McLean: Right, right. And so, those things are all really interesting to me and has made me – you know, I am a believer in business. And so, I have some admiration for the entrepreneurs, including McClendon, who believed so much in this and risked everything. And the glorious thing about Aubrey McClendon, unlike many other business leaders, is he not only risked other people’s money, he risked his own. I mean, he put personal guarantees around all of this stuff and as a result, essentially died bankrupt. And I have some admiration for people like that, right? Because it’s people like that who move the world forward.

So, I’m not a complete hater of this or completely dismissive of it. But I think the evidence right now would tilt me in the direction of even more skeptical than my book was.

Chris Martenson: Interesting. My skepticism is rooted in the idea that traditional conventional oil wells were the things we first went after, and that’s the caprocks and porous sandstones and things like that that sat above the source rocks. Well, we ran out of that stuff and now, we’re into the source rocks themselves. There are no pre-source rocks. There’s no next in this story.

Bethany McLean: Right.

Chris Martenson: Right?

Bethany McLean: That’s a very good point.

Chris Martenson: So, we’re going after this stuff. And again, I’m not a person saying we shouldn’t go after it. We should do it. I think we should do it more carefully. I don’t think we should be flaring so much natural gas into the night sky. I don’t think we should be taking the flowback from this nasty soup of chemicals that they use in fracking and putting into open air ponds to drift downwind. I think there are things we could do more carefully.

But if we’re going to use it, we should use it with a sense of like any good business, you have a strategy. And you say, “Where are we going? How are we going to get there? What’s our vision? What are the resources?” Well, the oil and gas we have are the resources. What’s lacking in this story for me, Bethany, is that vision that says, “And here’s what we’re going to do with it. So, in 2030 or ’40 or whenever it runs out, this is the kind of country we have. It’s got this kind of infrastructure and here’s how we move ourselves around and eat, work, and play.”

So, I’m a critic because it feels like we’re just doing it at breakneck speed. And so, one of the things that really caught me was last year, Ford announced that, “Hey, you know what we’re going to do? We’re not going to sell sedans in North America anymore. We’re just going to focus on SUVs and trucks.” I think they bought into the idea of Saudi America so deeply that they completely reoriented their strategy, just to pick on one company. Tons of them have done it.

Bethany McLean: Wow. Wow, that’s a really interesting anecdote and quite frightening. And I agree with you. I ended my book with this observation from Charlie Munger who, you know, Warren Buffett’s compadre who actually has views on this. And he doesn’t come at this from a conservation standpoint, he comes at it from a practical standpoint, which is there still is no substitute for hydrocarbons in certain essential areas of modern life like fertilizers. And what are we doing? Food security is a really important part of national security. So, what are we doing drilling all this stuff out of the ground at this frenetic pace without any regard to what could feed our population in the future?

And you’re right, we’re using source rock. There isn’t a next, as you said so well. And that we’re using it before other countries means only that. We’re using it before other countries are using theirs.

You know, we’ve never had an energy policy in this country. But I also think our business world, our markets, have become increasingly short-term oriented. So, it’s just all about making money today with not really any long-range planning of the sort that you mention and I worry that will be a tragedy.

Chris Martenson: I have the same concern, of course. And you mentioned that you had to leave out maybe some of the environmental considerations. What else did you leave out of this book that you kind of agonized over?

Bethany McLean: There’s so much. You know, in a way, it was a mistake to do this as a mini-book because it is such a fraught and complicated story. And so, I felt like on some places, it was a little bit of cliff notes rather than deeply explored. Because everything you look at in this, instead of it being a one-paragraph description, you realize you could pick up that boulder and there’s a whole minefield underneath it and it needs its own exploration to even get an answer. And I mean by that, you know, renewables – where are we? How likely – how close are we on renewables? What about water usage? What is the real cost of that?

I mean, there’s so much that isn’t in my book that I find incredibly interesting and important.

