Sunday, October 27, 2013

Trying to plug a security risk in checking accounts

Isn't it strange that, in order to pay a bill online from your checking account, all you need to do is provide your account number and routing number and confirm the amount to be billed? I've always wondered why the bank didn't require me to approve the payment on the bank's website. Isn't that a major security risk - if someone gets my account number and routing number, they can basically extract however much they want, right?

I decided to ask someone at my new bank, Cardinal Bank, about this.

Routing and account numbers are all you need to steal funds, but there are safeguards...

I went in and asked about this, and it turns out that not only can someone take your funds with just your account number and routing number, if the 'merchant' promises that you authorized the transaction, the bank isn't allowed to block the transfer!

However, the manager assured me that I (the checking account holder) am protected by Federal law, and if I see a checking account expense I didn't authorize, I can file a claim. If someone (the bank? I'm unsure) agrees I didn't authorize the payment, the bank is legally required to give me my money back.

I still have a few problems with this:
  • The bank adjudicates the claim: The bank adjudicates the claim, but it's the bank that would have to pay out if they agree that I didn't make the payment. I would hope the bank is insured for this, but still - the incentives aren't exactly aligned properly.
  • When I file the claim, the money's already gone: When someone defrauds my credit card, they're stealing from the credit card company, not me (and generally, the credit card company forces the merchant selling the fraudulently purchased goods to pay). It's WAY easier to keep money than to fight to get it back.
  • The 'secret' is your checking account number: The manager said don't worry, just don't hand out my checking account number. What? It's on every check I write, along with the routing number! I hand that so-called 'secret' information to people all the time! So, the 'secret' information ain't so secret.
So ok, how can I protect myself? Normally, I'd just get a savings account with no online bank or ATM access, but Cardinal offers a checking account with 1% interest rates (higher than any CDs < 3 years long that I've seen), so I wanted that. I asked if I could disable online transactions and they said they could only do an all-or-nothing 'block' on the account, just as if the gov't told them to completely halt all activity on it. I wouldn't be able to use my ATM card, checks, or even go in person to get cash.

Since I intend to park a chunk of savings into this account and not touch it for months/years, I asked if they would put a hold on the account, but they said they needed a reason to do it. I said, 'How about because I asked you to?' (that's actually pretty close to what I said).

Long story short, the manager said it wasn't possible, and just to rely on the technical and legal safeguards like everyone else. I said ok. In addition though, I'm taking extra precautions:
  • I'm not activating my ATM card.
  • I'm not writing any checks.
  • I'm not setting up my online bank account here.
Hopefully this will at least make adjudication a little easier if anything ever happens...

Wednesday, October 23, 2013

Parallels between antibiotics and peak oil

I just read a really interesting interview on the state of our antibiotics:

We've reached "the end of antibiotics, period"

In short, there've been rapid developments ("evolution") in antibiotic-resistent bacteria such as MRSA and another called Klebsiella pneumoniae. Some are more-or-less treatable with highly toxic, decades old antibiotics, but those too are losing their efficacy. With no treatment options available for some of these, we're also at a point where there are no antibiotics in the research pipeline to give doctors and patients hope that someday there will be treatment.

This will have a dramatic effect on the quality of health care and range of treatment options available in this country. Read the whole article for details.

The whole article is interesting and disappointing, but a few points jumped out.

Parallels between Peak Oil and Antibiotics

I will quote the article on the topic of antiobiotic research and then I'll quote Gail Tverberg's primer on peak oil. Spot the pattern:

Antibiotic research:
We were quickly developing new antibiotics. When bacteria developed resistance, we always had a new antibiotic waiting in the wings, and we had new therapy that we had to offer.

