Oil Price Crash: 50% Of U.S. Shale Could Go Bankrupt

Yves here. Oil prices have reversed some of their Monday rout. Investors are also trying to take comfort from that, Xi visiting Wuhan, and Trump’s plan to cut payroll taxes. For instance, from the Financial Times:

The fading sense of panic on Tuesday prompted investors to sell havens, which have rallied furiously in recent weeks. The 10-year US Treasury yield jumped 15 basis points (0.15 percentage points) to 0.6475 per cent, after having dived below the 0.5 per cent threshold for the first time on Monday. The 30-year Treasury yield rose 13 bps to back above 1 per cent. Bond prices fall as yields rise.

Those moves followed a promise by President Donald Trump of a “major” economic relief package to reduce the negative impact from the Covid-19 outbreak, including a possible payroll tax cut.

Brent crude, the international oil benchmark, rebounded 5 per cent to $36 a barrel on Tuesday, while the US marker West Texas Intermediate rose to $33. In Monday’s rout, oil plunged by a quarter in its sharpest one-day drop since the 1991 Gulf war.

In China, the CSI 300 stock index closed 2.1 per cent higher after President Xi Jinping made his first visit to Wuhan, the city at the centre of the country’s outbreak, in a signal that the Communist party believed it had brought the epidemic under control.

In the mean time, Kyle Bass thinks thing will get cheaper…but he’s been wrong on Japan, so take him with a fistful of salt. But his commentary on oil is consistent with the post below.

However, and he’s not the first I’ve heard say this, but Bass takes this oddly cheery outlook for the US (and by implication the rest of the world) that the coronavirus outbreak won’t produce as bad outcomes as 2008 because the banking sector isn’t implicated. He then proceeds to describe how exposed the European, Chinese, and Hong Kong banking systems are. He seems to see the US strictly in terms of the impact on exposed sectors, and isn’t considering that a return of the virus in the fall-winter, and the resulting loss of income to hourly workers as a result of lockdowns and widespread self-quarantines, would produce a tremendous downdraft that will pull all sorts of other activities down (home sales and repair, visits to doctors and dentists, reduced use of professional services….).

By Nick Cunningham, an independent journalist, covering oil and gas, energy and environmental policy, and international politics based in Portland, Oregon. Originally published at OilPrice

It’s one for the history books.

Oil opened on Monday down roughly 25 percent, the sharpest decline in decades, and broader financial markets fell so precipitously that the circuit breakers put in place during times of volatility tripped, temporarily halting trading.

The list of adjectives available to describe what is happening to the oil market is not adequate. There are now multiple crises unfolding at the same time.

First, there is obviously a health crisis – the coronavirus continues to spread. Large swathes of northern Italy are now on lockdown. The number of cases in the U.S. has surged, and could explode in the coming days. Mandatory lockdowns may not be far off. The Trump administration is asleep at the wheel, actively trying to play down the extent of the crisis.

Second, there is a brewing economic crisis. China shut down parts of its economy in January and February. Parts of Europe followed. The U.S. is next.

The Dow Jones has fallen by more than 16 percent in the past week, and markets have quickly shifted from concern to full blown panic.

Third, if all of that is not enough, OPEC and Russia just added on an oil supply crisis. The collapse of talks last week and the ensuing price war has WTI down to $33 per barrel as of midday on Monday, down from $45 last Thursday on the eve of the OPEC+ talks. OPEC and Russia have said that all restraints on production expire at the end of the month, and everyone can produce at will. Oil could easily be in the $20s at any moment (and might be by the time this piece is published).

For the U.S. oil industry, this is a historic crisis. It has the ingredients to be far worse than the 2008 financial meltdown. At that time, a sharp contraction in the global economy blew a hole in the market. But OPEC responded by cutting production.

This time, that same potential for an economic calamity is present, but there is an oil price war occurring simultaneously.

A decade ago, the shale industry barely existed, and falling oil prices cushioned the blow to the U.S. economy by making energy cheaper. Today, an oil market bust could pretty quickly plunge Texas, North Dakota and Appalachia, among other places, into a recession.

Analysts are now predicting that the Eurozone, at a minimum, is heading for an economic recession. France’s finance minister Bruno Le Maire said that Europe needs a “call to arms” to defend the economy.