Chris Martenson: And you know, so, here we find ourselves, as you wrote in the epilogue that I think it was under Ford – President Ford – that oil exports were banned. And now, we’re back to oil exporting and everything I read in the New York Times, Wall Street Journal is just really cheering this idea that we’re a powerhouse and that it’s a good thing that we’re exporting all this oil. Charlie Munger makes the point that maybe that’s not a good thing because energy is the master resource, not a resource. It’s the master resource upon which our whole civilization depends.

But we’re selling it for bucks and we’re trying to convince Germany that maybe they should buy our L&G instead of Russian gas. I can’t find any coherence in this story. Who’s driving this ship?

Bethany McLean: Well, that’s a really good question. I’m not anybody is. And that’s one, perhaps, drawback of our market-oriented system is that it’s thousands and thousands of small producers. So, the government can’t say like they could in another country, “Stop producing. We’re not going to do this.” That’s not the way our system works. Instead, it’s based in the market. And maybe that market safe will prove to be well-founded. But I worry in something, as you point out, as critical to our existence as energy that it requires a more long-term strategy than our market is capable of.

But it’s individual entrepreneurs and businessmen – and again, mostly men so, I use that term deliberately – driving a strategy of making money now. It’s in their interest and their company’s interest. And so, that’s what they see.

I think there is, if I were to be fair about it, I have talked to some people in the defense industry and I think there is also some sense that the less we need from – even if this notion of energy independence is a myth, the less we need from the Middle East is a good thing. Because our strengthening of the Middle East economically over the last decades has not worked out well. And so, anything we can do to not support that region of the world as extensively as we have would be a good thing.

But I’m not sure, when I try to push on why and isn’t it too late for that, I don’t get good answers.

Chris Martenson: Interesting. Oil is infinitely fungible. So, even if the United States was in an exporting mode, we’d still be 100% tied to the world price of oil.

Bethany McLean: Right. This notion of energy independence is such a fraud.

Chris Martenson: It is, it really is. And you know, probably the most important chart I’ve got in my oil charts is one showing that the Beijing Petroleum University came forward with the idea that they wanted to add up what China’s production was going to be. And they publicly announced in 2017 that 2018 was their peak year. I think it was actually 2016 but we’ll have to see the data really come in. It doesn’t matter. They publicly acknowledged that they have peak oil plus they publicly acknowledged what their imports were likely to be. You add those two things up and you look at by the year 2030, China will be on track to be importing close to 100% of world available exports unless something really changes in the story.

Bethany McLean: Wow.

Chris Martenson: And you and I both know that’s not going to happen economically or geopolitically. So, something will have to happen before then.

Bethany McLean: Wow, that’s the scary part.

Chris Martenson: Yeah. And so, to me, a chart like that, a comprehensive and intelligent adult response to that in this country would be, “Well, then, let’s make ourselves as insulated as possible.” Efficiency, conservation, alternative energy. There’s lots of things we can be doing but it hasn’t really come forward yet.

And that’s my deepest criticism about this whole shale story is the extent to which it’s been used as propaganda to support an idea that we don’t have anything to worry about.

Bethany McLean: Right, I totally agree with you. We’re 100% aligned on that. And even if the shale revolution does prove to be real and there are these technological advances and we don’t have anything to worry about, there’s enough reason to believe that we do have something to worry about and then, consequences are big enough that shouldn’t we at least be planning for that? Shouldn’t we at least have a contingency plan if this thing isn’t real, right? Given the weight of evidence that it may not be.

Chris Martenson: Well, absolutely. And I want to thank you so much for writing this book. I read it straight through.

Bethany McLean: Oh, good. I’m so glad to hear that.

Chris Martenson: Yeah. Well, I loved it because it confirmed a lot of things I already knew but it put great detail around it and that was excellent. And I’d learned a number of things and I hadn’t really understood, some of the players and what they were really up to. So, just very gripping, I loved it.

