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When an oil well like Deepwater Horizon explodes, the images are unforgettable. When the entire industry starts to collapse, it’s hard to see and to remember.
In a recent essay I proposed the existence of a new human subspecies – homo sapiens ephemera — that is smart (thus sapiens) but severely afflicted by attention deficit disorder and long-term memory loss. Thus ephemera may understand, for example, the connection between a burning fuse at his feet and an imminent explosion, but almost immediately forgets it, goes on to something else, and is surprised by the blast. Nowhere is this behavior more evident than in the U.S. oil patch, whose collapse, predicted here and elsewhere for years, is now described by none other than Moody’s Investors Service, quoted in Bloomberg News as “catastrophic” and perhaps “the worst bust of any industry this century.”
Does anybody remember the Savings and Loan debacle? The Enron (“smartest guys in the room”) implosion? The Dot-Com collapse? And the Sub-Prime Mortgages that Ate the World? After each of these episodes, Ephemera slapped his slanted forehead and said, “Boy, that was dumb. But nobody could have seen it coming.” Put on your protective headgear, because it’s happening again.
When they came to you, Ephemera, and asked you to invest gazillions of dollars up front in the New American Oil Revolution, they talked about energy independence! and America, Number One! and everything back the way it was in 1950! But the burning fuse at your feet was about fracking wells that cost ten times that of a conventional oil well and play out nearly ten times faster, about exploding trains and polluted water and earthquakes, in a market that would soon devalue the product by 50%.
Of course you gave them the money. You bought their stock, you bought their bonds, you bought their junk bonds. You lent them money, and when they couldn’t pay it back you lent them more to roll over the debt, which almost immediately became enormous because every one of those expensive wells had to be replaced every three years. You let them convert your secured debt to unsecured debt, or to watered down stock, or to fairy dust. Now, according to Moody’s, there has finally been an explosion. Who could have seen that coming?
Moody’s reports that twice as many oil and gas companies have gone bankrupt so far this year than did so in all of last year. Investors affected by these failures have seen an average 21 percent return. No, that’s not return on their investment, it’s return of their investment; they lost 80 per cent of their money. And those were secured lenders; junk-bond holders got back 6 cents for every dollar they invested.
Yet the fuse burns on. In the Bakken fracking field in North Dakota, for example, where no oil company has made any money, even when oil was priced at over $100 a barrel, where the total accumulated debt of the players is north of $30 billion, where production has been declining for over a year with oil prices below $50 and well below the cost of production — the zombie companies, almost all of them technically insolvent, continue to borrow operating money through such creative pitches as “distressed exchanges.”
The fuse burns faster, smokes even more, and doesn’t have much farther to go. What’s that? Hillary sneezed? Tell me more…..
Also see: What’s Next for Oil: Whiplash
Yep, here we go again. It reminds me of the time, oh way back in the 1980’s, when someone in a position to know, remarked that the world has 10 years to figure out the carbon problem. Nobody did anything differently – and still don’t, despite huge sea life die-offs, climate change on a scale that is impossible not to notice, and all that goes with it (like crop failures and “the hottest year on record” for the past three years).
Though we humans have “intelligence” – which Ernst Mayr once described as a “lethal mutation” – we’ll just keep doing what we’re doing until we can’t.
Imagine if we had took all that money plus all the money spent fighting in the middle East and dumped it in a hole, just how much better off we would be. Or we could waste it fighting poverty.
“Of course you gave them the money. You bought their stock, you bought their bonds, you bought their junk bonds.”-TL
Who is the “you” here? I didn’t lend any money to these jackasses, nor did I buy their stock. Why are you blaming me for this?
RE
Previous graf: “When they came to you, ephemera…”
Current graf: “Of course you gave them the money…”
So I’m not blaming you unless you are ephemera. If you were, your short-term memory would be fine and your long-term memory would be wrecked. Looks like it’s the other way around.
Tom, thank you so much for continuing to share these updates with us, as frightening as they are, and even if they do keep us awake nights. we need to know, even though there seems to be nothing we can do about it.
Recently they stopped much of the massive waste of burning off natural gas and are shipping it as liquefied (LNG) – immediately after my emails to the cable financial news media outlets. Also windmills and solar panels are reducing the need for some oil products. Some oil use including jet aircraft, freight trains, big long distance trucks and ships will always exist.
A little while back I was talking to my son on the telephone and I asked him if he knew anyone who could do the math to figure out if water could be injected into a fusion boiler to make steam to run turbines to generate electricity without the water turning into hydrogen and oxygen (a bomb). He knew of none. Within 2 months Lockheed Martin announced that they were working on that exact project and mentioned another 10 year time frame. This could be the one that works. I know everything is hacked and I wonder about my item.
They’ve been promising controlled fusion since the 1950s. I’m frankly not holding my hopes high.
“Also windmills and solar panels are reducing the need for some oil products.”
um, “magic green” nonsense, is made with, and 100% dependent upon the unsustainable, fossil fuel powered industrial infrastructure which is killing us.
I don’t understand. Most of the time, you need to use a previous technology to bootstrap into the next. What do you propose we do to get onto renewable energy? At a minimum “magic green” tech is cleaner than merely burning fossil fuels. If you need to burn some to get there, isn’t that worth it?
What does ‘there’ refer to? If it refers to a business-as-usual future (with the difference that it’s much cleaner and greener), fat hope.
In itself and by itself, ‘magic green’ tech is indeed more environment-friendly. But firstly it just doesn’t deliver as well as good old fossil fuels. Try flying a commercial airliner using solar or wind power. And secondly, as already noted, the construction (and MAINTENANCE) of the necessary hardware for ‘magic green tech’ requires burning fossil fuels, often LARGE amounts of them. (Not to mention mining for things like rare earth metals — if I remember correctly — which only makes them even less green than we think they are.) Windmills and solar panels are emphatically NOT reducing the need for fossil fuels. And this also means that, once the fossil fuels go — and they’re on their way to the exit — sorry, the windmills and solar panels go, too. At most, they can only stay around for a while.
The only ‘there’ we can work for now is one with way fewer of us around, leading a pre-industrial, agrarian way of life.
The Master said, “Among people those born with knowledge are the best. Next come those who acquire knowledge through studying. Those who learn from painful experience are still next, and finally those who simply refuse to learn anything are the most hopeless.” (Confucius, Analects 16:9)