Empty shelves and zombie fracking firms


We don’t yet know the long-term significance of COVID-19 for the United States, but it has already exposed some underlying fault lines in our political economy and, of course, in class power. The biggest cracks to date are the costs of the “lean manufacturing” model, the perils of zombie financing in the fossil fuel industry, and the enduring power of finance.  

What’s with the shortages? 

The United States is still the second largest manufacturing nation, after China. So why do we find ourselves short of ventilators, masks, Personal Protective Equipment, and so on?

Over the past four decades, U.S. manufacturers of everything from iPhones to drugs have adopted a “lean manufacturing” model: just-in-time supplies, outsourced component production, and global supply chains. Our global supply chains are geographically concentrated in China and rely on only one or two sources (that is, no redundancy). Single-sourced supply chains reduce costs and increase profits, pleasing banks and investors, but leave us vulnerable to disruptions in the global trade system. Consider these examples: 

80% of active pharmaceutical ingredients used in drugs manufactured in the United States are produced abroad;

97% of antibiotics used in the United States are produced in China;

95% of surgical masks used in the United States are produced abroad; and

70% of N95 (and other tight-fitting respirator masks) are imported from other countries, primarily China.

Zombie financing: 
The costs of fracking

In 2000, the United States was the world’s largest importer of petroleum, sucking in over 10 million barrels a day. We consumed a quarter of the world’s petroleum output while producing less than 10%. In 2019, the United States was a net exporter of petroleum and petroleum products—and the world’s largest producer. We were chasing the holy grail of energy independence.

What happened? 

In two words: hydraulic fracturing. Or in one word, fracking.

The environmental problems with fracking are well documented. But little attention has been paid to the finances of the industry. Fracking wells have a relatively short life. Companies must constantly be drilling new ones. And this doesn’t come cheap. So money must be borrowed—many billions over the last decade. 

Well, you may say, so what? The companies will pay it back out of their profits. But fracking companies are not profitable. Instead, companies have paid off old debt by issuing new debt. (A rolling loan gathers no loss, as they say in banking.) The bulk of this debt is BBB-rated, one notch above junk. Investors, including pension funds, have bought this new debt because it paid higher rates. 

COVID-19 has changed these calculations. Plunging prices and a glut of oil have illuminated the reality: Fracking companies are a perfect (but not the only) example of what the Bank for International Settlements calls “zombies”— companies that cannot meet interest payments on their debt, much less pay off the principal. Bankruptcies and job losses have already begun.  

Who gets what

By early May, Congress had authorized over $2.2 trillion to fight COVID-19. For working people: a one-time $1,200 check; four months of a $600/week increase to unemployment benefits; plus, for the first time, unemployment benefits to gig workers. Lose your job, join the more than 30 million others unemployed and seeking help, and wait in lines at overwhelmed food pantries.

But the bulk of the spending is for businesses, big and small. The process for receiving this largesse is faster and easier than navigating the rickety unemployment systems of various states. And there are no constraints on executive pay or dividend payouts. All of this is to be expected: We live in a capitalist political economy with a very high concentration of wealth.

Is there an opening for the Left?

The other day a (non-economist) friend asked me, “Where is all this money coming from?” Taxes? No. The Federal Reserve and Treasury simply created it in response to congressional legislation. There is a Magic Money Tree. It blooms whenever there is the political will for it to bloom. We must demand that the Tree continue to bloom—for all of our needs. This is crucial in the fights ahead, because another zombie is emerging into the light: austerity. You know the message: We have been profligate, and now we must pay—by cutting public services and jobs. Already some governors of low-wage states are threatening to deny unemployment benefits to workers who stay off the job because of health concerns. 

Oh, and we’ve probably gotten rid of fracking—at a cost of about 2.5 million jobs, with no replacements planned. Green New Deal, anyone?