[Congressional Record (Bound Edition), Volume 161 (2015), Part 1]
[Extensions of Remarks]
[Pages 370-371]
[From the U.S. Government Publishing Office, www.gpo.gov]




     FRACKING IS JEOPARDIZING THE ENVIRONMENT AND THE U.S. ECONOMY

                                 ______
                                 

                           HON. JIM McDERMOTT

                             of washington

                    in the house of representatives

                        Friday, January 9, 2015

  Mr. McDERMOTT. Mr. Speaker, I rise today to express my growing 
concern about the economic issues of fracking. The once booming oil 
fracking market could be headed for a bust.
  If a bust in the oil fracking sector does happen, it could create 
massive losses on Wall Street and for investors on Main Street in two 
ways. First, fracking oil drillers issued massive amounts of debt to 
construct the necessary wells. With the price of gas falling, many oil 
fracking drillers now face cash shortfalls. As a result, it is becoming 
more and more difficult for frackers to meet their debt servicing 
obligations. If the debt servicing obligations are not met, investors 
on Main Street and Wall Street could be left holding billions of 
dollars of worthless bonds.
  Second, many companies took out derivatives contracts against market 
fluctuation, insuring stable cash flow. Losses are mounting on these 
contracts as oil prices fall. Wall Street banks that own many of these 
contracts will have to absorb massive losses. The unexpected shock of 
falling oil prices may destabilize the balance sheet of these big 
banks, creating the conditions for another financial crisis.
  Below is an article from Truthout.org that further explains this 
issue.

                             [Truthout.org]

 Russia Blamed, U.S. Taxpayers on the Hook, as Fracking Boom Collapses

                           (By Ben Ptashnik)

