Billions of Barrels of US Oil Set to Disappear. Poof.

oil fire

An oil refinery in Puerto Rico burns in 2009. That’s one way to make a bunch of oil disappear, but accountants can do it faster. And they’re going to. (Wikipedia Photo)

In a few weeks, several billion barrels of American oil will vanish in an instant. (I am not making this stuff up: the headline is right there on Bloomberg Business, hardly a chicken-little medium.) This is — shortly to be was — the oil that just a few months ago (Remember? When we were young, and happy?) was to return us to energy independence, to make us the number one oil producer in the world, to bring the happy days here again for good.

Okay, there were weasel words salted into those assurances all along, words that we didn’t realize were there until too late. The new American oil revolution was going to put us on the road back in the general direction of North American energy independence (as long as you counted Mexican and Canadian oil, too); and we would be the number one oil producer if you included in your definition of “oil” such things as biofuels, refinery gains from heat expansion, spillage and, if necessary, drippings from leaky transmissions in shopping mall parking lots.

Well, we bought it. Even the president said we had a hundred years of petroleum lying under our feet. Thus it would be our great-grandchildren, not our grandchildren, whose lives we would ruin by burning it all up. Whew, that was a relief.

But much of that oil is about to disappear, not with the boom of an oil-train explosion or deep-well blowout or terrorist bomb, but with the quiet click of a computer mouse. And this time it’s not (as it often has been before) the Energy Information Administration revising downward a previous guess about oil reserves.   

As the American shale-oil boom, a.k.a. American Oil Revolution, was accelerating back in 2009, the Masters of the Oil Universe demanded and got an accommodation from the Securities and Exchange Commission: it was made easier for the oil companies to claim as hard assets, for purposes of valuing their companies and borrowing money, the value of all the oil they estimated to be “in reserve,” which is to say lying somewhere under the ground they had under their control.

The oil companies’ estimates of their own “proven reserves” were astronomical, of course. In the careful words of one expert observer, David Hughes, “There was too much optimism built into their forecasts.” Translation: They lied.

It is as if you and I, on applying to the bank for a loan, were able to claim as assets all the money we intended to make in our lifetime. “$20 million over 20 years, you say? Why then a $10 million loan should be no problem.” And so it was for the fracking industry, which never could have got started without oceans of cheap borrowed money.

Remarkably, at the time the SEC snuck two tiny limitations into the newly permissive rule, so niggling that no one thought them worthy of mention. To be, um, legitimate, these claimed assets had to be 1) profitable to extract under current market prices, and 2) actually extracted within five years. Profitability went away a year ago when oil prices collapsed from over a hundred dollars a barrel to under 50. Despite the fact that quarterly assessments of assets, including oil reserves, are required, bankers and hedge funds and operators used smoke and mirrors to avoid the Draconian restructuring that the new prices required. But now the five years have run out.

Hence the vanishing oil (which of course is not really vanishing, because it never existed). Chesapeake Energy Corporation, one of the noisiest participants in the erstwhile “Revolution” (Successful? That’s a whole ‘nother story.) is among the hardest to be hit: at year’s end it will lose over a billion barrels of reserves, or 45% of its assets.

Chesapeake is hardly alone. Moody’s Investment Service has just issued a report on the “deteriorating credit quality” in the oil and gas sector, a set of “exceptionally adverse conditions” that are “staggering in their breadth and severity.”

So this is how the oil revolution ends, not with a bang but a poof.


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4 Responses to Billions of Barrels of US Oil Set to Disappear. Poof.

  1. Tom says:

    HAAA-HAAAAAAAAAAAA Mr. Lewis, once again you accurately point out in layman’s terms what the high finance/oil industry have been up to – LYING through their stinking teeth! All that crap vice president (now there’s an accurate term, the vice being greed) Cheney SECRETLY did behind closed doors to “make it all happen” out in the fracking patch has come home to roost in the form of a giant hole in their delivery of expectations.

    So they’ll just take the economy of the world down with it – that’s all. i’m sure we can find it in our hearts to forgive them as we commoners are always forgiven by the banks when we make a little mistake (like not paying the mortgage on time).

    Yeah, right . . .

  2. Proving to all and sundry once again how beloved by the gods I am, I was in the right place at the right time ( I don’t do podcasts or similar ) to hear the Glen Beck episode ( normally I hate the windbag, not politics but for being a dumbass, but I was being paid to drive and listen to the radio ) where he was shouting about the New American Energy Independence and how we had at least a hundred years of oil left if not three hundred. I’ve had great fun with that one, believe you me. The whole fracking thing was largely amusing ( it almost wasn’t when our loving county sold drilling rights over our water table, but luckily the ass fell out of the industry right after ) from day one. I wonder what fun stuff, besides the boogey man ISIS, they will come up with next to pacify us. Keep up the wonderful work-I haven’t been this excited about a new found blog for some time ( I’m still waiting for that next book ).

    • SomeoneInAsia says:

      ***I wonder what fun stuff, besides the boogey man ISIS, they will come up with next to pacify us.***

      Oh, I’m sure the American film industry can help a great deal in this respect! Rest assured they’ll spin off at least a couple dozen more good-versus-evil-save-the-shire/world/galaxy/you-name-it fantasy/sci-fi epics featuring people dressed like they just took a bath in their pyjamas and/or freakish creatures that can’t make up their mind how many eyes, ears, noses, mouths etc they want and in what positions. All served in nice, delicious CGI sauce. The very latest one on the way will be about some interesting events that took place long, long ago in a galaxy far, far away. This great mythic narrative will elevate us all into such stratospheric heights of inspiration the whole global economy can come crashing down tomorrow and, trust me, you will not be troubled in the least bit because you’ll be thoroughly gratified. :D

  3. Tom says:

    $100 Billion Evaporates as World’s Worst Oil Major Plunges 90%

    [a hundred billion here, a hundred billion there – next thing you know, you’re talkin’ about some real money!]

    Colombia is nursing paper losses of more than $100 billion after its oil boom fell short of expectations, wiping out 90 percent of the value of what was once Latin America’s biggest company.

    From being the world’s fifth-most valuable oil producer at its zenith in 2012, worth more than BP Plc, state-controlled Ecopetrol SA now ranks 38th. Its market capitalization has fallen to $14.5 billion, down from its peak of $136.7 billion.