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How the Bank Bailout Hobbled the Climate Fight

Wall Street took the money the government lent them and plowed it straight into the fossil fuel industry.


Almost exactly a decade ago, as the Federal Reserve worked to stabilize a careening stock market, overleveraged banks, and underwater mortgage lenders, it made a decision that helped fundamentally reshape the global energy industry. In the middle of October 2008, the Fed agreed to bail out America’s big banks, even the ones that weren’t failing, like JP Morgan Chase, Citigroup, and Goldman Sachs.

That decision continues to be hotly debated ten years later. But its profound environmental impacts are, quite often, overlooked. The bailout was one of the most significant turning points in America’s role in the global climate crisis and perhaps its most important piece of environmental legislation, ushering in a decade of fossil fuel investment that has set the fight to curb carbon emissions globally back decades.

Before America’s housing market collapsed in 2008, its fossil fuel sector had been in a period of lengthy decline. Domestic oil and gas wells had stagnated through much of the 2000s; production flatlined at around five million barrels, and many experts warned that shortages could be imminent. That began to change at around the time of the financial crisis. In 2007, a group of oil industry veterans, scientists, and private equity investors presented their findings at a conference put on by Goldman Sachs. Mark Papa, the head of EOG Resources (short for Enron Oil Group, an independent entity established in the wake of Enron’s 2001 collapse), was there to sell investors on a new technology pioneered by Texas oilman George Mitchell in the late 1990s and early 2000s: hydraulic fracking.

EOG, an early adopter, believed it had identified a vast swath of shale formations that could be fracked, and before too long, investors bought in. By 2008, the financial crisis was in full swing. With oil prices spiking, banks, seeking a sure bet, saw in fracking a tempting investment opportunity. The financials were somewhat shaky—at that point, shale companies had been losing hundreds of millions of dollars trying to make the technology work and scale it out. Many would have folded if not for the massive and sustained financial backing that Wall Street, riding a recent infusion of taxpayer money after the bailout, was willing to provide.

Even as oil prices dropped, investment continued. “Those companies paid good dividends,” said David Hughes, a fellow at the Post Carbon Institute. “They weren’t profitable, but if you don’t have any other place to put your money because of low interest rates, it isn’t hard to find investors.” So Wall Street banks took the money the Fed had lent them and plowed it straight into the fossil fuel industry. In recent years, bailout recipients JP Morgan Chase and Citigroup loaned over $900 million and $600 million respectively to EOG alone (it’s hard to know if every last dollar went into the company’s fracking infrastructure, but it’s likely the overwhelming majority did). Each time shale driller Halcon came close to violating debt limits set by its backers, the company’s lenders—JP Morgan Chase and Wells Fargo—loosened restrictions. Oil that according to pure market forces might have otherwise stayed in the ground continued to flow.

The zero interest rate policies of the Federal Reserve, designed to help the housing market recover, compounded the problem further. As the Cambridge University professor Helen Thompson has written in her book Oil and the Western Economic Crisis, they “allowed oil companies to borrow from banks at extremely low interest rates, with the worth of syndicated loans to the oil and gas sectors rising from $600 billion in 2006 to $1.6 trillion in 2014.” Those low interest rates also meant that fracking companies could continue to refinance their debt even as losses mounted.

The bank bailout had unwittingly become a bailout for the domestic oil and gas sector, which, as a forceful opponent in the fight over global climate change, ushered in an energy revolution that has now, ten years later, remade the global market.

It’s hard to overstate just how significant of an impact fracking has had on the fossil fuel industry. In September of 2008, one month before the Troubled Asset Relief Program (TARP) was signed into law, U.S. oil producers cranked out less than four million barrels a day on average. That figure has more than doubled in the decade since. Today, it’s more than eleven million, and since 2015, the United States has begun exporting oil to other countries for the first time in 40 years. It is now the foremost producer of oil and natural gas in the world, outpacing both Saudi Arabia and Russia.

Fracked oil, in particular, changed the contours of fossil fuel consumption. Today, 69 percent of oil and natural gas wells drilled in the United States are for fracking (up from 2 percent in 2000). There are now more barrels of fracked oil being produced in the United States than the entire oil total output this time ten years ago. When they started flooding the market, it drove prices down, increasing demand, and with it, consumption. As energy market analyst Pavel Molchanov, who works for the financial services firm Raymond James, told me, “if it were not for production from shale, then, all else being equal, prices would be even higher than they are currently, and demand would be lower.”

When the bailout was passed in 2008, the world consumed 90 million barrels of oil a day; now, it consumes 100 million barrels daily, with half of that additional volume coming from American fracking fields. That has led to a surge in carbon emissions: In the United States, they are slated to increase in 2018 for the first time in years, despite the continued contraction of the coal industry. Global emissions have also continued to climb throughout the decade. Some of that can be chalked up to total global oil consumption, along with the expansion of fracked natural gas, which results in methane emissions that “are likely comparable to coal, if not higher,” Hughes said. “A lot of the increase globally has come from fracking.”

It didn’t have to happen this way. The massive investment in the fossil fuel infrastructure after the bank bailout could just as easily have gone to renewable technologies, like wind and solar projects, which, in an ironic twist, have been pilloried for their reliance on subsidies and inability to turn a freestanding profit. Today, that’s a better description of the fracking industry, which has been on a massive money-losing streak. (Since 2007, energy companies have lost an estimated $280 billion on shale investments. Higher prices recently, along with reduced tax obligations, may help a handful of these companies break even, but certainly won’t be enough to offset a decade of losses.)

Of course, it’s possible the boom may yet be short-lived. Fracking wells decline in output rapidly. Production in the average well in the Bakken—a key area for fracking shale in North Dakota—declines 69 percent in its first year and more than 85 percent in its first three years, while a conventional well might decline by 10 percent a year. Many “sweet spots” have already been tapped; the Barnett shale in Texas, the original fracking field, has basically run dry. Still, the impacts of the increased carbon pollution are likely to be lasting. With oil now the number one producer of emissions in the American energy sector, and the United States responsible for the second most emissions globally after China, the shale oil boom permanently set back any meaningful attempt to slash emissions, including the Paris Climate Accords.

As Congress goes about preparing for the next financial crisis, it’s crucial that they realize how their bailouts can impact the climate in these ways. But there’s a hidden benefit, too. If shale oil is allowed to incur massive losses without conceding any claims to viability, shouldn’t wind and solar be held to the same standard? In fact, the application of the bank bailout to a massive energy and infrastructure program provides a strange photonegative of what a Green New Deal might look like, if public funding flowed towards green energy projects that were safely shielded from the whims of the market.