The pain for U.S. drillers was immediately visible when markets opened on Monday. Deep losses hit everyone. “We have taken the unprecedented steps of bringing our full coverage group to Hold or Sell,” Neal Dingmann of SunTrust said, according to Bloomberg. He called it “energy Armageddon.”

“Not one company in our coverage can keep production flat for more than a few months while spending within cash flow at $35 WTI,” Charles Meade of Johnson Rice & Co. said, according to Bloomberg.

“The U.S. shale sector is getting completely killed. A complete bloodbath. Billions of dollars in equity wiped out.”

“The U.S. is going to be the collateral damage here. The producers here are going to be suffering so much,” Amrita Sen, chief oil analyst at Energy Aspects, told Bloomberg from Houston. “They were already suffering and there’s no lending. There’s no money right now for them. This is really going to crush them.”

On Monday, Diamondback Energy said that it would “immediately” slash capex and cut back on completion crews and rigs.

Shale drillers were already facing substantial hurdles with cash flow problems and maturing debt. “We are preparing for two years of low prices and will make the necessary adjustments to maintain our great balance sheet,” Pioneer Natural Resources’ CEO Scott Sheffield told the Washington Post. Pioneer’s share price cratered by 32 percent on Monday.

“There will be many bankruptcies in our industries and tens of thousands of layoffs over the next 12 months,” Sheffield added.

Shale stocks tanked on Monday, with big names in shale such as EOG Resources, Whiting, Continental Resources and Apache all down over 30%. But one of the biggest losers was Occidental Petroleum, which has seen its market capitalization shrink to $15 billion. It paid $38 billion for Anadarko, and shares are off roughly 73% since that deal.

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65 comments

  1. Kasia

    I’m no expert on the oil market but isn’t it possible for the US (and perhaps other countries) to impose a tariff on Saudi / Opec oil in order to protect domestic producers? One could argue that this should work both ways and that a price ceiling should also be imposed on US domestic producers so that they do not gouge customers in the case of a price spike.

    Reply
    1. Noel Nospamington

      Most likely producers of Shale Oil in the USA and Tar Sands in Canada will lobby and get massive bailouts from their respective federal and state/provincial governments for their heavily polluting industries.

      All in the name of saving dirty jobs. But in reality those workers will only receive a small fraction of any bailout money.

      Reply
      1. sinbad66

        I had thought of the same thing, especially since this is a campaign year. And no president wants to be the one “on the watch” when massive layoffs hits any industry.

        Reply
      2. PlutoniumKun

        Thats not likely with Shale. It is dominated by lots of small operators who don’t have the clout to get a full bail out. Historically, in States like Texas and Oklahoma, they’ve been let go during oil busts – its the banks linked to them that (sometimes) get prioritised for rescue. Big Oil might actually be quite happy about this as it will help support their investment in the Gulf of Mexico and Alaska.

        I don’t know much about the Canadian situation, but I suspect the tar sands operations are too big for Alberta to rescue, and too politically toxic for the State government to touch.

        Reply
        1. rosemerry

          “The collapse of talks last week” was not a collapse, it was Russia saying NO, it did NOT want to continue to support US shale oil production while Russian wells werenot allowed to produce and sell, and also because of the US attempts to stop the Russian gas pipeline to Europe for its own selfish needs/desires to sell LNG at a much higher price. The Russian spokesman made it quite clear-for once the Russians are not being taken in by the US sanctions, and can manage with lower prices and ruble for the time being. Even Bloomberg reported all this.

          Reply
        2. rjs

          “One of the companies hardest hit was Continental Resources, founded by Harold Hamm, a Trump supporter and an adviser to the president on energy issues. It lost more than half of its market value Monday, though it recovered about 8 percent by midday Tuesday. Hamm’s 77 percent personal stake in the company lost $2 billion of its value Monday. Hamm said in an interview Tuesday that the administration should consider using laws on illegal dumping to prevent Russia and Saudi Arabia from slashing prices of oil sold in the United States.”

          https://www.washingtonpost.com/business/2020/03/10/trump-oil-bailout/

          Reply
      3. JohnnySacks

        Did Yves say it? Not sure where, but it’s as if our leaders think the cure to cancer is strolling through the chemo ward and handing out $20 bills.

        And on another note, help me please. How is a payroll tax reduction going to help laid off workers? Boggles the mind, but if considered in the context of the election, the narrative will be “tax and spend liberals are going to raise your taxes!”

        Reply
    2. John Beech

      Who gives a damn about domestic producers? In the oil business someone is always going bankrupt! Happens all the time. Someone else just buys the asset and production never stops, or at worst pauses briefly.