It all changed several years ago. What we found is that the pace of development of new antibiotics really began to slow down about a decade ago, and now we began encountering these highly resistant infections, and we didn’t have new antibiotics to use. We had the ones that we had, but we didn’t have anything new.
…There’s probably a variety of factors that have contributed to the fact that we don’t have new antibiotics. One might be that we developed a lot of the antibiotics that were easy, if you will, to develop. …

There are some people who say we sort of picked all the low-hanging fruit, and then it got really hard to develop new antibiotics.
[emphasis added]

Peak oil / discussion of oil extraction (source)

We live in a world that is finite. While there are huge amounts of oil, gas, coal, and minerals (such as uranium, gold, silver, copper, and lithium), we tend to extract the easiest to obtain, highest quality resources first. Eventually, we find it is more and more expensive to extract additional quantities of these items. Aquifers that are slow to replenish become more and more depleted. Top soil tends to erode faster than it is replaced. Pollution tends to be a problem too, with the most obvious example being carbon dioxide added to air and water.

Economists have set up their economic models as if we would never reach limits. In fact, we seem to be reaching limits now, especially in the area of oil supply....
[emphasis added]

Fascinating parallel! We developed the easiest-to-develop antiobiotics first, just like we mined the easiest-to-mine minerals, extracted the easiest-to-extract oil, and invented the easiest-to-invent inventions.

Rather than use all this wealth - energy, minerals, safety from disease, comfort, reliability, etc - to develop a happy, long-lasting society, we've continued to grow exponentially, using up our resources as fast as possible. And now we're out of the easy resources, and having great trouble meeting our needs with the remaining ones.

Another Parallel: Protecting the Commons

The other parallel between oil and antibiotics is that both represent a commons: resources which could benefit everybody for an unbelievably long time if managed responsibly and if society were restrained from abusing them. Just like we've insisted on increasing our oil usage exponentially until there's nothing but highly dangerous and expensive energy sources remaining, we've abused antibiotics by over-sanitizing with antibiotic soaps, giving antibiotics to farm animals unnecessarily, and over-prescribing antibiotics.

In order for our current lifestyle and society to persist long term, we would have had to act much more responsibly in the past. But with peak oil and increasing antibiotic resistance here today, we have 3 choices:
  1. continue our pattern of learned impotence, hoping 'researchers and the free market and government' will save us with new technology
  2. contribute somehow to the development of new antibiotics and more responsible use of them 
  3. adjust our expectations and lifestyle so we're not dependent on things which are going away
Since (1) seems unlikely to succeed and I'm unable to contribute on (2), I'm left to figure out (3). I believe there are many exciting possibilities here, and I'll update with more research as I find it. The key will be to recognize the scale of the problem and respond in a reasonable way to address it.

Tuesday, October 15, 2013

Given the systemic financial fraud, how do you choose a bank?

Choosing a new bank
My fiance and I decided it was time to leave Bank of America behind. We talked a lot about systemic financial fraud which Bill Black, Yves Smith, Matt Taibbi, and others describe so well, and we asked ourselves a few questions:
  1. Diversifying: How do you diversify your savings? Should you keep some money in a Too-big-to-fail bank, even if it's known to be fraudulent and is at high risk of collapse? Should we diversify geographically, by bank size, or something else?
  2. How do you know if executives are honest? How do we know executives aren't engaging in control fraud? What research could we do, what questions could we ask either online or of the bank employees themselves?
  3. Should we even keep our money in banks? Is it better in physical cash? Credit unions? US Treasuries? Gold? Other currencies? Skills? A mix?
Point (3) I'll leave for another post. This story is about finding a non-fraudulent bank.

The risk of financial loss due to bank failure
Although the FDIC insures accounts, we learned in 2012 that even this insurance may fail (discussed here) during the next financial crisis.  And when a financial crisis comes, it can hit the victims instantly with little or no warning. Since the financial fraud that lead to the 2008 collapse was never rectified - too few fraudulent companies went bankrupt, no executive perpetrators were thrown in jail, etc - I expect another crash at least as bad as 2008 to come, and we don't want to be in a bank which will go belly-up when that happens.

We ended up deciding to go with smaller, local banks with the exception of USAA (discussed below). We made up barely plausible scenarios where it would be better to be in a TBTF (Too Big To Fail) bank, but in the end, we decided it's foolish to give your money to known frauds. We also don't want to contribute to such institutions.

So what questions do you ask?
My fiance and I kept trying to think of how to discover whether executives of a given bank were involved in control fraud or not. 

