Keith Srakocic/AP Photo
The flag of the Commonwealth of Pennsylvania flies on the drilling rig at a shale gas well drilling site in St. Mary’s, Pennsylvania, March 2020.
Predicting the outcome after days of war in Ukraine is a fool’s errand; devastation, fierce resistance, or a fragile peace lurks around every corner. What we can say about the confrontation is what Ukrainian official Svitlana Krakovska uttered at a U.N. climate conference on Sunday: “Human-induced climate change and the war on Ukraine have the same roots: fossil fuels and our dependence on them.”
Russia is a major supplier of oil and gas, especially to Europe. Oil prices hit triple digits after last week’s invasion, which factors into the cost of shipping goods. Inflation was already spiraling before the conflict, and recessions traditionally proceed from oil spikes. Barring Russian energy from global markets would worsen these problems. This risk has led to economic sanctions, the West’s main tool to respond to Russia’s war of choice, that come with an asterisk.
After days of hesitation, the U.S. and Europe finally kicked several Russian banks out of the SWIFT system, preventing international financial transactions. But they made an exemption for energy deals, which account for close to 40 percent of the Russian budget. Incidentally, Russia earns more on every one of these deals as energy prices rise, allowing it to fund the invasion through the very chaos it creates.
Western nations are also preventing the Russian central bank from using its $630 billion in foreign exchange reserves, and targeting laundered assets of Russian oligarchs. But as long as Russia can sell oil and gas, it can mitigate the sanctions’ impact.
Simply put, the West has failed to wean itself off Russian energy. Though the U.S. buys next to nothing in Russian crude, in a global market any loss of supply carries global implications. And Europe is directly reliant on Russian natural gas; the recession that would follow sanctions on those resources would reverberate globally.
These economic and political constraints have led to a strange partnership between domestic energy interests, Republican politicians, and Democratic wonks, all seeking a restoration of the U.S. fracking boom. “In the short term, need the frackers to get fracking,” Slate’s Jordan Weissman said last week. The American Petroleum Institute demanded faster permitting and fewer legal restrictions following the invasion, asserting that deregulation was the path to energy security.
It’s natural to see energy abundance as the antidote to empowering Vladimir Putin or any other hydrocarbon-fueled despot. The long-term solution is clearly to transition away from fossil fuels, but for policymakers desperate to hold down gas prices and avoid political Armageddon, the appeal of unleashing fracking is seductive.
But nobody asked the frackers about this. Their words and actions have indicated that they’re perfectly content raking in the dough without having to invest in producing more oil.
The Prospect’s Lee Harris and The Wall Street Journal reached this same conclusion over the past month. The shale industry has ceded to investor demands to consolidate the industry, slow down production, and reward shareholders with the bounty of higher oil prices. It’s worked spectacularly: Leading shale firms like Pioneer, Devon Energy, and Continental Resources have all announced higher profits in 2021 than they’ve seen in over a decade. And they’ve all said they would limit production increases to less than 5 percent this year.
“$100 oil, $150 oil, we’re not going to change our growth rate,” said Pioneer CEO Scott Sheffield earlier this month. The company funneled $1.9 billion to investors through dividends and stock buybacks last year, and plans to keep down its capital expenditures in 2022. Devon CEO Richard Muncrief told investors the same thing this month, saying that frackers would not boost production. While traditional oil operations in the Permian Basin may increase, that is “going to be the only place in the U.S. you truly even see much growth,” Muncrief said. U.S. shale has for the past several years been the swing producer in global oil markets, making their resistance to grow output consequential.
The shale industry has ceded to investor demands to consolidate the industry, slow down production, and reward shareholders with the bounty of higher oil prices.
This brings us to an important truth about not just oil markets, but most economic sectors where Wall Street has become the most powerful voice in decision-making: For financiers and CEOs, scarcity is good, and abundance is distasteful.
The fracking industry learned this over the past decade. As Harris reported, U.S. shale growth covered 80 percent of additional global oil demand in the 2010s. This historic investment, cheered on by the Obama administration, brought in a diverse set of companies seeking fortunes and moderating gas prices.
But Wall Street investors wanted their bets on frackers to pay off for them rather than for consumers. They didn’t want profits chewed up by reinvestment. So they called for mergers, and a pivot away from growth and toward shareholder reward.
The pandemic bust in demand provided the opportunity. Acquisitions rose throughout 2020 and 2021. And the new breed of fracking companies listened to their investors’ call for discipline, holding off on exploration and flowing excess profits into dividends. If there were more competitors driving down shale prices, maybe overall production would rise. But that’s not a problem anymore.
Many participants in the market benefit from artificial scarcity: the fracking firms, their investors, the oil trading houses that benefit from disruption. There’s even credible speculation that oil majors bailed out frackers at the bottom, under the condition to hold down production. This blob simply wants higher oil prices. “Why on earth would they want any U.S. [oil producer] to grow?” Ben Dell, an investment firm managing partner, told The Wall Street Journal. “The sector has been working. Cash flow is getting returned. This is not the time to change the business model.”
API’s plea for permitting and deregulation, then, is mostly a bluff to reduce overhead and enrich financiers even more. Fracking companies just figured out how to be profitable, and their partners on Wall Street want to keep it that way. They like the higher oil prices resulting from geopolitical instability. (It’s also not clear that the U.S. could extract, refine, and export much more oil and gas even if they wanted to.)
It would be far worse, of course, to build more fossil fuel infrastructure and lock in long-term deals on dirty sources of energy. The reduced methane emissions alone from limited fracking production is a big climate victory. But the broader lesson is that Wall Street’s interests almost never match the interests of the country as a whole. In fact, big financiers were asking political leaders not to cut off Russia from SWIFT. These are the same interests making money on trading because of inflation.
The best near-term solution to higher oil prices is diplomacy, and not just in Ukraine. Resuming the Iran nuclear deal could bring that nation’s oil supply off the sidelines, which would be significant. Much of that oil is already pulled out of the ground and loaded into tankers.
But in the long term, homegrown renewable deployment should now be seen as a vital national-security imperative. The combination of fossil fuel kleptocrats and the forces of capital who draft off their actions is poisonous to global stability. And that goes beyond just energy; letting any markets fall into the hands of self-interested financial actors is debilitating.
The truth is that the U.S. never really had its much-touted energy independence. This crisis has revealed America’s powerlessness, despite a record run on fossil fuel production, to actually direct it toward anything positive. The only way out of the fossil fuel game is to stop playing.
