Our Overabundance of Oil

Our overabundance of oil, which is said to be the cause of its current low price, may have begun with an increase in production but it continues today because our oil storage facilities are filling up. In Europe storage is 97% full, and while the U.S. has filled only 500 out of 550 million barrels, it has not been so full before except in 1929. Hence you can see why Congress was recently willing to allow oil exports for the first time in decades. Yet America still imports oil; why? That would be because tight oil is not high quality; most of our needs in the U.S. can’t be served by this crap. We can only refine it as much as possible and ship it to somewhere else for use, in places that care less about air and water quality for example. Tight oil production from fracking accounted for 75% of global increased production; Saudi increases were less than 25%. The Saudis were afraid of losing market share and so wouldn’t cut back production; they also saw the benefit of driving the fracking industry in America to its knees for a very long time. These last several months, as the price of oil has plummeted, have seen a decrease in U.S. production and not just in tight oil… also biofuels, natural gas liquids, and the old standard crude oil production rates have all fallen. Fracking only manages to continue now because once a well has been drilled, its cost of operation is minimal and selling oil at any price provides cash flow to be able to pay interest-only on the debts used to drill in the first place. This low price though won’t allow debts to be repaid. Most of these types of loans were for five years or less; the expectation of course, as it was for homeowners taking sub-prime loans for their first house purchase, was that the price of oil would remain high forever, keeping the value of the underlying collateral (oil in the ground) high, and allowing financing to roll forward without having to be paid back quickly. Thus the trigger point for the bankruptcy of so many drillers looms dead ahead.
But this storage issue means that we not only have to grow the world’s economy to get us back on track with rising energy use, we also have to deplete what’s been stored. Our hill has grown steeper. Debt defaults will hurt not only the companies who took loans to finance well development, but also those companies that supply the drills and sundry supplies, the rail and pipeline operators who transport the crude to and from the refineries, and the workers who flood to the fields like it’s a gold rush, only to find themselves weeks or months later once again without a job. It will also destabilize governments that export oil, and depend upon the recent high prices to fund social programs for their poor. As the revenues crash, the vast mass of people no longer aided by their government are ripe to be led by a charismatic but treacherous figure into rebellion. This could further disrupt the supply and make it easier to use up our oversupply; as long as it is some other country in trouble and not our own.
So it turns out that oil over $80 per barrel destroys our industrial economy; and oil under $80 per barrel destroys oil producers. Look at North Dakota, site of the latest gold, um, I mean oil rush: the landscape is littered with half-completed apartment buildings, most likely never to be finished as the rush of new workers is over as quickly as it began. And if that is hard to see, what’s not hard to see is the debris of fracking wells, some of which were just abandoned as the owner went out of business and now are a toxic problem belonging to Joe and Jane Taxpayer.
Falling wages and austerity are shrinking, not growing, our global economy. There will be debt defaults as loans to oil companies come due, as students can’t find jobs in their field and default on debt, and as the *deep subprime* auto loans that have been driving new car sales these past few years also show their true colors and lead to repossessions, demand destruction, and disappearing bank assets. Our *old* economy worked well because when more energy and better technology made workers more productive, both profit and wages rose. In our *new* economy, energy costs rise as extraction becomes more difficult and either wages or profit must fall to compensate. Repaying debt with interest is easy when your income rises or the currency inflates, and that is the case in a growing economy. But in a contracting system, debt repayment can be nigh impossible. In other words, wages (or at least disposable income) must rise faster than commodity prices for economic expansion to take place. And without economic expansion, debts cannot be repaid. For twenty years now, the cost of life’s necessities (shelter, food, energy, health care, transportation, education) has risen while wages have not. We borrowed to make ends meet and continue to consume life’s luxuries. When household debt growth slowed as we reached the limit to what we could borrow, quantitative easing and zero interest rates managed to put more money into the system to compensate. But today, in Europe, negative interest rates are driving investment and capital away. In America, the thought of a quarter-percentage point rise in interest put fear into investors, in no small part because of how it will make the oil fields fail that much faster. The results of zero interest rates in China can be seen in the photos of empty, newly built cities, a poster child for the myriad financial mal-investment of the last decade around the world.
In the cacophony today of natural systems and human institutions spinning wildly out of control, outcomes are clearly non-linear. Any prediction is just your story, for the moment, and subject to change in the next as yet another unforeseen consequence bites you in the rear. Sadly we seem to be living in a time and a system when anything goes, no one need speak truthfully, and nothing really matters. Put another way, we think we have assigned a value to everything, yet we know the true value of nothing. We drive electric cars so that suburban sprawl and single-occupancy commuting can remain the vast majority of our transportation system. We look to molecular medicine to allow us eternal life and perpetual material consumption, without yet being able to explain the placebo effect in useful terms. We hang our descendants’ energy future on some yet-undiscovered power source that will keep our gadgets working without harming our world, as if by magic. Worst of all in the short term, we think financial *instruments* and *products* are not fantasy and will be able to marshal the resources needed to accomplish all of the above.
Nearly everything about our lifestyle that defines us as *modern* or *industrial* adds greenhouse gases to our atmosphere as if it were an open-air sewer. Modern and industrial are the keystones of an economy that lets some of us work harder than others, while others live off the work of some of us. The whole idea that *renewable energy* is the answer arises within the belief that *something* must exist in our near future that will let modern and industrial continue…we just have yet to find it but don’t worry, someone is working on that problem with lots of taxpayer money. Understand something please: there is no Law of Nature that entitles us to drive alone or buy food grown 8,000 miles away.
As our global economy slows, countries will desperately devalue their currency hoping to increase their exports. The combination of falling commodity prices, falling consumption, and defaults of the oil producers, consumers, students, governments and banks may trigger derivative defaults that crash the global financial system. Your account may not exceed the FDIC limit for coverage; but that insurance fund is at about $50 billion today, while what is insured by that fund is about $7 trillion. If you hold money in banks, you will be asked to bail-in, or give till it hurts to reflate a bank that has been stripped by looters well-versed in derivative trading. Even that may not be enough; and lest we forget, business accounts meant to fund payrolls are not covered by FDIC, and are more vulnerable to bail-ins than we are. How long are you willing to work without being paid? Collapse usually takes years or decades to play out; but all the great empires that have died before ours lacked one thing we have today: long supply chains. We depend upon just-in-time delivery for everything from food and cash to gas for heat, electricity for just about every tech device we own, and gasoline for our cars. Oil disruption will cascade scarcity throughout every economic sector; how much inventory do you have at home? So-called *long-term* thinking these days means six months. The ups-and-downs of oil prices are hard to think of as a cycle; this concept is new to oil, its price hardly wavered when I was young. But as prices gyrate between low and high, as with many systems, we see the highs get higher, the lows lower, and the time between peak and trough less and less. The cycle builds inertia and momentum, at least until it reaches total and utter collapse. As nothing was fixed following 2008, and central banks have no ammunition left for their financial bazookas, what do you think will happen?

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