First we had a little fun. Our initial set of questions for each bank looked like this:
  • Are you Bank of America?
  • Are you LIKE Bank of America?
  • Is your bank name or acronym SNAKE related?
    • for example, Bank of America = BoA = BOA(constrictor)
    • We don't want any SNAKE banks (SNAKEs are Slimy Noxious Ass-wipey Kleptomaniacal Enterprises)
    • And any COBRA bank would be crossed off our list! (COBRA = Catastrophically Obese Bank of Rocky Assets)
After drawing up a list of banks to investigate, we cross-checked our list with Wikipedia’s list of snake breeds. There were no problems that we could tell (whew!).

We then proceeded to come up with more questions:
  • Are you like BoA?
  • how big are you?
    • number of assets you manage
  • regional? national? local?
    • this info is on the banks’ websites
  • how nice is your online banking and other customer service?
    • hard to find out until we sign up…
  • Is your website secure?
  • Do you have a branch in Arlington?
  • Have any executives been implicated in past criminal behavior?
  • Does the bank engage in any behavior very similar to what fraudulent banks did, such as giving out NINJA loans or selling off mortgages to other institutions as soon as they were created?
Answering questions, phase 1: Online research
This was super interesting: obviously, no bank will say "Yes, our executives are looting this institution, and you're likely to be victimized very traumatically over the next 5-10 years". So we had to do our own research and come to our own conclusions.

Bank comparison websites
Katie found some websites which claim to compare banks to make choosing one easier. The one that looked most promising was Deposit Accounts

It combines a lot of different data, including savings account rates, reviews, and a grade on institutional health. So far so good! 

But things started to look sketchy quickly. "Institutional Health" is a score based on 4 sub-scores: Texas Ratio, Texas Ratio Trend, Deposit Growth, and Capitalization. Strike 1: this doesn't seem like a very complete set of standards for judging a bank.

Katie noticed that USAA's sub-score grades were A+, C+, A+, C+ - and yet its overall health was an A+! So clearly something was screwy. Strike 2: their grading system fails at basic math.

We tried to think of a way to gauge how good the site is at scoring banks: how accurate are the grades? We went over to Bank of America's page and discovered their overall "Institutional Health" score to be.... A+! Clearly this site totally fails. Strike 3: The site fails to account for known control fraud problems which are by definition institutional in scale.

Lastly, I always ask "how biased are these sites"? While Bank Deposits claims, "advertising relationships never affect which rates we include in our tables or the order in which we show them", we did notice this line in its about page: "We receive no compensation for over 99% of the banks and credit unions we list". Advertising relationships may not affect those particular items, but there are many ways for a bank comparison site to favor advertised banks, including omission of fraud or other problems in their rankings. Also, they claim to receive compensation from some of the institutions they list, so that mode of influence always lurks. Strike 4: The site isn't financially independent from institutions it judges, and so can't be considered unbiased.

All in all, we didn't learn anything about banks, but it was a good lesson in how hard it can be to research things online.

Other online research
This too was difficult. Searching for criminal or suspicious behavior for the executives of our banks turned up nothing. Only one bank turned up articles or forum discussions of fraudulent behavior committed by the bank; other reviews were mostly about customer service. 

One question I had is "Does your bank package and sell off mortgages and other loans as they're made, or do you keep them?" If the bank sells the loans, we can't know if it's fraudulent or not. However, if it keeps the loans, especially 15-30 year loans, that indicates that the bank takes its loan underwriting super seriously: if it gives out crappy loans to just anybody, it will fail quickly.

However, I couldn't figure out how to learn this online. Determined to have some more fun, we decided to walk into banks and ask the managers some of our questions point-blank.

That lead to...