      Reply
  2. Ignacio

    We are preparing for two years of low prices and will take the necessary adjustments to maintain our greatly inverted balance sheet

    Some editing required there.

    Reply
      1. Ignacio

        It was just some cynical/joking editing of CEO’s talk. Nothing to complain with a very pertinent post. Sorry if I did not state it clearly.

        Reply
  3. bmeisen

    What are relations like for drilling crews thesedays? Do individual laborers work as employees of e.g. Pioneer, or as sub-contractors of a contractor? On individual rigs, are drilling crews composed of laborers who work for a contractor who has put a team of sub-contractors together, or of laborers who are employees of a contractor?

    Reply
    1. ejf

      I wish I had the numbers but lots of these folks are sub-contractors. They’re paid well when they work, and they work lots of hours when they do work. I know of one guy who lives in southern Colorado who travels to jobs in North Dakota, Montana and southern New Mexico.
      These guys are pushed by time and project constraints. Because a lot of these guys are not from their project areas, they are not inclined to care about the imprint they’re making on the land, roads or towns.
      That’s particularly so in southern New Mexico in places like Roswell, Carlsbad and Hobbs and then east to southwest Texas.

      Reply
      1. Nomad

        I hope can shed some light on this a little bit. I worked in the fracking field Very briefly, barely 8 months in 2015 for Weatherford.
        The short answer is that there are Lease-holders and various levels of contractors… (At this point after typing the bit below, having reread bmeisen’s question, I feel as if you are drawing a little too much from the construction industry for reference. We commonly say ‘contractors’ in this field but these are whole companies with dedicated employees with all the various benefits, sometimes with more benefits than an office worker.)

        The Lease-holders are the big boys, “Company-men”, think Shell, Exxon, or BP. They bought the rights from the landowner, often decades ago and they coordinate the creation of the well.
        Which consists of the following basic steps (I am going to gloss over the parts that I wasn’t a part of or privy to.)
        The Surveyors pick the Wellsite. (a prep crew would come in after them and set-up the site, clear the area of trees/brush, build a road, and set up whatever amount of environmental containment is required.)
        The Drillers truck in their equipment and drill the well, when they’re done they pack up and leave.
        The Frackers(this is what I was apart of) would then truck their equipment in and ‘Complete’ the Well. The infamous pumping of water, sand, and chemicals. note each one of those items would be provided by a separate contractor. After the Well is “completed” to spec, from the company man’s engineer, the fracker packs up and leaves.
        At that point another set of contractors would come in to “Produce” the well, which would mean putting in pipelines and setting up the well head to distribute the flow of nat gas and yes waste-water.
        This whole process would all be over-seen by the “Company man.”

        Reply
  4. vlade

    What fascinates me is that no-one’s really commenting on one difference.
    In the 2008, no real productive capacity was destroyed (initially). What was hit was the money/credit transmission. Which is super important, but worst comes to worst, it’s just numbers in computers and govts can (and did, see the UK) take over and “fix it”. There’s an argument that what was the real impact was when the now caught up with future (i.e. the debts that were unpayable to start with become clearly unpayable, like the liar’s loans). But still, with correct financial stimulus (which didn’t happen), the impact could have been dealt with reasonably.

    In 2020, there is a real destruction of long-term capacity. For example, cold foundries are hard to restart, sometimes economically unviably so. Once air routes are dropped, it may be harder to re
    Dead, or long-term ill are in a different catergory from unemployed in terms of productivity. etc. etc.

    Reply
    1. Yves Smith Post author

      Yes, I didn’t state the point crisply enough. Thanks for doing so. Pretty much all the banks that failed were merged into other banks, so no operational loss.

      Reply
    2. Colonel Smithers

      Thank you and well said, Vlade.

      You aren’t the only one.

      I was thinking that, coupled with Brexit, will countries and, amongst others, FIs wish to rely on London so much for their business. Some City firms have triggered their disaster recovery etc. plans. This is London wide, but can soon be internationalised. For example, the Irish, Italian and some Asian arms of the firm we know well has banned travelling in and out and, although in the pipeline for the past year, the Irish and Australian arms are ramping up activity migrating from London and relying less and less on London.

      Also, as businesses repatriate, supply chains come home or nearer, will things like governance, health care, education, quality of life etc. be considered? I can’t see Brexitannia emerging a winner from this shake out.

