Forbes: “Shale Oil Boom Goes Bust”

This happy fracker -- a Halliburton employee at a site in North Dakota’s Bakken play -- obviously hasn’t got the memo yet. It’s over. (Wikipedia photo)

This happy fracker — a Halliburton employee at a site in North Dakota’s Bakken play — obviously hasn’t got the memo yet. It’s over. (Wikipedia photo)

Yes, Forbes, the magazine of the Masters of the Universe has uncharacteristically published some discouraging words about the only good news the American economy has had to celebrate in many decades.

Oil output from the most productive U.S. shale fields is expected to drop off next month by 57 million [sic — they mean thousand] barrels of crude daily from April to May, the U.S. Energy Information Administration said Monday. That would represent the first monthly decline in more than four years, according to Reuters.

And then there’s Bloomberg Business, a more objective reporter of what’s going on in American industry, with the headline: “Shale Oil Boom could End in May After Price Collapse.”

Output from the prolific tight-rock formations such as North Dakota’s Bakken shale will decline 57,000 barrels a day in May, the Energy Information Administration said Monday. It’s the first time the agency has forecast a drop in output since it began issuing a monthly drilling productivity report in 2013.

Yet even after admitting that it’s over in the shale patch, the Pollyannas insist that it’s only for a while, until reduced supply brings prices back up and everybody starts doing exactly what they were doing before. How shall we put this?

It ain’t gonna happen. Here’s why.

The only way that a rise in prices could cure the situation is if the fall of prices caused the situation. But it didn’t. Virtually every operator in the shale patch was suffering negative cash flows, and accumulating impossible debt loads, from the very beginning of the oil “revolution.” (Sure. they declared impressive operating profits on individual wells, but had to spend outrageous sums to replace them when they played out — in two or three years.)

The frackers are, pretty much without exception, up to their eyeballs in debt. They have junk bonds that have to be rolled over, subprime loans that have to be repaid, lines of credit that are being called and stockholders who are bailing out. They have kept pumping oil since the price collapse last fall for two reasons:

  1. With their enormous debt obligations, the operators know that to stop, or even pause, is to miss payments and die. So the zombies kept walking.
  2. Most operators hedged the output of their wells — that is, signed contracts guaranteeing their price in advance, for a fee — and thus were booking not the market price of $50 a barrel, but the hedged price, closer to $100. It works great until the hedges run out, or the counterparties go broke.

It turns out that this hedge thing is casting a rather long and dark shadow over financial institutions that are far from the fracking patch — the biggest banks in the world. I have written often here about how this carnage is going to spread, from the oil patch to the junk-bond market, to the entire bond market and then the stock market. But the calling of the hedges is now taking the fire to the big banks.

As of December 31, 2014, Bloomberg says the frackers had bought $26 billion worth of hedges, up fivefold in three months, from the likes of JP Morgan, Citigroup, Wells Fargo and Bank of America. These banks may be too big to fail, but they are not too big to cry when they take a hit like they’re taking right now.

Here’s the bottom line: US oil production peaked in 1970 at 9.6 million barrels per day. Development of the Alaskan oilfields brought an oil renaissance leading up to a  second, lesser peak, in 1985, of 8.9 million barrels per day. The fracking “revolution” has brought us to a third peak, of 8.6 million barrels a day (the average for 2014).

From here there is nowhere to go but down. The crash of 2015 is proceeding, at its ponderous pace, and although it’s true that the fall never kills, it is also true that the sudden stop does.


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11 Responses to Forbes: “Shale Oil Boom Goes Bust”

  1. gwb says:

    Hello Tom,
    Your favorite number-checker here again… This time, Forbes got it wrong – it’s not a decline of 57 million barrels a day by May, but 57,000 – Bloomberg has it right. You might want to put a note in your post that the Mouthpiece of the Masters of the Universe needs better copy editors…

  2. Craig Moodie says:

    First Fannie and Freddie then AIG then the rest of them. What makes you think, for one moment, bailouts are’nt coming for the hedgies and their cohorts.

  3. Tom says:

    Last i heard, Craig – they’ll be bail-INS this time (too), where deposits can be grabbed without warning by those banks. Remember that line from Animal House:
    “Ya fucked up! Ya trusted us.”

    Great analysis Mr. Lewis. Looks like things are headin’ south around May or so for the financial institutions. Should be an “interesting” election cycle as a result.

    and that ain’t all

    The Six Too Big To Fail Banks In The U.S. Have 278 TRILLION Dollars Of Exposure To Derivatives


    But when you add up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars. In other words, these “too big to fail” banks have exposure to derivatives that is more than 28 times greater than their total assets.

    If you’re a bird watcher, look for Black Swans on the horizon.

    • colinc says:

      I’ve never been much of a “bird watcher,” even though I enjoy watching those little peckers pecking at whatever they seem to deem peckable! :) Nonetheless, I see an entire flock of Black Swans on the horizon and, when they land, there will be few who think it’s “enjoyable.”

  4. The United States taxpayer has already underwritten much of the junk bond derivatives, in the “budget deal” in December. We are on the hook for this mess – not the banks.

  5. colinc says:

    Mr. Lewis, what is your perspective on the role of OPEC nations’, Saudi Arabia in particular, ongoing “balls-to-the-walls” pumping of crude effect on the situation you summarize? Do you think the increased output from ME nations has been “encouraged” by the U.S. government’s ploy to impose “sanctions” on Russia? Do you think this constitutes “evidence” that “our” government officials are bat-shit insane/stupid and should be summarily removed from office by any and every means available? Do you think there are, or can be, a sufficient number of our “fellow” citizens capable of realizing any of this to make even an iota of “difference?”

    • Tom Lewis says:

      It isn’t what the Saudis say, it’s what they do. And it isn’t how much oil they produce, it’s how much they export. Objective estimates of what the Saudis get out of the ground indicate that they have never surpassed their 2005 peak. Even if they have, the amount of oil they export has been falling steadily since 2005 because of increased domestic demand. The other OPEC countries are pumping what they can into the market for the same reason the zombie frackers in the US are — they desperately need the cash. There may come a time when the American electorate awakens to who is screwing them and why, but I for one am not holding my breath.

  6. Avery says:

    C’mon, Tom. Forbes isn’t the magazine for masters of the universe. It’s a magazine for small-cap investors and middle managers. I mean, they turned their website into a blogging platform. The real masters of the universe are already building their underground city as an escape plan.

    • Tom says:

      Underground cities. No sunlight, radon, no replacement parts, potable water scarcity, unsustainable food production, just to mention a few problems they may have – i don’t see how they are going to prosper. Their ‘escape’ puts them in a prison of their own making. The masters of the universe are fools, like the rest of us. Who’s going to do all the work? Where are the medicines, doctors, dentists and support staff going to come from? They’ll need a sizable army, who may or may not be loyal to them after a while. It just goes on and on – too many problems and no real solutions. How long do they think they can stay underground? Radiation lasts for thousands of years. i think they’re just prolonging the inevitable outcome.

  7. Mike Kay says:

    Perhaps the most amazing thing about fracking is the blind willful disregard to the permanent damage done to huge areas of underground fresh water. The greatest externalized cost of all could possibly be the wide assortment of incurable diseases about to be unleashed on a populous forced to drink water contaminated with toxic and radioactive fracking waste.
    The fact that the ruling monkey class is so eager to sacrifice the health of unlimited future generations should be enough for people to quit imagining that any solutions will be trickling down.