And so, I would really encourage anybody listening to get a copy of Saudi America: The Truth About Fracking and How It’s Changing the World because it’s really a big story. To understand this is critical because if – like you said, it’s a tale of two narratives. If the narrative is, “Don’t worry, you’ll be surprised. Technology will come along, we’ve got nothing to worry about in anybody’s lifetime listening to this.” Okay, that’s one story.

The other narrative might be, “You’ve burned through all the best stuff as fast as possible,” kind of breakneck, maybe a little bit shoddy, and we ran through the good stuff. And now, it’s poor acreage, hideously expensive, and lots of wipeout. So, one of those two things is true.

And so, I want to thank you for putting this book together. And I would like to ask you, “What’s next?”

Bethany McLean: Well, I hope to be able to continue to work on energy-related issues. Somebody told me, “Once you get bit by the energy bug, it’s really hard to let go of it.”

Chris Martenson: It’s true.

Bethany McLean: And there are just so many more stories here. So, I’m trying to figure out a way to do that. But I’m also working on a piece about Chicago, my home city, which will be fun and interesting. So, lots of new stuff. It’ll be good. And I’m contemplating launching my own podcast so, we’ll see how that goes.

Chris Martenson: Well, excellent. Good luck with all of that and I’ll look forward to anything that you’re producing next.

We’ve been talking with Bethany McLean, famous author and author of this book, Saudi America. So, grab a copy of that and we’ll have a link to it. Of course, you can find it online easily, as well.

So, Bethany, thank you so much for your time today.

Bethany McLean: Thank you so much for having me. Have a great day.

About the Guest
Bethany McLean

Bethany Lee McLean is an American journalist and contributing editor for Vanity Fair magazine. She is known for her writing on the Enron scandal and the 2008 financial crisis. Previous assignments include editor-at-large, columnist for Fortune and a contributor to Slate.

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6 Comments

  • Fri, Mar 01, 2019 - 3:56pm

    #1
    ezlxq1949

    ezlxq1949

    Status Bronze Member (Offline)

    Joined: Apr 29 2009

    Posts: 178

    The land has smallpox

    Chris said,

    … the land below, it just looked so bizarre. It looked like a quilt. It was a checkerboard of scraped-off squares dotting the land just as far as the eye could see. Just grid-like precision.

    Other areas lack the grid-like precision. The land looks as though it has contracted smallpox.
    Yes, this is how we exercise good stewardship.
    In Australia the Northern Territory is about to suffer the fracking plague. Exploratory drilling has just started. The Aboriginals are outraged. The damage will be immense. The governments don’t care. Alternative sources of, say, diesel fuel, are available, but these don’t fit the corporations’ business models and the governments don’t care.

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  • Fri, Mar 01, 2019 - 4:23pm

    #2
    Uncletommy

    Uncletommy

    Status Bronze Member (Offline)

    Joined: May 03 2014

    Posts: 508

    Who's gonna pay for my HD super-duty 350 XLT?

    After  splitting and hauling in some more firewood to keep the temperature of the house above 15C, I sat down and had a chance to catch your interview with Bethany McLean. The information prompted the question above and the answer was obvious; our grandkids and great-grandkids. Having lived and worked in the Western Sedimentary basin for over 40 years, the general modus operandi in the oilpatch is get it while you can. Not unlike real estate, it’s not how much you make on each transaction, it’s how manying transaction you make that sets the priority. Whether it’s Aubrey McClendon, Warren Buffet, Charlie Munger, Donald Trump or who have you, they’ll tend to be found on the same end of the Bell curve; a flat narrow tail.. 
    The oil patch isn’t appreciablely different than most male oriented success stories, as Bethany diligently notes. Agriculture isn’t much different (allbeit the margins are a lot tighter on a per acre basis).”If I can just make it through the next year or the next business cycle, I’ll be happy. Oh, and subsidies help. “Life, liberty and the pursuit  of happiness is the common mantra of not only the US mentality, but of the the human condition in general.
    I think I may have referenced one of John Maynard Keynes quotes in a past post (my apologies); “in the long term, we’re all going to be dead”! Chris is right, “the next 50 years is going to be completely different from the past.” Enjoy the ride and perpare your descendants! Counterfeiting may become a growth industry.
    Interesting, but a somewhat cursory discussion, given the potential scope of the subject.Good job, guys!