      Further afield, say Mauritius, whose economy rests on four pillars, tourism, financial services, light manufacturing (mainly textiles) and agriculture (mainly sugar), any country with that level of global exposure is facing difficulty, especially when politicians have been buying elections with foreign denominated debt.

      As for structural changes to the economy and society, a decade ago I came across a statistic about the number of middle aged people who lose their jobs and never work again or, if they do, do something very different and less remunerative.

      Reply
      1. BobW

        I remember a headline from about then, too. Something like “If you’re over 50 and out of work, you may never work again.” Not strictly true, there are McJobs, but a good career job? Pretty much correct.

        Reply
        1. Colonel Smithers

          Thank you, Bob.

          We may well have seen the same article.

          About that time, I spoke to someone, much older, who had a child a bit older than me. The child lost her job as a junior lawyer in the early 1990s, her mid 20s, and never worked again in the profession.

          Reply
        2. John Beech

          If you’re over 50 and don’t have a skill, then McJobs probably is the only answer – could be why you’re out of a job. Anyway, the answer for those worth more than a McJob is either someone else snaps them up (LinkIN is a wonderful resource), or alternatively, they start their own company.

          Cases in point; first is a friend who worked for Motorola locally. Does antenna design. They shut their office and the offer included a move to Chicago and a pay package that wasn’t especially attractive based on cost of living. Since he didn’t want to move to Chicago, he quickly took work in Ft. Lauderdale. I offered him use of my airplane but after a month of that he quit and started his own boutique firm. Now employs 11 guys, every single one of them making well north of 100k. Recently mentioned purchasing a large Faraday cage from the old Motorola facility (from the landlord). Think similar to a pool room enclosure but made of copper and costing north of $50,000 for something the size of a small bedroom. Apparently too much trouble for Moto to remove so they left it. And as is typical, he purchased it for pennies on the dollar because the landlord just wanted it gone. Anyway, turns out beam steering is a thing, he’s good at it, and he’s got contracts waiting. So Moto’s loss is his gain. Now he signs the front of the paychecks and is worth millions.

          Another case; programmer works for IBM. Instead of programming, they have her traveling to educate. A lot. Seems they’re rightsizing these days. She was offered a job but once again, a similar story as the money for the locale they had in mind didn’t make sense. So she started her own boutique consulting business. IBM’s clients are fighting to book her. Now she leases a small building and they come to her. No traveling to speak of and she too is signing the front of pay checks having joined those of us living the American dream.

          Folks, the laws aren’t written for those endorsing the check.

          Reply
          1. Noel Nospamington

            These are nice stories, but I would consider these very rare examples.

            In my experience few people have decent specialized technical skills plus decent business skills which are needed to launch a successful new business.

            The successful examples I’ve seen involved technical people partnering up with business savvy people. But even in this case success not common since often the business partners tend to take advantage of their technical partners.

            Reply
            1. RMO

              If you’re over 50 and HAVE skills you’re often up that famous creek without a paddle. Even what he called “McJobs” can be hard to get if you’re past middle age. And that’s without the zombie-apocalypse-pandemic-fear, the wars just on the edge of turning into infernos and the oil price crash. Oh yes, and the locust swarms

              I feel like we may be flying blind through a Selden Crisis here:-)

              Reply
          2. Massinissa

            My dad is a senior architect and is a 65 y/o man who just got laid off from his firm a few months ago. Chances of being hired by another firm is near zilch despite his 40 years of experience in the field. Hes trying to start his own consulting business but the chances of that working out are probably also close to zilch. For various reasons I don’t want to discuss I can’t really work, and I and my mother who hasn’t worked in decades were pretty reliant on his income. Sigh.

            Reply
            1. TheHoarseWhisperer

              I am sorry to hear about your dad Massinissa. Architecture in the US is a terrible business. There is no guild protection to speak of (architects are not required for pretty much any construction project – something that is quite visible when you start driving around any suburb in the country). It is highly stratified – like tennis – the people who have clawed their way to the top of the profession are rich and everyone else is barely making ends meet.

              On top of this, you are at the mercy of the business cycle. Which in practical terms means that if you are not the owner, you are fired at the first sign of a slowdown.

              I hope that he manages to get some work on his own. The urban centers are still holding up although for how long if the coronavirus hits in earnest is an entirely different question.

