The Fed has pulled out its big guns, slashing interest rate targets to zero and announcing $700 billion worth of new quantitative easing. Republican Senator Mitt Romney seems to support giving every American $1,000, and Republicans in general are getting behind paid sick leave. Paul Krugman is calling for the government to spend 1 to 2 percent of gross domestic product per year on a permanent stimulus. And New York City Mayor Bill DeBlasio over the weekend floated the idea of the “nationalization of crucial factories and industries that produce medical supplies,” citing the example of the domestic mobilization for World War II.
Nationalization, as I wrote earlier this month, has a long and proud tradition of navigating America through times of crisis, from World War II to 9/11. No sector may be facing as profound a crisis right now as the oil and gas industry. With crashing oil prices, all manner of stimulus measures on the table, and previously tight-fisted politicians now thinking more creatively, nationalizing the fossil fuel industry might just be one of the most sensible ideas on offer.
For the last week, the White House has reportedly been exploring low-interest loans to a struggling fossil fuel industry. Talk of a bailout is in the air, spurred on in part by longtime Trump ally and fracking magnate Harold Hamm. In the first concrete move on this front, Donald Trump promised to have the Department of Energy buy up oil for the Strategic Petroleum Reserve and “fill it right up to the top,” although that didn’t do much to stop oil prices from sinking to below $30 a barrel on Monday; there’s only so much it can hold, after all.
None of the options being floated by the administration will fix the lingering crisis facing America’s unconventional oil and gas sector. At best, they’ll stave off a reckoning for a little while longer. Kathy Hipple, a financial analyst at the Institute for Energy Economics and Financial Analysis, has been tracking evolving trends in the debt-ridden oil and gas sector for the last decade. “A bailout of a once-thriving industry that needs some help during a downturn is one thing,” she said. “But we’ve got evidence that this industry has failed to produce a positive cash flow for a decade. The logic of bailing out a failing industry, that has failed even when oil prices were much higher, would be political. It would not be economic.”
Sold on the promise that improving efficiency would eventually yield big profits, investors on Wall Street gave shale drillers improbable quantities of cash for nearly a decade after the last recession, loading companies up with the debt made possible by federal policy responses to it. Those expected profits never materialized, and the sector has seen a rash of bankruptcies in the last several years. By last summer, it had effectively lost access to the cheap credit that enabled the boom. “There is no business case to be made for fracking,” Hipple told me. “If you had a child with a lemonade stand that every day spent more money on lemons and sugar than they got selling lemonade, eventually you would say there’s no business case for that lemonade stand.”
Drunk on cheap credit, and with no one telling them not to, shale oil and gas companies have drilled themselves into oblivion, producing as much as possible regardless of actual revenue coming in. The efficiency improvements that were supposed to herald an era of fat profits only seem to have made matters worse. Speaking to an industry conference last summer, Steve Schlotterbeck, the CEO of EQT Corporation—the company’s largest natural gas producer by volume—warned that the “technological advances developed by the industry have been the cause of its slow suicide. There will be a reckoning, and the only question is whether it happens in a controlled manner or whether it comes as an unexpected shock to the system.” That’s a question policymakers will now have to confront head-on, hemmed in by several harsh realities: hundreds of billions of dollars’ worth of debts coming due, geopolitical tensions outside their control, a likely flood of new bankruptcies, and limits on the amount of fossil fuels that can be safely burned to avert climate catastrophe.
Nationalization might be the best way out. Trump’s uncritical support for the fracking industry will probably do about as much good as his pledge to end the so-called War on Coal, which has continued its downward spiral since he took office. The Democracy Collaborative’s Carla Skandier, on the other hand, has suggested a “51 Percent Solution for the Climate Crisis,” in which the government takes a majority stake in privately owned fossil fuel firms, winding down production along a science-based timeline and giving workers a dignified off-ramp into other well-paid work, all the while muting the industry’s enormous influence over our political system. “Only democratic government can ensure the planned wind-down of fossil fuel production in accordance with climate safety goals,” she writes. “With room for private profit cut out of fossil fuel extraction and production, the powerful entrenched opposition of the energy sector would crumble.”
