The Uber Driver and the Fracker

A hydraulic fracturing drilling rig creating a new well on the Niobara shale formation, one of the most intensively fracked areas in the United States.

One way to better  comprehend the current state of the oil business, and gas prices, is to look more closely at the situation of an Uber driver. (Our example is imaginary, and the numbers are made up, but I think realistic.)

As he begins his employment, our Uber driver is quite pleased with the job. At the end of most days he has a nice wad of cash (or its equivalent) in his pocket and feels optimistic about his prospects. But he is entirely on his own, and must pay for his own gas, oil, maintenance, tires, insurance (including, not incidentally, health insurance), etcetera. Still, by working long hours and being thrifty, he keeps his head above water.

At the end of his first year, his profit-and-loss statement (P&L) is in positive territory, but not by much. When all his expenses are accounted for he has “made” — and this depends entirely on how he categorizes his expenses — perhaps $15,000 after taxes. Not great, but equivalent to a lot of low-end jobs, and he has his independence. So he resolves to work even longer hours next year, and do better.

But the next year he has a short illness, and despite working longer hours ends up with basically the same financial results. Ditto, the year after that. And then he runs into the bitter truth about being an Uber driver.

He has to replace his car. The average cost of a new car today is $40,000, an amount that will almost completely obliterate three years of earnings. Sure, he can finance it, but the reality is that with the wear and tear an Uber car gets he will probably have to replace it in three years. To pay off the loan in three years will require payments that will devour his retained income.

So he’s learned a nasty lesson, but here’s the lesson the observer of Uber (and fracker) economics must learn: the expense of buying a new car every three years will never appear on his profit and loss statement (just the interest paid on the loan). So after six years he may well be able to show six annual P&Ls that show substantial profits every year, and yet be dead broke. 

Now let’s meet our Fracker. The bitter truth about fracking oil wells is that they play out after an average of three years, whereas legacy oil wells last for 20 years or more. They are hideously expensive to build and operate — each one requires millions of gallons of water,  thousands of tons of sand and a witch’s brew of toxic chemicals — but if the price of oil is reasonably high each well can make money every year.

But because of the cost of replacing the wells, and the need to do so every three years, virtually nobody engaged in the fracking industry since it began its current “boom” about 20 years ago has made any money, despite displaying impressive P&Ls. Indeed, most fracking players have gone deeply in debt.

And that, dear friends, is why we are seeing reports about unprecedented “profits” in the oil patch, coupled with rising gas prices, which many take as proof that the oil companies are gouging us. A corollary belief is that all they have to do to end the current gas price crunch is to “ramp up production.”  

The unfortunate reality is that the frackers are facing forced liquidation, even as the price they can get for their product is soaring. They are dead frackers walking.