Troubled Oil is Under Water [UPDATED]

A Russian oil rig in the North Sea. New oil wells are deeper, more expensive, more complicated -- and play out faster -- than ever.

A Russian oil rig in the North Sea. Used to be only part of the oil business was in deep water. Now it pretty much all is.

The whole global edifice erected with oil profits is trembling and cracking while the people responsible for its imminent implosion refuse to even get under their desks, insisting that there is no problem. This crash that is already under way is not the ultimate one that will bring down the Industrial Age, not quite yet, but it is going to drop us from the rubble-strewn “new normal” of the post-2008 Great Recession to the cratered moonscape of the newer normal that will follow the Crash of 2015. The problem in 2008 was subprime home loans. The problem now is subprime oil wells.

The trigger for the detonators that are setting off the charges that will bring down the oil “boom” was, of course, the gut-wrenching decline in oil prices, which on Friday reached $66 a barrel in the US, a 40% decline in just a few months. That price is below the break-even point for two of the major US plays — North Dakota’s Bakken (the biggest) and the Permian Basin in Texas. The situation is far worse in the Canadian tar sands, where costs are the highest of all. And may soon be even worse in the petro-states, whose mostly tyrannical leaders can still produce oil at a profit, but who need every nickel that $100-a-barrel oil was bringing in to keep their palaces safe from riffraff bearing pitchforks and torches. Saudi Arabia and Iran are wounded, Libya is in intensive care and Venezuela is in hospice.

Although the shale frackers, tar-sands cookers and deepwater drillers are keeping up a deafening chorus of “Don’t Worry, Be Happy” on the world’s airwaves, if you listen carefully when they draw breath you can hear the cracking of the beams of the stage on which they’re standing. Some examples:

  • In the 12 major American shale-oil plays, permits for new wells fell by 15 per cent in October, after doubling since November of last year. In the Eagle Ford play in Texas, source of about 40% of the current fracking “boom,” the decline was 22%. The total number of oil rigs operating in November — 1568 — was down by 50 rigs in a month and was expected to be down by 100 at year’s end. Given the hideous depletion rates of fracked wells — about 80% in the first two years — new wells must be opened at ever increasing rates just to keep production level. If these declines in new wells and operating wells continue for just a few months we will see sharp declines in shale oil production next year.
  • The stock prices of nine of the larger operators in the shale patch lost between 19% and 34% of their valueon Friday. They are all down about 60% since mid-summer. Worrisome as this loss in equity is, it pales in comparison with what happens once the bond markets take fright. The fracking boom has sucked up much of the liquidity sloshing around the country looking for better returns than US Treasuries offer. The frackers have financed their unbelievably expensive operations not with profits nor with stock sales but with junk bonds, whose owners are not unlike a herd of longhorns on the Texas plains: one lightning strike, they’re gone.

Any of the events described above constitutes a lightning strike. Maybe they’re waiting to hear the thunderclap.

When it comes, the falling dominoes will not stop at the edge of the fracking fields but will tumble into the territory of Big Oil, whose titans are also deeply in debt, and on into the general stock market, whose movers and shakers are certifiably insane.

Like the laid-off owner of an under-water home (that is, a home worth less than the mortgage on it) going into foreclosure, the oil bidness is hunkered down, insisting everything is going to be all right, waiting for the sheriff.

[UPDATE 12/04/14: Applications for new oil-well permits in the United States declined almost 40 percent between October and November, as reported by Reuters. This presages a corresponding drop in rig counts, and production, which will appear in 60-90 days. Welcome to 2015.]

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4 Responses to Troubled Oil is Under Water [UPDATED]

  1. Tom says:

    Fantastic analysis Mr. Lewis. We’ve been noticing “indicators” that all is not well in the economic sphere of late and many of us are wondering how the banks and especially the insurance industry is managing their eluding of the repo truck.

    With chaotic weather causing WAY more problems than even their worst case models may have indicated, the insurance industry must be bleeding money or becoming fraudulent in not honoring their half of the bet – weaseling out of every nickel and dime their teams of shyster lawyers can fob off on a broke, deluded and desperate clientele with no way to fight back. Oh, like the “health care” industry – capture the patients and vacuum out their money while giving them staff or mrsa, lousy service by substandard workers who aren’t paid enough and don’t care, and an exit bill roughly equivalent to their pension, home and valuables. How about that – and they’re in “insurance” too.

    The banks are sitting on so much bad paper that the next strike against the petrodollar (read “monopoly money”) – the once reserve currency of the world, soon to be so much scrip – could be the undoing of the whole house of cards. It can’t come soon enough to protect the environment from all the damage we’ve done, and will only start the clock on the ticking radiation time bomb, once the electrical grid fails, sending us all into the nightmare that doesn’t end. Russia and China buying up all the physical gold and trading away dollars isn’t helping and neither is the FED and Wall Street continuing fraud, imaginative economic models and misfeasance. Something will give before too long, whether it’s the environment, the economy, the political situation, social collapse, energy, or any combination of these and/or one or more of many other factors that could fly into the picture like the proverbial black swan.

    Energy will whipsaw wildly from cheap now to much more expensive as things wind down and much less/no new oil is being produced, steadily declining inventory, and evermore scarce heating oil, aviation fuel, diesel and the many by-products that make civilization possible.

    And of course THAT all has social effects – like rioting, food shortages, collapse of health care, police, fire protection, trash and sewage handling, along with municipal water and we’re off to the races – disease, violence, (cannibalism possibly) . . . stone age.

  2. Tom, that is a terrific summary. The only bit I don’t understand is the distinction you draw between the ultimate crash that will bring down the industrial age and the impending crash of 2015.

    We are seeing the law of diminishing returns fighting to express itself through a financial system predicated on growth and we are seeing the EROEI of oil falling below the point at which industrial civilization can function. It seems to me that these twin factors will crash the system entirely.

    • Tom Lewis says:

      Could be. But the system, as bloated and corrupt as it is, has tremendous momentum. These guys will continue doing what they’re doing until the social order crumbles under their feet, and they have the power top avert that for a while yet. I think.

      • venuspluto67 says:

        @TL: Yes indeed. I am continually amazed that “these guys” have been able to keep as many running chainsaws in the air in their ongoing juggling-act as they have. It’s conceivable that they could continue to do so to some extent after the derivative-driven mega-crash of 2015/16.