The Crash of 2015, Day 49: Hell to Pay

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What do you mean, Uncle Clarence didn’t believe they were going to do it, and stayed in his room?

I know, it’s old news. If I stop by on Monday and tell Oscar Oblivious that his house appears to be on fire, he is of course concerned. But when I stop by on Wednesday to say it’s still burning, has consumed most of the structure, and collapse appears to be imminent, he demands to know why I am bothering him with old news. The Crash of 2015, the burn and crash of the economies of much of the world into — at least — serious recession for a very long time, is well under way. It is of course no news at all for the mainstream media, transfixed as they are with simpler stories of happier, imaginary times. But for you who come here from time to time, it’s old news. How is it then that you are still in the burning house?

Let’s review what has changed since we last checked on the fire; the rafters and columns are weakened, the smoke and flames are visible for miles, and collapse — not of the world as we know it, perhaps, but of this structure, certainly — appears to be unavoidable.  Fires are started by heat, and the heat in this case was the utter unsustainability of the fracking oil boom: the wells are so expensive, and so expensive to operate, and play out so fast, that there never was a way to make money with them in the long run. The recent plunge in market prices was an accelerant for the fire, not its cause.

Because of its root insolvency, the fracking revolution had to borrow a lot of money to get going, and to keep going as long as it did. It issued stock and junk bonds, and took out “leveraged” loans (i.e. loans for the technically insolvent), while its enablers put out collateralized debt obligations, started leveraged-loan funds, sold hedges and invented derivatives. It has so far accumulated approximately twice the amount of subprime debt the real estate market ran up before the crash of 2008.

It is debt that started this fire, and keeps it going, and will provide it with tinder first in the fracking industry, then in the legacy oil industry, and finally in the debt-swollen financial markets of the entire planet. Because it has always been the case that when you borrow money with which to gamble, and you lose your bet, sooner or later someone comes around and breaks your legs with a bat.

What’s that you say? Not your problem because you don’t gamble? Really. No 401k, no mutual fund investments, no pension to rely on, no funds on deposit in an institution that can use them to gamble? Lucky you.

So here’s where the fire is now, in the fracking patch:

The rig count is still down, and falling faster: The number of drilling rigs going for oil in the United States peaked in October of last year at 1609. Since then, 553 have been mothballed. That is twice as many as were pulled from service after the world financial meltdown of 2008, and is a faster, further decline than anything ever seen in the oil patch. The rate of retirement of active (oil and gas) rigs has approached 100 per week. In addition to the wells not drilled, there are the drilled wells not fracked. At the end of the year about 775 wells in North Dakota’s Bakken Shale had been drilled but were not being fracked.  And it’s not just rigs that are being laid off, but people as well. Unemployment is rising fast in the shale-drilling states of North Dakota, Texas and Pennsylvania.

Production is still rising, but it’s zombie production: Yes, fracked-oil production continues to go up (crude inventories are at an historic high and climbing) because no one — not Saudi Arabia, the other OPEC countries, or anybody in the fracking patch — can afford to stop pumping and selling whatever they can pump and sell. If you find yourself spending more on the necessities of life than you earn, you don’t quit working until things get better; you earn what you can, cut back where you can (good luck reducing your mortgage or car payment), sell what you can, pay what you have to, max out the credit cards, and wait for the repo man. That’s exactly what the frackers are doing right now. Existing wells and remaining cash will keep them going until mid-year or so, and then there will be hell to pay. And hell gets paid first.

The lender of last resort just left the resort: Junk bonds have been the primary source of funds for the fracking boom so far. No more. Oil companies are not even trying to float new issues, and companies in unrelated sectors are struggling to find suckers — I mean lenders — who don’t care about risk as long as you promise them, cross your heart, a double-digit return. Used to work, not any more. Likewise, leverage loans, the last refuge of the insolvent, are drying up. April is the month that lenders review the assets backing up lines of credit; and an oil well hemorrhaging money faster than it’s discharging oil is in-valuable, or worthless. Again, there will be hell to pay, and hell gets paid first.