There are two things making the fracking bust here in Oklahoma difficult to comprehend and analyze.
First, the world oil glut caused by the hydraulic fracturing boom in Oklahoma and other states was based on poor planning and greed and was entirely predictable.
Second, the local energy news reporting about the situation continues to be shallow if not simply propaganda, making it difficult to determine what major reductions lie ahead in terms of layoffs and overall reductions in government revenues, which affects everyone.
Let’s deal with the first issue. It’s a case of simply supply and demand economics, a concept fairly neutral in terms of political affiliation. When there’s an over supply of anything for sale, either more demand must be created or the prices will drop. In the case of oil, which gets refined into gasoline, this country has made great and needed strides in recent years to reduce demand by producing cars that use less gasoline. In the case of natural gas, some of which fuels power plants and warms our houses and buildings, the country has reduced demand through solar and wind power.
These basic facts don’t take a Harvard MBA to decipher. What has happened is that local big oil and gas companies have continued to deploy hydraulic fracturing or fracking to extract as much oil and gas from the ground here in Oklahoma despite clear warning signs the boom would go bust. These companies did this to make as much money as possible when oil prices were soaring artificially above $100 a barrel, knowing full well prices would eventually drop and production would slow. Right now, oil is below $50 a barrel. Companies need fracked-extracted oil to be at around $80 a barrel to break even.
Meanwhile, local oil and gas companies with this full knowledge agitated for and won gross production tax cuts supported by Gov. Mary Fallin and the Republican-dominated legislature. What’s even worse, thousands of workers are facing possible layoffs here and elsewhere, which leaves even less money for the economy and government operations. Education funding in Oklahoma, for example, which is already one of the lowest in the nation, will probably see even more cuts. How low can we go? We’re going to find out.
A sensible over-arching national and Oklahoma energy policy, one that protects the interests of citizens while allowing profits for oil and gas companies, is probably not possible in today’s political climate, especially here. But as we get ready to relive the bleak 1980s here in this Oklahoma, let’s not forget this was preventable, and it was caused by conservatives inside and outside of government. It’s a teachable moment, of course, but I’m afraid no one will learn a thing.
Reconsidering the 1980s in Oklahoma, a bleak economic time that I lived through as an adult, brings me to my next point about the local media. According to local energy writers here, the story goes like this: Yes, oil and gas companies will face a slump, but it will be nothing like the 1980s because the state’s economy is so diversified. Also oil prices will rise soon enough. Okay, in their defense, these local journalists are quoting the same old type of local “experts” saying the old predictable things they said in the 1980s, but given the ramifications and lessons learned one might expect some more enterprise and more piercing questions.
How is the economy more diversified here? I don’t believe there’s been such a big shift. What about the fact that the ensuing layoffs from a major oil bust affects all sectors of the economy? Sure, auto dealers might sell more cars and trucking companies might benefit from lower gas prices, but that hardly compensates for a major oil bust. For example, a small business-let’s say it’s an upscale restaurant-might have to close because it now doesn’t have enough customers. That means more unemployed people who won’t be buying new cars or ordering the consumer goods trucked right to their front doors.
The local energy writers don’t often consider in their calculations that an oil bust also can lead to a banking bust because banks leverage themselves during a boom because of the same greed motivating oil and gas companies. This is what happened to Penn Square Bank in Oklahoma City. It was closed in 1982 and led to the collapse of the larger Continental Illinois National Bank and Trust Company in 1984.
If oil prices remain low, and there’s no reason to suspect otherwise unless-and here’s the basic trick played on us all, folks-there’s a sudden major war or violent conflict truly destabilizing oil-producing countries in the Middle East, then expect bank failures and/or nationally affiliated bank failures in Oklahoma and across the country. That means even more unemployed people.
I don’t want to exaggerate how bad the economy was here in parts of the 1980s in Oklahoma because of the oil bust, but there wasn’t a lot of economic opportunity and there were a lot of empty buildings and the layoff announcements came in droves. The boom created a lot of new development that then went under during the bust. The malaise was palpable.
Could Bricktown and other Oklahoma City downtown hot spots cool off economically in the recent bust if it’s an extended one, which then has a domino effect on other businesses? What about Oklahoma City Thunder ticket sales, especially the expensive seats? What about all those new apartment complexes in downtown Oklahoma City? Who’s going to live in them?
I say get ready for the worst. If it doesn’t happen, then great. But I’m no way convinced that we’re not heading for a 1980s-style crash if not something worse.