              Reply
          3. Anthony G Stegman

            Those are nice stories, but are wholly unrealistic for the vast majority of the workforce. Little more than pipe dreams.

            Reply
      2. David

        Not just Mauritius, I fear. All over Europe there are towns and cities that have turned their back on producing things and extracting things, and have rebuilt their economies, to great acclaim, around tourism, the conference business, banking, IT and often higher education. I shudder to think what will happen when the tourists stop coming, the conferences stop, the foreign students no longer come …. you can’t eat IT, and even IT consultants, I should think, are not very appetising.

        Reply
    3. PlutoniumKun

      Thats a very good point, although its worth pointing out that the subsequent austerity did indeed destroy productive capacity. In 2006 the Irish construction industry could build in excess of 100,000 units a year. It is now struggling to build 30,000 a year despite huge demand and a booming economy. It has proven enormously expensive and difficult to build up the capacity to build houses, and this is a relatively simply product. I’m sure this could be replicated in many other sectors.

      Michael Pettis has been pointing out that there is evidence that Chinese industry is struggling very hard to get moving again, despite government exhortations. There seems to be a very significant ‘cold foundry’ effect as you describe it, along with all the other supply chain issues we know about. I think that in China in particular, this could be the signal for a lot of businesses to simply abandon plants and projects that are seen as of questionable profitability (and there is a hell of a lot of that in China). I personally know one wealthy Chinese family who are ‘cashing in’ their factory investments – ironically, they are using the money to buy into housebuilding in Ireland (via business visas).

      I can’t recall the name, but a few years ago there was a book on historical booms, that pointed out that some booms left a useless legacy (tulips), some have left a very worthwhile legacy (railways, fibre optic cables). I strongly suspect that the recent boom will leave us either a worthless one (dead end investments in driverless cars), or a highly toxic one (lots of leaking fracked wells, pouring methane into the atmosphere).

      Reply
      1. Robert Gray

        > In 2006 the Irish construction industry could build in excess of 100,000 units a year. It is now
        > struggling to build 30,000 a year despite huge demand and a booming economy.

        During the crisis there were numerous reports about the ‘ghost estates’ abandoned mid- or even post-construction all over Ireland. Are they all now completed and occupied?

        Reply
        1. PlutoniumKun

          Yes, pretty much all are now completed, around 90% the last time I checked. There are still a few ‘ghost’ houses and apartments around, even in high value areas, but so far as I know those are abandoned because they are in litigation or there is some engineering issue (quality standards pretty much disintegrated in the last 2 years of the boom).

          Reply
    4. Zamfir

      Is there already much sign of this? I have understood, for example, that Chinese integrated steel mills have kept running during for the last month (exactly to keep the installations hot). Their EAF colleagues did shut down, because they are easier to turn on again. There is now a glut on the market which may have a severe impact on the industry, but that is different from physically damaged plants. Most capital plant can (physically) stay idle for a long time, and the exceptions don’t need that much people on a skeleton crew.

      On the wider point: my personal impression is that plants suffer harder from market turmoil (or credit turmoil), than from physical damage. A re-build is relatively easy to manage. Scope and requirements are clear, cost is relatively predictable, the projected benefits are reliable. Decisions are made fast, because the story is clear and uncontested. I have seen burned-down plants where re-construction starts in a week, and is in full swing in a month or so.

      Sometimes the opposite happens – the rebuild is not worth it, But that too is often a simple and clear decision. That is much less damaging than an ill-considered capex program that struggles forward on points-of-no-return.

      I think this points holds fairly general – physcial destruction of captial is a minor issue, compared to capital destruction from building the wrong stuff, or compared to missed opportunities due to market uncertainty and credit uncertainty

      Reply
      1. PlutoniumKun

        I hadn’t heard that about steel installations – the air pollution information would strongly suggest that key parts of the steel industry have indeed shut down – you’d expect to see noxious hot spots around major steel centres if they were being kept hot. There would also be a very significant surge in electricity demand if plants were being ‘heated up’, especially EAF’s, and so far as I’m aware, there is no evidence of this.

        Reply
        1. Zamfir

          you’d expect to see noxious hot spots around major steel centres if they were being kept hot.

          I had to check this… to my mild surpise, it might indeed be visible. There was a “before and after the virus” NOx map from NASA, recently on the web. https://www.theverge.com/2020/3/2/21161324/coronavirus-quarantine-china-maps-air-pollution

          You can indeed see several big steel centers, as remaining pollution spots on the “after” map. Anshan, Tianjin, the south of Hebei. Not the group near Shanghai though – perhaps those are cleaner, or more EAF. Or it’s all a coincidence.

