ABSTRACT
This chapter explores the inherent risk of financing oil fracking activities in a free market environment. The free market exhibits great volatility in price depending on how supply lines up with demand. The essential problem is that price is an excellent signal on when to expand capacity, but gives no inkling of how much to expand. The inevitable result is that too much capacity is added to the existing stock causing ultimately distress in an industry. The industry under scrutiny is oil fracking. The additional risk faced by oil frackers is that their wells don’t last 20–30 or more years as do conventional oil wells, but 3–4 years. Whereas a conventional oil well has the opportunity to profit from episodes of high oil prices, a fracked well, once the market turns, does not.