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  • Fri, Mar 01, 2019 - 9:15pm

    #3

    Stabu

    Status Bronze Member (Offline)

    Joined: Nov 07 2011

    Posts: 95

    The Problem With an Ever-Narrowing Focus

    I absolutely loved this interview. What struck me as surprising, however, was that Bethany seemed to be mostly unaware about our energy predicament and clinging on to the hope of technological change and energy substitution (now I’m getting a deja vu regarding some of my other most recent comments). I guess the problem is that as society becomes more and more specialized it’s harder and harder to see the big picture, so even if you study the fracking situation in detail you may miss the bigger oil and gas story.
     
    Speaking of experts, I would love if you guys could bring back Mark Cochrane to discuss the latest climate science, including the very disturbing recent study about stratocumulus cloud disappearance under high levels of CO2 that humanity may unfortunately trigger in the coming century. Even more points if you could torture him to take a look at the most recent musings of Guy McPherson, who has moved up his human extinction estimate from 2036 to 2027. Yes, Guy is an alarmist, pessimist and not exactly a climate scientist, but he still understands climate science better than I do and I’d love to see a real scientist go through Guy’s latest logic.
     

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  • Sat, Mar 02, 2019 - 9:48am

    #4

    jeantheau

    Status Member (Offline)

    Joined: Feb 01 2009

    Posts: 10

    fracking within the geopolitical agenda

    In the 1980s, the US turned the oil spigots to full open, exploiting the Gulf and North Slope resources so fast that oil prices crashed and stayed there for quite a while. I think it’s fairly well recognized now that this was an intentional strategy designed to undercut the oil revenue going to the USSR. And it worked, with the USSR breaking up within the decade. Yes, there were other factors in the failure of the Soviet Union, but loss of oil revenue was a key reason that their economic instability increased to the point where the union failed (and — bonus! — Western interests could start to penetrate).
    PP’ers have been speculating about fracking mostly within the realm of financial scammery and energy/environmental foolishness. It is certainly the latter and is probably the former — jeez, what ISN’T part of the Big Ponzi these days? But since US fracked oil came online, oil prices have been much lower, putting revenue pressure on Russia, Venezuala, and all the various OPEC client states the US tries to keep in line. Additinally, because oil is not nationalized in the US (and for multiple other reasons), low oil prices are more positive than negative for the US.
    The big pile of free money created by the Fed after 2008 has made it easy to fund this fracking/geopolitical strategy. From the perspective of those plotting the continued global hegemony of the US, it probably was an easy call.
    Now, the real question:  What comes after this phase inevitably winds up? Not likely to be pretty.
    Mark
     

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  • Sat, Mar 02, 2019 - 4:53pm

    #5

    Snydeman

    Status Member (Offline)

    Joined: Feb 06 2013

    Posts: 477

    Excellent

    An excellent podcast. She is an amazing guest, so if you can get her on the roster every few years, I think that’d be good. I’m going to go buy her book if fornonother reason than to support her coming onto the site. I also plan on using this podcast in my Econ classes, because it’s never a bad thing to show my girls that understanding economics isn’t beyond their ability as females.
     
    just excellent!

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  • Sat, Mar 02, 2019 - 9:31pm

    #6
    tahoe1780

    tahoe1780

    Status Member (Offline)

    Joined: Jan 11 2010

    Posts: 2

    Oil Depletion and Climate Change

    https://www.resilience.org/stories/2019-03-02/cheerleaders-for-doom/
    “The U.N. says that, in order to avoid catastrophic levels of warming, we need a global mobilization at the level of World War II. We know, from history, we didn’t fight that war out of hope or optimism. It was out of fear and alarm.”

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