          On production numbers, here a link http://www.seaisi.org/News/9756/Chinas+March+steel+output+may+rise+from+February+on+improved+logistics+demand

          It gives a decrease of 4.5 million tonnes in february, with an expected rise again for march. Regularly monthly production is something like 65 million tonnes. So -4.5 is significant, but doesn’t mean plant closures. Such numbers imply extended maintenance on already-closed plants, and reduced volume on still operating plants .

          Reply
    5. Adam1

      I’d also add that financial crisis’s typically need a trigger. In 08 the start was teaser rates ending in ’06-’07 that began the run-up in non-payment which revealed the fraud and caused the panic. There are lots of people in precarious financial situations who will be in prepayment trouble if they loose their job or their income drops as the real economy shrinks. Just because it starts as a financial crisis doesn’t mean it wont end or turn into one.

      Reply
      1. JohnnyGL

        That’s actually not quite right. A lot of prognosticators THOUGHT teaser rates running out would trigger the crisis, but it turned out that you just needed prices to stop rising, which meant that speculators that couldn’t make payments could not refinance, either.

        Most loans didn’t make it to the teaser rate period end.

        Once the downdraft started, as you say, it picked up its own momentum and pulled in millions more who got tricked into taking junky loans.

        Reply
      2. mle detroit

        I haven’t “needed” or tried to sign in to airbnb since last summer’s vacation. Today I got an email out of the blue with a special link to sign in instantly. No other message at all. I’m thinking that site’s traffic has cratered and, worse, all those who have properties (that aren’t rooms in their homes) are staring at unpayable loans. So yeah, CV may be turning into a financial crisis now.

        Reply
    6. charles 2

      According to Peter Zeihan last missive
      Supply destruction is the whole point of the exercise by the Saudis, either through plain old bankruptcy, social troubles and al. (Think Iran and Venezuela), or more originally, by stuffing some much oil in every tank that can hold it, that the Russian cannot get their oil off the ground, which is a problem in the Artic because apparently a stopped well is a frozen well, and a frozen well is lost for good, one has to drill a new one…
      IMO, the Saudis neglect the capacity of the Chinese to build as much strategic reserves as the oil market surplus delivers : They have an insane amount of dollar reserve, and an insane amount of steel producing capacity…

      Reply
    7. Ignacio

      In Wuhan it has been shown that such a long quarantine is causing depression and anxiety. Time will be needed for full recovery.

      Reply
  5. Lost in OR

    The oil industry has earned more bad karma than the banks. They’re on par with the tobacco industry. Subsidizing or protecting those barons so soon after Obama’s bank heist would be a tough sell. Not that the swamp won’t try it. (Wouldn’t that be socialism?)

    We’re going to own their legacy of non-financial externalities so we may as well own them. That is, nationalize the ba$tards.

    Reply
    1. John Beech

      Good grief, seriously, nationalize is your idea? Haven’t you learned anything from watching Maduro and his cronies mismanage the richest oil fields in the world?

      Reply
      1. TMR

        Anyone with a pinch of O&G knowledge and without an ideological axe to grind would know you’re full of it. Venezuela has a lot of oil, but it’s not very good.

        Reply
      2. Lost in OR

        What would you suggest? An Obama-style bailout? Perhaps the Fed can buy up some of the fracking industry junk bonds? More subsidies and tariffs? Less regulation?

        The petroleum industry is the greatest impediment to having a rational energy or climate change policy. I don’t believe they have our best interest at heart.

        But I have to agree with the tenor of your statement. It’s not like the US gov’t is doing that great of a job managing the defense or surveillance or medical industries.

        Which, I guess, brings us to where we’re at. A major crisis in both our government and our economic systems. Neither is working well. Besides shooting other people’s ideas down, do you have any suggestions?

        Reply
      3. Massinissa

        This is a terrible argument. Just because Venezuela did it poorly doesn’t mean it can’t be done correctly, or even hasn’t been done correctly. Its an argument based on one single anecdote.

        Also Venezuela has heavy sour crude. One of the worst kinds. That makes it, at best, also an apples to oranges comparison.

        Reply
      4. skippy

        Sanctions for not genuflecting to the 2000 coup whilst pegged to the dollar will do that to ya … all whilst bond holders like old NC Jim demand 100% returns on bonds bought distressed – too boot.