Answering questions, phase 2: In-bank research
I like asking uncomfortable questions. To keep things simple, we decided to stick to fraud-related questions, and came up with these to ask each bank we visited:
  1. Please show us your fee schedule and explain how it works.
  2. Does your bank package up home loans and sell them off, or does it keep them on its books?
  3. What protections does your bank have against fraud committed by its executives, such as control fraud? 
    1. Alternatively, how can you demonstrate to me that this bank is safer from control fraud than other banks?
About these questions:
  1. Many banks like Bank of America are known for having very abusive fee extraction tricks.
  2. No banks seem to be doing NINJA or other similar loans, so I settled on this as a good proxy for whether the bank takes underwriting seriously. Selling off loans doesn't necessarily mean they're fraudulent, but keeping their loans is a good sign they're a careful bank.
  3. This was the most fun. The alternative version is important: I don't know what protections a bank can even have from a bad CEO and CFO. Essentially, I'm inviting the manager of the branch to show me ways a bank can prevent bad behavior by executives based on his/her own bank's situation! I liked this approach. A narrow-minded manager wouldn't even be able to understand the question, while a thoughtful, aware one would jump all over it.

I wish in retrospect I'd asked about website security too, but these questions lead to enough awkward conversations that it may be just as well that I didn't. My bad experiences with bank website security will make for a good post sometime.

Anyway, with these questions in hand, it was time to approach actual bank managers! We narrowed our list of banks to 4, 3 of which had local branches and 1 (USAA) we ended up calling on the phone.

Katie and I did each of these together. I generally took the lead in starting conversations, but when Katie saw the opportunity to ask even tougher questions than I, she jumped right in. It was fun and educational!

First stop: First Virginia Community Bank
FVCB was recommended to me by my parents several years ago and I already have an account there. I decided to pretend I didn't have an account just by not bringing it up in conversation. After entering, we were talking to the branch manager within 15 seconds. First two questions were no problem:
  1. They have 'standard fees' only and directed us to the website for the schedule.
  2. They don't issue mortgages anymore.
Then it got interesting with question 3. The manager kept thinking we were asking about protections against credit card fraud! "No," I said, "I mean, are there protections against fraud committed by bank executives themselves?" After asking 3-4 different ways, the best I could get was that FVCB was a conservative, small bank with FDIC insurance. It is fee-friendly. Also, he offered to send us the bank's balance sheet so we could review it ourselves.

It was disappointing that the manager basically didn't understand the threat we were trying to understand until we explained it several times. It was even more disappointing that, 3 weeks after visiting, he still hasn't emailed us the balance sheet. All in all, a poor showing for FVCB on this question! It doesn't mean they're fraudulent, just that their manager didn't inspire us that they're any better than any other bank. And he failed to follow through on the only substantive response he gave - to send us a copy of their balance sheet.

Next up: Cardinal Bank
Cardinal is tied for closest to our apartment. It may be the ugliest bank location in Arlington, but we didn't let that scare us away. I'll try to get a picture to add to this post.

We walked in and started talking to a dude who ended up being their assistant manager. He was nice, but seemed new and didn't understand the mortgage and fraud questions. The manager overheard us though and barged in. Lucky thing he did...

Answers to our questions:

1) Fees: Nothing remarkable here. 

2) Mortgages: They both sell and keep loans.  I couldn't figure out the criteria for keeping them. This still seemed like a good sign though. 

3) Executive fraud risk: This was interesting. It turns out the branch manager, Robert, had worked at Wachovia before it was acquired by Wells Fargo in 2008. We had a very engaging conversation which hit a lot of good points:
  • Compare with Wachovia: Robert talked about being a manager at Wachovia and being forced to mislead/lie to customers about the status of the bank during the chaos of 2008. He described not having any insight besides what his boss the regional manager gave him to pass on to customers, and this oftentimes proved to be deliberately misleading. He said Cardinal bank does not behave like this; their culture seems much more honestly pro-customer than Wachovia's did.
  • All about relationships: Rob talked about how importantly they take relationships at the bank, including being on a first-name basis with customers. He compared their focus on relationships with other banks' focus on 'widgets' like free checking or particular website features or fees (Note: Cardinal does offer a free checking option)
  • No TARP money: Cardinal received no gov't bailout funds
  • Strong Bauer rating: I didn't know what Bauer was, but apparently they give Cardinal the highest 5 star rating.
Super interesting, especially hearing about Wachovia. I didn't learn anything about specific institutional safeguards, but it was enough for me to hear from a manager who was aware of the risks that this culture and specific group of leaders made it a good bank.