       As Congress removes restrictions on taxpayers bailing out 
     the too-big-to-fail banks, the right is blaming 
     environmentalists and Russia for the demise of the fracking 
     boom. In reality, the banks' junk bonds and derivatives have 
     flooded Wall Street, and now the fracking bubble threatens 
     another financial crisis.
       Collapsing crude oil prices due to oversupply are reaching 
     tsunami proportions, threatening Wall Street banks, investors 
     and a dozen countries, foremost Russia, Iran and Venezuela, 
     where revenue losses have caused severe financial 
     degradation, and economies are about to implode. While 
     Americans are today enjoying $2 per gallon gasoline, Wall 
     Street's analysts predict that an imminent energy market 
     collapse will bring financial institutions to their knees 
     once again, and taxpayers are being set up for another 
     mandatory bailout.
       At the heart of these tectonic shifts in the entire energy 
     sector is the recent expansion of the hydraulic fracturing 
     (fracking) industry, a boom cycle that began in earnest when 
     Congress and the Bush administration passed the Energy Policy 
     Act of 2005, which exempted the new horizontal drilling 
     technology from the Clean Water Act, the Safe Drinking Water 
     Act and the National Environmental Policy Act. By tapping 
     considerable quantities of new oil and gas resources from 
     shale deposits, the fracking boom promised U.S. energy 
     independence, upending the world's prevailing paradigms 
     around renewable energy and peak oil expectations. 
     Environmentalists fought against the huge Keystone pipeline 
     infrastructure that would deliver the fossil fuels to foreign 
     markets, fearing that exploiting these resources would 
     undermine the struggle for the curbing of carbon emissions.
       Fracking also threatened the dominance of Russia and Saudi 
     Arabia as the fossil fuel suppliers of Europe when it became 
     evident that the United States would soon become a net 
     exporter. In the United States, fracking was hyped on Wall 
     Street as a get-rich-quick opportunity, attracting massive 
     capital input, and creating an investment bubble. Bloomberg 
     reported this year that the number of bonds issued by oil and 
     gas companies has grown by a factor of nine since 2004.
       ``There's a lot of Kool-Aid that's being drunk now by 
     investors,'', Tim Gramatovich, chief investment officer and 
     founder of Peritus Asset Management LLC, told Bloomberg in an 
     April 2014 article. ``People lose their discipline. They stop 
     doing the math. They stop doing the accounting,'' he 
     continued. ``They're just dreaming the dream, and that's 
     what's happening with the shale boom.''
       When gas fracking first popped onto the scene, grandiose 
     claims were made that the United States had 100 years of gas 
     supply in shale, or 2,560 trillion cubic feet. And Wall 
     Street rode that initial estimate. The only downside (beside 
     the environmental disaster left by this toxic industry) was 
     that, like the housing bubble which depended on ever-growing 
     home values to maintain profitability, shale gas wells had to 
     deliver consistent or growing production and profitability to 
     pay back heavy debt interest loans on well driller companies: 
     $3 to $9 million per well. Fracking wells require not just 
     drilling, but also huge injections of energy, water, sand and 
     chemicals to fracture the rocks that hold the oil and gas 
     deposits.
       But in fact, no statistical evidence confirmed the hyped 
     claims of a l00-year shale gas supply. In 2011, a study 
     downsized this estimate from 2,560 trillion cubic feet to 750 
     trillion cubic feet, and by 2013, the U.S. Geological Survey 
     refined that down to 481 trillion cubic feet--less than a 19-
     year supply based on 2013 rates of production. Nevertheless, 
     huge amounts of capital poured into increasingly marginal 
     operations, and the fracking market was flooded with junk 
     bonds and derivatives as investors piled in.
       Meanwhile oil fracking, which is separate from gas 
     fracking, also needed huge injections of capital, but more 
     importantly, oil frackers needed oil prices to stay at $85 a 
     barrel or higher on average to break even. Many of the shale 
     oil wells that have sucked up a huge amount of investment 
     have also turned out to have short lives and their operators 
     required continued infusions of capital to drill new wells to 
     keep afloat, even as prices tumbled due to the glut they 
     themselves created. The Bakken, one of the largest oil 
     fracking plays, is a typical example. It grew exponentially 
     after environmental protections were removed. But since 2008, 
     Bakken has required increasingly larger numbers of wells just 
     to maintain level production and service debt. The industry, 
     already in trouble in 2013, has now endured plunging revenues 
     through a year of oil selling at $60 to $70 per barrel, on 
     average, instead of $90 to $100.
       Everyone had expected that in 2014 the Saudis would move to 
     limit supply and maintain stable oil prices by cutting back 
     production, as OPEC has done for decades. But an unexpected 
     shockwave hit the industry in November 2014: The Saudis laid 
     down the gauntlet and announced their intention to continue 
     full production and let oil prices drop.
       For the Saudis, this serves two purposes: First, it 
     undermines the expansion of U.S. shale oil by forcing prices 
     down so low that many of the wells have to be shut down or 
     lose money. Second, it punishes their enemy, Iran, whose oil 
     export-based economy has been savaged by the lower prices. 
     The Saudis are sitting pat, with a trillion-dollar war chest 
     savings account accumulated over a decade of $100 per barrel 
     oil. Oil Minister Ali al-Naimi has publicly admitted that the 
     Saudis will wait as long as needed to retain market share, 
     even if prices plunge further.
       Falling oil prices will place a huge stress on the world's 
     junk bond market as energy companies now account for 15 
     percent of the outstanding issuance in the non-investment 
     grade bond market. The plunge in the prices of crude could 
     trigger a ``volatility shock large enough to trigger the next 
     wave of defaults,'' according to Deutsche Bank.
       This explains why the Obama administration--with complicity 
     of both congressional Democrats and Republicans--managed in 
     the wee hours of the morning to slip a loophole into the 
     supposedly ``must-pass'' cliff-hanger omnibus budget bill. 
     This toxic Trojan horse, passed in December 2014, now 
     includes a minor footnote provision that might cause 
     taxpayers to pick up the tab on more than a trillion dollars 
     (yes, trillion) if the energy market bubble implodes, which 
     it must if oil stays at half the price it fetched just six 
     months ago.
       After last minute, heavy lobbying on the budget bill by 
     Jamie Dimon of JPMorgan Chase and an army of 3,000 Wall 
     Street lobbyists, it appears that once again sufficient 
     insecurity and fear had been spread among the political class 
     regarding destabilization of the financial markets (or 
     withdrawal of campaign financing). They allowed a last minute 
     amendment that killed Dodd-Frank protections, and allowed 
     U.S. taxpayers to be shaken down to cover Wall Street's shale 
     gambling debacle.
       The heavy-handed move by the financial industry has 
     outraged progressives and libertarians alike. It seems that 
     these Wall Street criminals, like junkies attached to their 
     drugs of choice, just could not resist the high of easy cash 
     from Ponzi scheme market bubbles, and so they have stuck it 
     to the U.S. public once again: Preposterously huge bonuses, 
     Porsches, pricey call girls, and million-dollar Manhattan 
     condos were at stake. So hey, why should they kick the habit? 
     After all, not a single one of those con artists went to jail 
     last time.
       Wall Street is now flooded with fracking industry 
     derivatives contracts that protect the profits of oil 
     producers from dramatic swings in the marketplace. 
     Derivatives are essentially insurance policies taken out by 
     the oil industry to guard against fluctuations in the cost of 
     fossil fuel supplies. Dramatic swings rarely happen, but when 
     they do they can be absolutely crippling.
       Derivatives taken out to ensure prices don't go down are 
     now creating billions in