        Corporatism never really ended in central – south America, property claims which resemble sheep skins of nobility …. but yeah their ideology thingy … sigh …

        Reply
      5. drumlin woodchuckles

        Do you mean the Orinoco Tar Sands? That’s not oil, its tar, sand and sandy tar. Hopefully Maduro crashes the Venezuela oil industry so comprehensively that the Orinoco Tar never gets mined. Never, Ever.

        Maybe nationalizing all the American oil companies would put them on a fast track to extinction through misMaduromanagement? If so, that would be the best and fastest way to “keep the oil in the ground”. All good “extinction rebellioners” should support nationalizing all the oil industries if we can be confident that it would really Madurify them into extermination and extinction.

        Reply
  6. Amit Chokshi

    This is not like 2008 in that the 2008 response to the financial shock and economic shock was reactionary and underwhelming and mostly monetary. Nobody would dare speak of fiscal stim. The response this time has been central banks are begging and countries are somewhat moving to enact fiscal stimulus and support. Even trump mentioned support for hourly workers and SMEs yesterday, in 2009 Obama prob would have just said to bail out the big firms with cheap money. Malaysia, Thailand, China, Hong Kong are all revving up fiscal stim, Japan I believe has programs being released for parents that lost income cause kids stayed home for school.

    As it relates to oil, I have been incredibly wrong for 1.5 years but I think this is shales last gasp. If 12mmbpd is shale oil, prices stay low at this stage for 3-6 months, and most of the production is from DUCs you could seriously have a market in balance or under supplied post COVID.

    Even before this opec implosion, drilling was going down. If u read the results and commentary of SLB, HAL, and other oilfield services since 2018 they were saying sales for them to frackers were down because drillers were going down.

    This will shut the door given no capital markets or near term results to support access to capital.

    There may be lotto ticket oppportunities in offshore drilling like RIG and DO if they can make it to the other side. To be clear offshore breakevens even in deep water have been lower than shale. Even land guys like Hess have pushed into offshore.

    In either case the cure for the low prices now – a price war – could result in 70 Brent in 1 year.

    Reply
    1. PlutoniumKun

      Yes, even in Europe they are talking belatedly about the need for fiscal response, although the structures in place will make it very hard to engineer, unless somehow the Germans are persuaded (possibly even they may change their minds if they face the disintegration of Deutche Bank, not to mention VW).

      You are right that sunk costs means the oil industry will focus on offshore and existing conventional wells. North Sea oil kept producing right through the very low prices of the 1990’s. They cut everything to the bone, but they kept the rigs going. Eventually it came good for them (especially the Norwegians, who kept their nerve).

      Tight oil and Canadian tar sands exist in a tight embrace. If one goes, the other goes. Tight oil in particular needs perpetual injections of cash, if and when this stops, the fall off will be very rapid.

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      1. John Steinbach

        Important point! Tar sands, as the name implies are very viscous & difficult to refine and transport. Tight oil is very light weight & also difficult to refine. The solution has been to mix them to facilitate pipeline transport, as well as ease of refinement. Without the mix, both industries fail.

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  7. Colonel Smithers

    Thank you, Yves.

    As crises should not be wasted, one wonders what is being planned, wargamed etc, by whom and for when. My parents, their civil service and medical fraternity friends and I think that any NHS shortcomings will be blamed on the state, workers, overuse and the solution proposed will be more privatisation and rationing.

    BTW this sort of emergency was wargamed when the UK had a functional civil service, i.e. before the neoliberal nihilists hijacked the state, but that no longer happens, the facilities no longer exist and the political and civil service leadership aren’t interested. For example, RAF Halton had medical, dental and nursing schools, amongst others, an institute of pathology and tropical medicine (headed by my father), and a hospital, Princess Mary’s (where my brother was born). That supported the locality. The British Army and Royal Navy had similar centres. There were military hospitals all over the UK and Germany, e.g. Wegberg, and further afield, e.g. Gan / Maldives and Singapore, pre-the pull out from east of Suez. Barracks had alternative uses. Maggie Thatcher and her merry band of jihadists decided to close all of these medical facilities.

    Just as Brexit has shown the weakness of the British body politic, so will the coronavirus.

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    1. Drake

      Yes, I’m sure all those bankrupt companies who’ve been externalizing their costs for years will make that their first priority. Right after golden parachutes for the executive team, to enjoy in their prepper bunkers.