Third: Main St. Bank
Main St... was lame. We ended up talking to a very soft-spoken, button-downed assistant branch manager lady who was somewhat new.

1) Fees: Nothing interesting here

2) Mortgages: All mortgages are sold off,  though it was unclear if some types of commercial loans were kept at the bank.

3) Executive fraud risk: The assistant branch manager seemed to have an impenetrable shield of ignorance about this issue. For the 14th time, we're not asking about credit card fraud - we're asking about fraud committed by executives at your bank!

We did learn that they're 10  years old, Virginia only, with low risk-tolerance. They also have a relationship manager. Katie and I discussed later whether it's a good sign or not that they have a relationship manager. Shouldn't that be everyone at the branch? Or the branch manager? I don't know.

After leaving, Katie and I had an interesting discussion: should it be discouraging to us that branch managers/assistant managers have basically no understanding of internal risk controls? I don't really know what it takes to be a branch manager, but they are leaders. I much prefer having local managers that are aware of these issues and can address them. Otherwise it'd be like having an nurse with no knowledge of medicine, only the ability to mindlessly carry out doctor's orders. It's good to have people ostensibly 'lower ranked' who are thoughtful enough to make sure all's well.

Last: USAA
I already have an account with USAA. Since they have no branch offices, we had to call. This was hard - we wanted to ask for a manager, but of course we couldn't get directly routed to one. 

We ended up calling and going down the bank services telephone tree branch. The guy was all ready to open an account for us. "Hold on, we have some questions!" I said. 

1) Fees: again, nothing interesting.

2) Mortgages: do you want a mortgage? I can only help with savings and checking accounts. "No," I responded, "I don't want a mortgage. I want to know what USAA does with mortgages." ... he couldn't help on this one, but he was very confused that after bringing this up, I didn't want to be referred over to a mortgage specialist.

3) Executive fraud risk: Wow this guy sucked. Like the others, he assumed we meant credit card risk despite repeated questioning. I asked to talk to his manager, but he said he couldn't put the manager on the line without a specific question. "Fine," I said. "What internal mechanisms does USAA have to ensure executives don't commit control fraud. How can you prove to me that this risk is minimized?"

He replied, "Uhhh... what?" After repeated questioning, he never did understand the question. He offered to shift our call to the credit fraud department and promised the wait would be less than 1 minute. We debated whether to wait at all, but after waiting for 2 minutes we just hung up.

For now, I'm keeping my USAA account. However, this was a really good example of the downsides to online-only banking. The quality of the conversation was poor, and the ability to get to someone who could answer subtle or unusual questions was lacking.

Final decision
In the end we set up an account with Cardinal. I'm happy about this, but of course it leaves us dependent on a systemically fraudulent and highly fragile financial system. I hope to find a better long-term solution.

Monday, October 14, 2013

Countering claims that peak oil is a myth

Update Oct 27, 2013: I added a new subsection called "Update:  Author Ignores Fracking's Externalities, Confuses 'Cost' and 'Price'"

A friend sent me an article that attempted to debunk some peak oil myths and expressed lots of optimism about the present and future of the fossil-fuel based energy.

Here's the article ("Sometimes They Ring a Bell").

The site requires a free account to read the article. It's quite short and worth reading.

I disagree with the beliefs the author expresses. My criticisms fall in two categories:
  • Important points the author does not address
  • Falsehoods / Nonsense
Furthermore, I believe the mindset of the author and hedge fund manager he references reflect a core problem that has caused our society to erode over time.

I’ll address all 3 of these.

Important points the author leaves out

Energy Return on Energy Invested
Nobody disputes that there are huge energy sources on earth available for extraction with current technology. The question is “How much energy does it cost to get them out?” The author goes on and on about how much energy there is and how many new finds there have been, but fails to address the EROEI of these.

How many barrels-of-oil-equivalent does it take to get one hundred barrel-of-oil-equivalent out of the ground? Is the ratio 100:1 (extracted:invested) like it was 100 years ago? Is it 30:1? 5:1?

