Frackers Restrict the Flow and Raise the Price After a decade of flooding the market with cheap fossil fuels, investors have cut back on production.
BY LEE HARRIS
Following two decades of steeply rising corporate returns, Wall Street profits soared to extraordinary highs last year, despite inflation and the increased costs of securing and transporting goods. The stock market is thundering along, with S&P 500 earnings rising 45 percent in 2021, according to FactSet. As the economy has staggered back from the pandemic, investors have ridden rising prices to higher returns. (Higher public investment during the past two years also explains some of the extraordinary profits.) “What we really want to find are companies with pricing power,” Giorgio Caputo, one portfolio manager, told Bloomberg. “In an inflationary environment, that’s the gift that keeps on giving.” Stock buybacks helped retailers remit profits to shareholders. Best Buy CFO Matt Bilunas told investors on a November earnings call that the consumer electronics chain would spend more than $2.5 billion on buybacks in 2021 while hiking prices on appliances. “In most cases, we’ve flowed those prices on to the consumer,” he explained. Brokers who string together strained supply chains have also seen swollen profits. 52 PROSPECT.ORG FEB 2022
The meat industry, which has shown some of the most dramatic inflation in the economy, is patrolled by a concentrated group of meat processing middlemen who buy low from ranchers and sell high to consumers at the grocery store. Many bottlenecks in this special issue stem from domestic underinvestment, offshoring, or oligopolies’ multiyear strategy to roll up an industry. By contrast, the saga of the shale boom—underwritten by banker ebullience, cheap credit, and public support—is a story of homegrown misinvestment. After years of struggling to cartelize, collapsing demand in 2020 finally shocked the industry into a wave of mergers. By the following summer, the investors who bailed out distressed frackers saw their demands for lower production and higher profits (and prices) finally realized. Commodity traders, who arbitraged across pandemic-induced dislocations and benefited from the volatility of fossil fuel commodities, are poised to further exploit bottlenecks in fossil fuels. Vitol, the world’s biggest oil trader, distributed $2.9 billion to partners in just the first half of last year, averaging a $7 mil-
lion bonus per partner. That’s on top of $2 billion in payouts in 2020—the same year oil prices went negative. The pandemic-time profits weren’t a one-off. The private trading houses are gearing up for years of sustained higher profits, anticipating that the same chronic underinvestment facilitated by the fracking pullback will now deliver a “commodities supercycle.” As lockdowns lifted and life resumed last year, oil supply lagged surging demand. OPEC Plus, the expanded consortium of oil-exporting nations, ramped up quotas to meet a growing appetite, but inventories were low and production had idled. Prices nearly doubled over the year. Entering 2022, key OPEC producers like Nigeria and Russia are still underperforming relative to their allotments, though rising production from the United States, Canada, and Brazil—all of which expect to pump at their highestever levels this year—could lift supply. The rise in energy prices has an outsize impact on inflation. Rising prices at the pump are a bigger attention-grabber than