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    1. John Beech

      This is quite interesting, thank you for the link, Christopher. Not sure I agree with Mr. Mitchell, but this definitely broadens my perspective on economic thinking. Someone above mentioned the blob in another context but I’m thinking the system – as it is – will fight to perpetuate itself. It’s the way of the world.

      For example, I’m a long time Republican voter who recently switched party allegiance in FL to enable my vote for Sanders. He’s now getting his clock cleaned by the establishment (so called blob) so it looks like my effort is for nought, but he too has an interesting perspective.

      If you’re not familiar with it, it’s instructive to learn a bit about a Spanish conglomerate (Mondragon), which began with a priest in Bilbao and workers who formed a cooperative. They own the means of production. What’s most illuminating is they are now engaged in creating second class employees as they struggle to integrate immigrants into the companies whilst remaining true to their foundation. Very interesting experiment playing out with people’s lives.

      As a business owner, I wouldn’t be opposed to this structure – however – I actually pay myself less than some of my employees so the 8X the lowest pay cap for the highest paid is attractive ;>)

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  8. John Beech

    Nothing wrong with bankruptcy. It’s not like the asset goes away, it just clears out the deadwood, e.g. the investors, whom are wiped out while the underlying asset remains (no pun intended although it’s appropriate). The point is the asset (in this case the well head and all it connects is purchased for pennies on the dollar, production restarts (or more likely, just continues), but now with a more advantageous cost basis. Ultimately, this makes for still cheaper oil. Counter intuitive, but this is how it works. And it’s how the oil business has often worked.

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    1. Lost in OR

      Great idea John! This sounds a lot like the housing market 12 years ago. I’ll bet vulture capitalists are all over this. I’m sure Citi and BofA and the rest are lining up clients already. Maybe they can get the Fed to pitch in some easy money. There’s nothing like the smell of consolidation. Isn’t this how capitalism is supposed to work? What a racket. /sarc

      Reply
    2. kk

      I thought that unlike the fairly constant headwell cost of oil of Russia and SA, the cost of extracting shale oil increases rapidly, thus necessitating a significant financing cost (and a risk premium for price volatility)?

      Reply
  9. Colonel Smithers

    Thank you, Yves.

    I just had a look at my employer’s commodity trade finance balance sheet and pipeline. I have not looked at them for a couple of years. It appears that we are ramping up lending to secondary producers, not the majors, and, apart from Norway, in emerging markets.

    My employer was mentioned above. The 150th birthday celebrations are still on, officially. Our most famous clients, the Trump, Berlusconi and dos Santos families, are not invited to any of the celebrations.

    Reply
  10. Kris Alman

    If the fracking industry goes completely belly up, the other big challenge we face is leaking methane from abandoned wells. I have learned that federal agencies (such as FERC, PHMSA and the EPA) don’t require insurance of fossil fuel companies–that it is up to local jurisdictions to make determinations whether a company will assume financial responsibility for clean-up. And that is simply not happening. My public records requests demonstrate there is no due diligence on the part of Ports, Cities and Counties when it comes to demonstrating a company has insurance or other means to demonstrate they will clean up their mess.

    The false promises of Trump’s Energy Dominance (not just independence) doctrine to export fossil fuels have lured smaller companies into this get-rich-quick scheme. Of course that all required pipelines to transport natural gas to export facilities. Fortunately, in Oregon where I live, we have staved off Canadian company, Pembina, from building a pipeline from Malin, Oregon to Coos Bay, Oregon where they wanted to build the Jordan Cove LNG facility. I hope FERC’s “stay of execution” in developing this huge fossil fuel infrastructure is not stupidly green lit because of these energy wars. It would be a suicide pact to move forward on it.
    https://www.cascwild.org/ferc-votes-2-1-to-not-move-fracked-gas-pipeline-forward/

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  11. DHG

    Let it, fracking destroys more than it creates. Fracking is just another coming true of Bible prophecy in that the Earth would be ruined in the time of the end but not to the point of no return as humans are to inhabit it forever in the new system of things under Gods Kingdom.

    Reply
  12. Hatuxka

    All those employees still working in the fracking industry will be dumped back on the local economies they came from as workers workers marginally qualified when they left for the oil booms and just as marginally employable as before. And the places they leave will revert back the to fading rural entities they were before the boom.

    Reply

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