Here are some graphs on EROEI (EROEI is hard to calculate, so numbers can vary but the trends are the same):
Dark green represents energy inputs included in transporting, refining, and other post-extraction actions required for the energy to actually be usable. Light green portions exclude these extra inputs.

and this:

To quote from the article which hosted the above graphs:
Notice that nothing compares with sweet crude – with its magnificant EROEI of 100to 1. In each case much more effort – and also environmental disturbance – has to take place in order to get less energy than we are used to getting. (In some cases, like the US corn-to-ethanol program, the net energy return is actually negative – more energy is used to make the product than is recovered from the process. Turning coal into liquid fuels is much the same.)
In general, an EROEI has to be at least 3 to 1 in order for the process to be economically viable. You will notice that many of our choices sit barely above that threshold. Note also that in order to sustain the sort of society that we have requires an estimated EROEI of energy supply 12 to 1.

This is crucial. The total quantity of energy isn’t important – it’s the gain compared to how much is invested. Furthermore, any one energy source may yield less than 1:1 and so be ‘worth it’ energy-wise, but would still not support our society. Society would utterly fall apart on 2:1 or 3:1 energy because we must also support the huge infrastructure investments, complex and geographically dispersed governments, massively energy-dependent military, etc. Sufficient EROEI is crucial.

Note in the first graph that current energy finds, e.g. in Texas, are not nearly as good as much earlier ones, regardless of total quantity of energy available.

You might argue “but with better technology, it’ll take less energy to extract the oil/gas/etc!” Better technology can indeed mean it takes less energy to extract energy, but this also obviously has its limits: it will ALWAYS takes more energy to “unleash natural gas trapped in methane ice buried deep in the ocean” than to make a short hole in the ground in Oklahoma and have top-quality crude oil gush to the surface.

This part of the letter, among others, makes this glaring omission:
I've noted in previous letters that there may be as many as four distinct oil- and gas-producing zones layered on top of each other in North Dakota. So the Bakken could be four times as big as we think today.

ALL FOUR OF THOSE PARTS AREN’T EQUAL. The lower zone will be much more expensive, environmentally damaging, and energy-intensive to remove than the highest. And if it takes more energy to get it out than we get in return, even with our best technology, it will never be worth it.

For a good video on EROEI: Peak Prosperity Crash Course

Rapid decline rate of fracking wells

Fracking wells have low EROEI, but that isn’t the only problem with Bakken, Eagleford, and others. The other issue is that the output from them declines super fast.

Here’s an image on the yield over 3 decades of the Samotlor field in Russia, 6th largest in the world: (Image source; data source is TNK-BP, a Russian oil company)

You can see how long it took for yield to begin a permanent decline after drilling started in the 1960s: ~12-15 years, and it didn’t deteriorate so fast! (and the USSR collapsed as this and other large fields bottomed out).

Now look at Bakken and other shale wells: (Image source)

To quote from the same article that image came from:
Newly fracked wells deplete far more rapidly than conventional wells, at times losing 70% of initial production in just the first year. That means the new shale oil discoveries trumpeted by those predicting energy independence will struggle just to keep pace with dropping production in current ones.

America burns roughly 19 million barrels of crude per day. Hydraulic fracturing produces roughly 1 million barrels. That means 18 million barrels per day (mbpd) still need to come from somewhere else.

You can see that these shale oil/gas ‘plays’ are not nearly as good resources as the massive oil finds of early/mid 1900s. Each drill starts strong and deteriorates quickly, meaning it doesn’t replace nearly as much oil as a classic, massive oil field from 50 years ago would have.

This is why you hear phrases like ‘working hard to stay in place” or “The Red Queen Syndrome”, a reference to the Alice in Wonderland sequel “Through the Looking Glass”. We’re investing huge amounts of energy and money into these resources (and destroying lots of aquifers, farms, etc) and the yield really ain’t that great.

You can see that clearly here:
(Image source; data source: Bureau of Economic Geology/Univ. of Austin Texas)

With early wells dying out so quickly, you don’t get exponential growth for long – yield from new wells can’t make up for dramatic depletion in old ones.