[[Page 371]]

     losses for those who sold such bets on the market; someone is 
     going to have to absorb massive losses created by the sudden 
     drop in oil on the other end of those insurance contracts. In 
     many cases, it is the big Wall Street banks, and if the price 
     of oil does not rebound substantially they could be facing 
     colossal losses.
       The big Wall Street banks did not expect plunging home 
     prices to implode the mortgage-backed securities market in 
     2008, but their current models also did not have $60 oil 
     prices included in projections. The huge losses may send a 
     shock wave into the entire financial industry. It has been 
     estimated that the six largest ``too-big-to-fail'' banks 
     control $3.9 trillion in commodity derivatives contracts, 
     those same gambling instruments that brought us the 2008 
     housing collapse. And a very large chunk of that amount is 
     made up of oil derivatives. Combined with the huge flood of 
     shale junk bonds on the market, the derivatives could 
     initiate a bubble burst that could turn into a financial 
     market implosion.
       Meanwhile, the global climate change issue and energy 
     market turbulence have morphed into geopolitical tensions 
     over European fracking. Unsubstantiated allegations in a New 
     York Times report by Andrew Higgins claim that the Russians 
     are funding anti-fracking protests to maintain their hegemony 
     over gas markets.
       The allegations have infuriated environmentalists and 
     climate justice activists. The last thing they want is to be 
     made scapegoats for the fracking collapse and be played as 
     the neo-Cold War dupes of the Russian empire. But memories of 
     red-baiting suddenly hang in the air as (by seemingly 
     coincidence) dozens of right-wing media sites regularly 
     devoted to anti-Soviet slanders or climate change denial 
     immediately picked up Higgins' Times piece, as if on cue.
       There are now dozens more of such published reports. Even 
     as the U.S. fracking industry collapses and tensions over 
     control of Ukraine and other former Soviet satellites re-
     emerge, there seems to be a concerted right-wing effort to 
     label fracking opponents Russian agents.
       Vague innuendos dominate this narrative. In the Times 
     piece, for example, former NATO Secretary General Anders Fogh 
     Rasmussen is quoted: ``I have met allies who can report that 
     Russia, as part of their sophisticated information and 
     disinformation operations, engage actively with so-called 
     non-government organizations.'' Others write, ``Some in 
     Sophia believe'' or ``Those who suspect Russian involvement'' 
     or ``There's no smoking gun, yet . . .''
       Critics in Romania accused the Times and Higgins of 
     scapegoating environmentalists and acting as partisan players 
     in a renewed Cold War.
       ``What, exactly, is the grand total of evidence that Russia 
     is financing these anti-fracking protests?'' asks American 
     blogger in Romania, Sam C. Roman, in his article, ``Pot vs. 
     Kettle,'' pointing out that the first anti-Russia allegation 
     came from a politician who owned land that Chevron planned to 
     frack, and is thus losing money from the protests. ``Not one 
     allegation against Russia in the entire article is proven by 
     a single document, piece of evidence or other direct proof. 
     All that exists are shadowy insinuations and allegations.'' 
     He asserts that accusations by Lithuanian, Romanian and NATO 
     officials against Russia have not yet to be backed up by any 
     proof.
       ``Add it up,'' Roman writes. ``You've got two former NATO 
     [secretary generals] stumping for Chevron (which competes 
     with Gazprom, a Russian energy company that also conducts 
     fracking operations in Europe) blaming the Russian government 
     for protests. . . . And all of this tied up in a neat little 
     bow by an American journalist who has already been caught 
     publishing anti-Russian propaganda in his newspaper before.''
       This all leaves the United States somewhat schizophrenic. 
     On the one hand, the United States and NATO's foreign policy 
     hawks are delighted by the oil price collapse; it serves to 
     isolate and subdue Russia, expand NATO's influence in Eastern 
     Europe, and puts pressure on Iran to negotiate on nuclear 
     aspirations. Not to mention that with gasoline at $2 per 
     gallon, consumer spending and economic growth will be 
     enhanced. The U.S. economy grew by a comparatively robust 5 
     percent in the third quarter of 2014.
       According to an article by Larry Elliott in The Guardian, 
     ``Stakes Are High as U.S. Plays the Oil Card Against Iran and 
     Russia,'' the price drop was an act of geopolitical warfare 