For the 1.6 million workers currently in the oil and gas sector, government leadership of the industry might be the only way they avoid crashing out of the carbon economy and facing mass unemployment during the (likely) recession. Otherwise, what has happened with coal bankruptcies, where executives take whatever money is left and run, could play out with fracking. The economic shocks could spread to other industries, starving local and state tax bases of sorely needed revenue. “As this bust unfolds, we’re going to see layoffs quite possibly reaching into the hundreds of thousands,” said New College of Florida economist Mark Paul. “Policymakers don’t have plans in place to protect those workers.” Now working on a paper with Skandier on the prospects for nationalizing fossil fuel companies, Paul argues that instead of a bailout for oil and gas magnates, “What we should be talking about is a bailout for fossil fuel workers who have put their lives on the line to make sure we can charge our cell phones and laptops.” By taking fossil fuel companies under public ownership while they’re cheap to buy, the U.S. could ensure the country’s energy demands are met responsibly as it transitions to a net-zero-emissions economy, without the need to appease those companies’ shareholders. Instead of giving up the decision-making power such a big share purchase would ordinarily entitle them to, as in a bailout, policymakers would use their new equity stake to begin a managed decline of fossil fuels and guarantee workers full pensions and wage parity. As The Atlantic’s Annie Lowrey pointed out on Twitter yesterday, the government could snap up the country’s four biggest oil producers for just over $300 billion.
The alternative, Paul said, may well be corporate raiders—private equity and hedge funds—swooping in to cash out, leaving mountains of layoffs, devastated communities, and reckless excess production in their wake. Those may be some of the only actors at this point willing to buy up shale assets, Hipple cautioned. Fracking debt, she told me, “was always junk-rated. E&P [Exploration and Production companies] have not been investment-grade rated for the most part. It’s always been a high-risk, potentially high return. Now it’s high risk, disastrous return.”
The public, on the other hand, stands to reap a substantial benefit from public ownership and leadership. Oil and gas isn’t just another troubled sector; it’s the foundation of the global economy. (Skyrocketing gas prices were a major contributor to the last recession, as it looked like stores of conventional oil were running out.) As the economic basis of unconventional oil crumbles—and seemingly invulnerable players like ExxonMobil and Saudi Aramco falter—stimulus spending may be our last best shot to transition the whole of the economy away from fossil fuels in a way that avoids disaster and economic chaos, in time to avert worst-case-scenario levels of warming.
“If we had acted 30 or 40 years ago, we’d be in a very different place,” Paul said. “But due to decades of denialism and delay”—much of it funded by the fossil fuel industry—“we found ourselves in a place where we need to engage in crash decarbonization. We know the fossil fuel industry needs to be rapidly wound down, and we know private capital has no interest in winding down their own business. Their interest is in trying to extract as much as possible in order to maximize short-term profits and rents to their shareholders. And we’ve seen time and time again that nationalization can be a really powerful tool to reorient business toward the social good rather than short-term maximization of profit.”
In a way, nationalization would merely involve the government correcting for nearly a century of its own market intervention. All manner of government hands on the scales have kept money flowing into fossil fuels, including the roughly $26 billion worth of state and federal subsidies handed out to them each year. A holistic transition toward a low-carbon economy would reorient that array of market signals away from failing sectors and toward growing ones that can put millions to work right away retrofitting existing buildings to be energy efficient and building out a fleet of electric vehicles, for instance, including in the places that might otherwise be worst impacted by a fossil fuel bust and recession. Renewables have taken a serious hit amid the Covid-19 slowdown, too, as factories shut down in China. So besides direct government investments in green technology, additional policy directives from the federal level, Paul added, would be key to providing certainty for investors that renewables are worth their while: for example, low-hanging fruit like the extension of the renewable tax credits, now on track to be phased out by 2022.
But as Paul also noted, it will take more than minor nudges to build a prosperous and low-carbon America out of a downturn. City University of New York economist J.W. Mason, who has studied the domestic economic mobilization around World War II, told me that one of the big lessons from that era is that “the more rapid the transformation of the economy that you’re looking at and the more you’re talking about new technologies, the more direct the role of the government has to be.” Throughout that war, Mason says, the federal government essentially created entirely new supply chains to meet wartime production demands, all the while tightly setting things like prices, wages, and consumption at home. “The role of the government isn’t just providing resources and changing market signals. It’s about solving coordination problems and bearing risk. You have to think about the government in those terms and not just money going out. Tax and price incentives don’t work very well for a very rapid transformation of several industries at once, or creating new ones that don’t exist.”
A recession in the oil and gas sector increasingly seems more like a matter of when, not if. With few better options on the table, public ownership may be the least lawmakers can do.