The Illusive Windfall: the Natural Gas “Bubble”

By Deanna Bitetti

In Ghana as farmland is taken over to pave the way for the natural gas sector to move in, food productivity is decreasing while prices are increasing. At the same time as food prices are increasing a shortage in housing stock is causing housing prices to rise as well, make it harder for local inhabitants to live and work. Transportation and maintenance prices are rising and large income inequalities are creating massive wealth distribution effects within local areas. Other externalities are also creating problems in the Ghanian coastal areas- closest to the Jubilee Oil Field- that are often not monetarily accounted for when discussing the development possibilities associated with developing the natural gas sector. As we seek out this illusive windfall- so to speak- we must be cognizant about the many high risk factors in continuing quickly forward with natural gas extraction.

If we are to do anything right in regards to how we continue to develop our extractive industry sector it is to take lessons from the past and to learn from the experiences of others. The term "Dutch disease" for example originates from a crisis in the Netherlands that resulted from discoveries of natural gas deposits. The newfound wealth caused Dutch currency to rise, making exports actually less competitive. Here we see a crisis created in a largely developed nation with a well diversified economy where the discovery of natural gas resulted in the lessening of productivity in other sectors and created deep market inefficiencies. We are seeing this as labor intensive industries such as farming and fishing are being slowly depleted to make way for oil and natural gas cultivation in Ghana. It is a possibility that if and when natural gas is exported we will see an increase in the price of cedi- or Ghanian dollars- actually creating a loss in the total trade of the nation as their exports become more expensive relative to those of other
nations.

A recent NY Times article “Behind Veneer, Officials Voice Doubts About Future of Natural Gas,”further reflects the growing fears among some natural gas skeptics across the ocean in America that all that glitters is not gold. As one leaked email from an employee of the Energy Information Administration states “Am I just totally crazy, or does it seem like everyone and their mothers are endorsing shale gas without getting a really good understanding of the economics at the business level?” If we are to learn anything from the housing sector bubble it is that rising prices can often be fueled by forces that have nothing to do with supply and demand. Rather lack of credible information about future returns on investment, a feeding frenzy and the lack of regulatory oversight by governing institutions, compounded by moral hazard type situations, can create an irrational speculative bubble.

As we know too well the processes that lead to financial crises often start with a substantial acceleration of capital inflows into an economy. This is what happened in the United States and the bursting of the housing market bubble that eventually led to a vast economic decline. While I'm not suggesting that a natural gas bubble rupture would have the same devastatingeffects of the housing market collapse, it could erroneously send our environment public policy decision making direction in America completely off track. In developing nations the risk of an increase in capital inflows in such a speculative market as natural gas is even more risky – because just as quickly as cash can flow in, it can flow out, leaving promises of vastdevelopment and infrastructure projects behind. While Ghana is already having conversations about what to do at the end of the natural gas cycle (hey at least they are confronting the possibility that wells do dry up and that natuyral gas is not infinite in quality) they have yet to clearly articulate an “exit strategy.” The boom and bust cycle associated with extractive industry development is already rearing its ugly head in Ghana, as crime, prostitution and even smoking has increased in areas near the Jubilee oil field. In many foreign nations, huge amounts of government money have already been borrowed against the future promise of lucrative returns from the oil and gas sector, often leading to long term, entrenched indebtedness with little returns in human capital improvement, job creation or infrastructure development to show for it. Infrastructure and maintenance costs are already beginning to increase in Ghana as trucks utilize roads that were never made to be operating highways for large scale industry. According to one lecturer 6 children were struck and killed by a truck barreling down a local road.

A second component of a financial crisis is the investment of a significant part of the surge of portfolio capital available into speculative assets or projects. Once again our experience with the housing market and the horrendous outcomes of investment in a high return, but highly risky, sector presents itself as a good model. The rise of foreign investment in the natural gas market combined with the possibility – as the recent NY times articles alleges- that the industry
has been overstating its well reserves, can potentially create a market bubble of its own. In the United States Congress is considering offering major subsidies to promote natural gas extraction methods and providing major tax incentives to the industry, speeding up the timeline for extraction and feeding the natural gas boom, and possibly bust, cycle. Both Ghana and the US must begin to pay close attention to the impacts that can be created by economic indicators regarding pace and scope of development in a highly risky, speculative sector.

Congressman Hinchey, sponsor of the FRAC Act which would put hydrofracturing under the jurisdiction of the Environmental Protection Agency, recently sent a letter to the Chairman of the Securities and Exchange Commission regarding the potential overestimation of natural gas companies regarding their reserves and attacked the lack of transparency in accounting of these reserves to the public. I applaud his rapid response and his questioning of the EIA as well as the SEC about reporting requirements and questioning the independence of the agency contractors, however more is needed to highlight to the growing inadequacies surrounding our discussion about natural gas.

The United States Department of Energy Secretary of Energy Advisory Board (SEAB) Natural Gas Subcommittee squandered a real opportunity, for example, for candid discussions about the net benefits and externalities posed by natural gas when it exposed itself to criticism for having members with close ties to the natural gas industry sit on its panel. This lack of credibility only leads to a deepening distrust and disillusionment of government and governing institutions by its citizenry. These are the experiences I have taken with me to Ghana and some of the issues I have discussed rather openly with industry representatives, members of their chamber of commerce as well as government officials.

Without doing our due diligence and ensuring transparent and accountable processes for determining appropriate regulation and oversight of the natural gas sector we are remaining naively hopeful of a future lucrative windfall. What we could wind up with instead is a bunch of depleted, barren wells and another economic quandary, once again asking ourselves “how did we not see this coming?” And the answer will be simple: we did.