Article doesn’t address “Demand Destruction”

The article notes that ‘people are driving less’ as if this were a good thing. It means that people are too poor to afford the fuel. If fracking/shale/tar sands can’t lower the price because they’re not economically feasible with prices <$80/barrel or <$100/barrel, our economy won’t recover – it’ll continue to sink into recession. We’ll continue to have more and more fiscal problems (like we’re seeing our gov’t deal with now [Oct 2013]…)

And when fracking/tar sands run out? And we’re stuck with deep ocean only? I mean… when does this stop?

Update:  Author Ignores Fracking's Externalities, Confuses "Cost" and "Price"

" is actually a major societal good. Abundance at cheaper prices? Increased lifespans? What's not to like?"
"Price" is the amount you pay for something. "Cost" is the total expenses incurred in the creation of that thing.

How are these different?

In a market, the producer incurs certain costs for making a product (like a basketball, meal, or gasoline). When selling that product to a consumer, he charges the consumer for all his costs as well as some extra that he keeps as profit.

To make up an example, imagine it costs an oil company $3 / gallon to extract, refine, and transport gasoline to a station where they sell it to a driver for $3.50, making a profit of $0.50. Where's the problem? Well, what if the producer doesn't incur all of the costs of producing that gallon of gas? What if some costs are borne by others? That cost doesn't get included in the cost of the final product, and the total cost of making that gallon of gas is hidden from the driver.

Let's look at some costs of fracking that aren't included in the price (the article referenced more than just fracking, but the same problems apply to other energy sources as well):
  • Destruction of drinking water supplies (aquifers, rivers): Fracking involves injecting lots of obnoxious chemicals into the ground, and since the (Federal) Environmental Protection Agency and most state agencies is not acting effectively to curb this, fracking companies don't pay the cost of cleanup - that's paid by the communities, if anybody (often, the water is never cleaned up, and everyone just suffers illness/death/loss of property value). These chemicals include arsenic, benzene, and other toxins.
  • Dealing with the waste products: In the linked example, frackers just dumped their wastes into a river. This is separate from the first example, because non-waste products also can destroy water supplies.
  • Fracking can cause earthquakes: ... and it's the building owners, bystanders, insurance companies, and other 3rd parties who pay the costs.
  • All this can lead to dramatically reduced property values: including going down to $0 in some cases when absolutely no buyers show interest in your property. Drilling leases can also void title insurance, and damage or lost home value may not be covered by home insurance.
  • Increased demand for public services: Fracking requires public roads, 911 services, access to public lands, and other things paid for by tax money. When frackers pay less in local taxes than the government pays in public services, taxpayers effectively give frackers a free ride.
Anyone interested in more detail can look at these reports here or here.

These are what economists call 'externalities', and they're known problems with a market-type economy like America's. Externalities occur where neither the producer nor the consumer incur all the costs of their activity. However, these costs are real, and really substantial, and they should definitely factor into the costs of fracking for anyone considering whether fracking is cheap. If the original article's author wants to claim these alternative energy sources are cheap, he should address this class of issue.

Falsehoods / Nonsense
Comparing Hubbert’s Peak and Fracking
This is very poorly worded and very misleading:

In the US, oil extraction followed a Hubbert-like curve, with the peak in 1971 – until 2008, that is, when production began to increase sharply again.

Hubbert’s down-curve isn’t necessarily that smooth – it’s quite bumpy. For example (and scale):
(Image source)

You can tell since 1971, there’ve been periods of increasing oil output, even though we’re on the down-side of Hubbert’s slope. There’ve also been flat periods. The last 5 years doesn’t break the trend yet in my book.
Furthermore, Hubbert’s peak doesn’t really apply as well to shale plays as classic oil fields, so comparing them is disingenous. Classic oil fields had the nice inverted-U pattern (inverted parabolic curve) in yield, where they produced an increasing amount over time until their yield began to fall.

You can see above that fracking wells are different – they max out very early and then deplete rapidly. They’re a different beast entirely.