     by the United States, administered by the Saudis. Elliott 
     suggests that U.S. Secretary of State John Kerry allegedly 
     struck a deal with Saudi Arabia's King Abdullah in September. 
     That might explain how oil prices dropped during the crisis 
     caused by Islamic State in Iraq and Syria, which would 
     normally have caused prices to rise.
       It would also explain why the Obama administration allowed 
     the financial industry the amendment to Dodd-Frank that 
     effectively exempts financial institutions from liability 
     associated with derivatives. Though shale derivatives were 
     not specifically mentioned by the Wall Street lobbyists as 
     they pressured their allies in Congress and the White House, 
     it is becoming increasingly clear that the too-big-to-fail 
     banks were beginning to panic as dark clouds gathered on the 
     horizon in the shale derivatives trade.
       Most bank customers and voters don't know that Congress has 
     already written into finance regulations that, in the case of 
     insolvency, financial institutions could grab the assets of 
     depositors and ``bail-in''--which means they can save 
     themselves from their losses in gambling operations at their 
     investment divisions by grabbing cash assets of depositors, 
     even those that are FDIC guaranteed, and legally convert them 
     to bank stocks. That means that in the event of another 
     market crash, Chase and Citi could take their depositors' 
     cash in savings accounts or CDs, and give the customers back 
     a bank stock certificate (of questionable value) instead.
       There are also those who scratch their heads and ask, ``Why 
     did the TBTF banks push for a deletion of the Dodd-Frank 
     provision now, instead of waiting for the friendlier 
     Republican-controlled Congress to pass this legislation?'' 
     The only answer that seems to make sense, and explain their 
     urgency, is that the collapse is imminent.
       In the 1990s dot-com craze, every new Silicon Valley start-
     up company was advertised as the next Microsoft. What 
     followed was the crash of 2000, when the NASDAQ dropped 4,000 
     points (80 percent) in months. This chart below is what the 
     crash looked like in 2000 to 2002 after the market had 
     reached 5,000 (almost exactly where it stands today).
       Having learned their lesson well from the last bailout, and 
     knowing that they will have a much harder time coming to 
     Congress hat-in-hand after a collapse, the TBTF banks 
     probably decided not to wait, pushing their minions in the 
     Beltway to inoculate them
     as soon as possible from the potential market explosion. In 
     the meantime, they were probably dumping their own stocks on 
     unsuspecting investors. Based on year-end reports for March 
     31, 2014, for 127 major oil companies, cash input for the 
     fracking industry was $677 billion, while revenues from 
     operations only totaled $568 billion--a difference of almost 
     $110 billion. And this was before the price of oil started 
     dropping six months ago.
       In three out of seven major fracking fields in North 
     America, companies are already reporting losses, with 
     closures particularly acute in Canada. It's not clear whether 
     economists fully appreciate what's about to transpire. This 
     decline in rig count is just the beginning. Perhaps the end 
     will come as early as this winter or spring, as fiscal 
     reports for 2014's fourth quarter are published, operations 
     shut down, crews are laid off, and many unprofitable oil and 
     gas rigs are mothballed.
       So, whom will the banks, brokers and investors scapegoat 
     for this upcoming crash? Some predict that they will likely 
     use every available media outlet to blame community 
     activists, Democrats and Obama for stopping the Keystone 
     pipeline and for opposing the fracking industry. And as in 
     the climate change denier movement, the narrative will 
     probably use ``communist'' and ``socialist'' rhetoric, which 
     is why the Russian card is so important to play: Hence the 
     Higgins article.
       The pundits on Fox will likely play on the patriotism of 
     the right and use their Big Lie ploy (say something enough 
     times, it becomes the truth) to the hilt. Six months from 
     now, while studiously avoiding mention of our ``allies,'' the 
     Saudis, or the Wall Street banks, they will likely be 
     vociferously defending those poor ``beleaguered U.S. oilmen'' 
     who could have made our country strong and independent again 
     in energy, but were broken by the Democrats and those 
     ``commie environmentalists'' working for Putin. The market 
     crash will be blamed on the ``climate hoax.''

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