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You have this perfectly good structure, and then you kick out a few of the supporting pillars, and the next thing you know the SEC is on the phone.
With oil prices at about half what they were six months ago, the most vulnerable players in the oil business, the frackers who brought about the new American Oil Revolution, are imploding. If you think that’s just their end of the boat sinking, no worries here, think again. They are, or were, the last best hope of continuing the oil bonanza, and they’re done. As soon as that fact is so obvious that even Faux News has to admit it (this may take a few months), it will dawn on us all that the very same thing is happening to the deep water drillers, the Arctic drillers and the tar sands wringers.
It would have happened at any oil price. The slump has merely brought it on sooner, and will force us to face — this year! — the reality that we will never again have quite enough cheap oil. That’s the meaning of the Crash of 2015. Now, about the schedule: Here’s what’s happened, what’s happening and what’s about to happen.
Old News (Since January 1)
WBH Energy files for bankruptcy protection. American Eagle Energy suspends all drilling operations. US Steel to close two plants making steel pipe for oil drillers, laying off 750. Dallas Federal Reserve Bank sees job losses of 250,000 in eight states.
New News (Last couple of days)
Resolute Energy, operating in Texas, Utah and Wyoming, has just borrowed $150 million from the “alternative” investment group Highbridge Capital at an effective interest rate (after fees, guarantees and other legerdemain) of as much as 25%. That is not a typo — twenty five per cent interest. It would be bad enough if Resolute had to borrow to keep on drilling, but this loan was taken for the sole purpose of avoiding default on previous debt (which, if negotiated more than six months ago in the prevailing market, probably cost around six per cent).
Sanchez Energy, after having announced a reduction in its capital spending plans in November, announced a second cut that brings its capital budget down to half what it was expected to be. This was one of several such announcements from around the world as the oil companies try to preserve cash by not spending as much on developing new wells.
Laricina Energy, operating in the Canadian tar sands with $1.3 billion in equity financing (from stock sales) and $150 million in four-year notes, is in default on the notes and needs another $350 million to do what it’s doing. Next step: probably liquidation.
News About to Happen
Any notion that this is all a temporary supply/demand correction in the oil business, and only the oil business, of a kind that we’ve seen many times before and that will right itself shortly, can most kindly be described as delusional. Here’s why.
These operators cannot simply shut down their wells and sit on their hands waiting for prices to go back up, because they are up to their eyeballs in debt, much of which has to be rolled over every few months, or they go out of existence. That is why they will pump oil until they are carried off in nets, because that’s the only way they can get any money. (That also explains why Saudi Arabia will not cut production to boost prices; that would cost the Saudis more than selling at low prices.)
The total amount of debt being carried by the fracking industry right now is double the amount of debt that was involved in subprime mortgages in 2008. The discovery that the 2008 debt was based on fictional assets and nonexistent ability to pay brought the economy of the world to its knees. If you believe that the current bubble will not do the same thing when the cost of credit triples (see Resolute Energy, above), the underlying assets vaporize (for example, the future value of a deposit of oil that cannot be recovered at a profit), taking with them into the ether the imaginary money that has been propping the whole industry up — if you believe the results will not be similar, I have some junk bonds to sell you.
Much of the money used to buy the junk bonds and provide the leveraged loans (meaning loans that no one in their right mind would ever grant given the security offered and the demonstrated ability to repay) has itself been borrowed. When the bottom floor of this house of cards collapses, it is not going to leave untouched the top floors. Imaginary money can buy stuff only when it is in motion. When the music stops, you discover that there aren’t any chairs to find safety in. None.
Hi Tom;
No argument from me that the days of cheap oil are gone and are never to return. No argument as well, that many producers and those employed by the producers will lose their jobs with all of the collateral damage associated in terms of the local communities and various investors who took the bait of “Saudi America.”
Let me however, for the sake of playing devil’s advocate, suggest that the government and the bankers, in collusion with the industrialists, will not simply roll over without pulling out every imaginable ruthless stop. What prevents the criminal cabal from simply printing money (I know it’s not capital) and shoveling it in back door ways to the various investment banks and their preferred clients now sinking in debt. They could also use this opportunity for the big boys to pick up various small time players for pennies on the dollar. Who cares Tom, who can do anything about it?
I know there comes a point when the entire system of fraud and fiction can no longer prevent the inevitable, but it’s hard for me to believe that this current price crash will immediately, as in this year, bring the whole house of cards down. For many of us who have been watching this sort of madness in various other aspects of the economy, it’s been simply unbelievable to imagine we’ve even gotten this far. Who could have believed how criminal the central bankers could be and how much manipulation could be brought to bear on the so-called free markets? Let’s remind ourselves of LIBOR rigging, gold and silver price rigging, banks laundering drug cartel monies, central bank gold thefts and leasing, FOREX rigging, front running trades, robo-signing, bail in legislation and all without a peep from the public at large.
Anyways, I guess I’m one of those rational, logical thinkers of old who can’t help but think that there’s even more irrationality and illogicality to come. Maybe, just maybe (tongue in cheek) the masters of the universe have figured out a way to manage and levitate economies endlessly through money printing, wide spread virtual food stamps, computer algos, unprecedented market manipulation,slopping out worthless education,turning journalism into mindless entertainment with the underlying message being that under each rock lies a terrorist in waiting. In my humble opinion, we may be fully locked down in a modern day version of a police state, long before the economic edifice is allowed to collapse.
I think you’ve nailed it here. Like you, I don’t think what’s coming this year is the ultimate crash of the age, just another garden-variety, seven-year bubble exploding, another ratchet downward to a poorer New Normal. (I say that, however, with a wary eye on the health of King Abdullah of Saudi Arabia, whose death could be the hand grenade in the fireworks factory.) And, like you, I find it hard to believe how far down this road we’ve come.
But there is much more than an economic crash in the offing. The environment is collapsing and it’s going to cause irreparable harm. There will be extreme weather events creating homeless refugees which will lead to social unrest and violence, and there will be food shortages with the same result, all happening at once. Some governments will become ever more fascist but eventually they too will become overwhelmed by chaos, as they will lose the ability to feed their soldiers. I don’t know how long this will all play out but it I’m pretty sure it is inevitable.