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Going into a house that was partially collapsed by an earthquake two days ago and is being consumed by a fire that started this morning, to tell the residents that they also have a serious termite problem, is not fun. It takes a special kind of guy. But I have to say this; while we have been mesmerized by coronavirus and the stock market crash and the shutdown of the entire economy and the onset of a depression, it is also the case that the entire American oil industry is crashing. We will be trying to deal with this long after we again start thinking of beer when we hear the word “corona.”
Don’t take my word for it. “We are on the verge of a major collapse [of the oil industry]” says former energy secretary Rick Perry. “The oil patch is falling apart,” says the mad-hatter investment guru Jim Cramer. When it’s finally getting through to intellectual giants and perpetual cheerleaders such as Perry and Cramer, something is definitely going on.
The immediate crisis has been triggered by the massive worldwide decline in demand for oil from the economies crippled by the coronavirus. The decline — or “demand shock” as it’s being called, is on the order of 20 million barrels a day. Led by Russia and OPEC, major oil exporters have been slashing their prices to try to hang on to a piece of the shrinking market. Whether intentionally or not, they are now selling oil at prices that are below the cost of production for US oil frackers.
But this is only the triggering event. That fact is that the US oil industry, far from being in the midst of an “oil revolution” that is dominating the world, is a sick puppy and has been for years. If you have hung out in this space for any time at all you will be familiar with the arguments, but let’s review:
- Hydraulic fracturing — fracking — is a hideously expensive, complicated and massively polluting method for extracting the last few drops of oil left in oil-soaked shale formations. Nobody would be doing it if there were any more underground lakes of oil into which one could stick a pipe and have it gush into your lap.
- Fracking wells play out in three years, give or take, instead of the 20 years expected from a normal oil well. This single fact should have killed at the outset any thought that fracking was viable, let alone the key to national prosperity.
- Not a single company involved in fracking has made any profits in the eight years of the “oil boom” when you take into account the enormous capital investments required to have the next well ready to go in three years. A study of 34 of the top players shows every one of them had negative cash flow in every one of the past ten years.
- The United States is NOT and has never been and will never be a net exporter of crude oil. It is a net exporter of something recently re-defined as liquid petroleum products, which include biofuels (!) and products refined from oil that was first imported. This is partially because fracked oil is so volatile and sour that it cannot be used for engine fuels and cannot even be processed by many American refineries, so we send most of it overseas. In 2019, the United States produced 12 million barrels per day of crude oil, and consumed 20.5 million barrels per day. Energy independence my ass.
- The fracking revolution has proceeded only because lunatic wealth managers, hedge funds and the like have been willing to pump gushers of money into junk bonds, liar loans and worthless stock — just like it was 2008 — without ever seeing any evidence that the thing could work. The buzz was good. They got their fees and bonuses. Laissez les bons temps roulez.
Reckoning day is here, I reckon. Vicious cuts to capital expenses, cascading bankruptcies, layoffs, plummeting rig counts, are eviscerating the American oil “revolution.” When we come off of our ventilators, stumble blinking into the light from our self-imposed quarantine, there won’t be anything there to see.
It was a nice house, though.
“Oil patch”…sounds very homey, almost quaint. Perhaps a good spot for Tom Sawyer or Lassie the dog.
Yup. Just a hoot and a holler from Grampa’s solar farm.
Good one!
Indeed. They even take the product to “tank farms”.
I loved Lassie…
I gather the ‘fracking revolution’ is further subsidized by ever deteriorating wages and conditions for oil workers.
Oh no, those man camps are quite nice
Past tense, I think. There’s misery for all now.
Termites, dry rot, formaldehyde, asbestos, aluminum wiring, and that dead body in the cellar that the dog has been scratching at for years. It was a nice house, indeed.
The Dow is no longer tethered to anything, it is free to soar as high as it wants.
Those bubble troubles are over. Bubble come forth, grow large, and multiply, then burst away! Who cares!
The Dow will be at 50,000 when the lights go out on civilization, that’s my new prediction.
Note: I could wrong, of course. For all I know, AI could sell it down to zero in first nanosecond of trading tomorrow,
“Hey, we need a 15 minute timeout!”
“What for, its at zero?”
Seems like the sh*t’s really hit the fan now.
The devil of modern industrial ‘civilization’ paid well in the short run. But the long run is now…
I had a conversation with my daughter’s beau last evening. He’s a fine lad from a wealthy oil family, and a post-grad geology student at OSU. He agrees that the fracking play is in its last act, but is confident that there’s plenty of oil out there yet to be recovered – mostly from the polar climes.
As it turns out, the global warming cloud has a silver lining: easy access to more oil, which will result in – you guessed it – more global warming!
We are all little more than lemmings headed for the cliff.
Then they find out when they get to those Arctic climes the once frozen terrain is melting away and mostly impossible to support any operations. There is a reason why most of the E&P construction work up there takes place in the winter months when things are frozen.
When it gets really cold we can burn old copies of the Hirsch Report
Doesn’t all the recent demand destruction make swallowing this bitter little pill, all that bit easier? The important question is: What next?
I just realized the opening music is “Amazing Grace” – I mean I heard it, but it never really sank in. Very good. Not even my favorite song, but it’s appropriate. It’s about a sailor who is sure his boat will sink and bargains with God to save him. He does survive and dedicates the rest of his life to spreading God’s word. I suppose it’s about faith, but for every 100 sailors who pray…
And that’s all folks Porky pig said it to perfection. wait just heard because of virus pork industry is tanking.