It's not new technology: fracking has actually been around for decades
From the article:

We have known the oil and gas was there for decades; we just couldn't get it up at a reasonable price. Now human ingenuity and new technology have made increased production possible.

Fracking technology has been around since the 1950s! (brief intro to fracking's history)

The 1960s had the first earthquakes attributed to fracking (yes, that’s been known for a long time too).

The author has it backwards: The reason we can get the energy out now is because prices have risen high enough so that we CAN get it out at a ‘reasonable price’ – the goal posts of what price was reasonable changed! If you doubt that, compare oil prices and the ‘fracking revolution’:

(Image source)

And fracking:
(Image source; data source: EIA)

Comparing the two, look at what happens in year-2000 in oil prices: they hit $30+/barrel and after a recession-induced interlude, climb inexorably higher. Fracking is expensive and dirty; it’s possible only because prices are so high.

This also explains why prices increased so fast after the crash in 2008: these ‘plays’ became unprofitable; unprofitable energy sources ceased being drilled, rapidly bringing supply in line with (diminished) demand. As governments re-inflated their economies, output increased again – but at the sustained higher prices they require.

Of course technological advances have occurred – I’m not saying they haven’t. I’m saying the major factor was the price change; increased price of energy drove interest in fracking. This is important: are humans and their technological prowess in control of the situation, or are they just reacting to the outcome of past decisions? What does this imply about our ability to shape the future?

Major problem: if we become hyper-efficient, who will buy our outputs?
Quoting the article:
Further, production of all types will become more efficient, requiring less labor to produce more goods and services. Many things will cost less but do more. To an economist this might look like a drop in the bucket of GDP, when it is actually a major societal good. Abundance at cheaper prices? Increased lifespans? What's not to like?

This has been a common theme throughout history. Increased efficiency->less need for labor -> recession/labor unrest/etc. If jobs aren’t needed because processes are so efficient, then too few people generate income, and too few people are around to buy the outputs of the efficient processes. This has been known for a long time, and it’s not a huge deal if out-of-work people are helped into new jobs, given aid by the gov’t, etc. When they’re left out to dry, or when there are no jobs they can easily jump into, you have major problems.

Interesting (short) readings on this:
  • Bertrand Russell: In Praise of Idleness (good description of how society ought to respond to increased wealth; compare with how it worked out and why hyper-efficiency is a problem)

In short: increases in efficiency have happened a lot, but we haven’t been good at distributing the resulting new wealth fairly. The bottom 99% are forced to keep working hard while the top portion become quite wealthy (especially early America through the 1930s and then 1980s-now).  It’s understandable that the author didn’t consider this: he would benefit mightily I’m sure.

I'm not arguing against efficiency improvements, just that the benefits aren't distributed to all the way the author implies ("major societal good").

Lastly, the attitude problem

In a healthy society, each citizen would care about the long-term well being of the society and government. The government wouldn’t be a parent-like, inscrutable figure that behaved foolishly occasionally, but would surely recover just fine and keep things stable without any work required on the child’s part – rather, citizens would recognize the challenges gov’t faced and work to understand and overcome them.

Compare that attitude with these two quotes from the article:

I was riding around in a golf cart this week at the Barefoot Ranch with a young hedge fund manager. He runs a value fund and could wax enthusiastic about his investment ideas. But then he would ask me about my macroeconomic views, and I could see the frustration cloud his face. "I know this is bad, but I just wish we could get it all over with so I could just do my work without having to worry about what the government is going to do to me." He just wants to find great companies with solid business models that are priced attractively. And not have to worry whether the governments of the world are going to create another big crisis. He was wistful about the "good old days" where we had a normal business cycle with a recession every now and then.

… and this …

Like my young hedge fund manager friend, I would so rather focus on the exciting transformations that are happening in our world, with all their positive implications. It is good to remind ourselves that there is life outside of government-created problems.

You can see what I mean! “Government-created problems” (!). These people don’t want to understand what the government faces – they just want it to ‘do its job’ and get out of the way. They deserve the government and the situation they get. If you want to see the actual problems, watch this video series. It's a good intro.

So that’s my thinking on the article. What do you think about my counter-points?