U.S. oil production increased an incredible 80% in the last 6 years; from 5 million barrels per day in 2008, to 9 million by 2014. This spike came from advancements in oil extraction; horizontal drilling and hydraulic fracturing. But the dramatic increase was only possible under the elevated oil price. Since 2010 oil has usually been over $100 per barrel. Obviously now, this is no longer the case.
Half of current U.S. production comes from just two states: North Dakota and Texas. These alone are where the majority of new jobs were created in the U.S. after the 2008 financial crisis. Over the last six years under high oil prices, North Dakota has increased crude oil production by over 500% and Texas by 200%. Even Canada has increased crude oil production by 37%.
The recent collapse in oil price spells big trouble for shale producers in the U.S. and Canada, and, we at Future Money Trends argue, for the whole North American economy. Future Money Trends argues this will also have a big impact on the whole North American economy. You see shale oil extraction is generally only profitable at oil prices above $75 per barrel. Today, oil is under $50 per barrel after a massive crash over 50% in just a few months.
If oil goes to $40 it would still take 1 to 2 years to balance out the extra 1.5 million barrels per day world supply surplus. Most of this will come from inefficient U.S. shale rigs and the Canadian tar sands ceasing to produce. The Middle Eastern oil ministers have continually blamed U.S. shale oil drillers for oversupplying the market. OPEC says the most efficient producers should maintain market share at the expense of the inefficient.
The last crash in oil began 2 months before the great stock crash in 2008. Could there be a new crash coming?
The 2008 crash cut the number of operating U.S. oil rigs in half – setting the stage for the rise in crude back to $100 a barrel from the low of $40. Since the crash, thanks to the Fed’s 0% interest rates and quantitative easing, easy credit flew into booms sectors like shale oil. Crude oil rigs soared eight-fold in 5 ½ years from 200 to 1,600 in late 2014. US crude oil production has been growing at quadruple the pace of the 1960s. When a sector grows this quick from easy money, there’s nothing else to call it but a bubble.
Since QE ended in 2014 huge amounts of money stopped flowing into the U.S. economy. The lack of official money printing also caused a temporary rise in the U.S. dollar index by 15% in 2014, sparking the oil price decline since world crude is still priced in U.S. dollars.
Already the total oil and natural gas rig count in the U.S. has plunged to its lowest since October 2010. The biggest one week decline in numbers of rigs in over six years just happened in January 2015. Oil shale production was very speculative to begin with. Continental Resources, the biggest player in the Bakken, spent $1 billion more than they made in 3rd quarter 2014. This was when oil was still $100 per barrel!
The capital expenditures of oil exploration & production companies has remained well above their operating cash flow resulting in six straight years of negative free cash flow. The total debt of oil exploration & production companies increased 83% in six years to $334 billion. Total debt of the full energy sector exploded 140% to $1.7 trillion today. Companies are now massively cutting back; 200,000 jobs could be lost in Texas alone.
The Oil & Gas Equipment & Services ETF is down 50% since July. Multi-billion dollar companies like Sanchez Energy and Goodrich Petroleum crashed 80 and 90% since June 2014. Not only will our energy sector be drastically cut down, the rest of the economy may suffer even more. We’ve created financial structures that only function properly under conditions of constant economic growth. The financial system almost went out of control in 2008.
Energy company loans now makeup 18% of the US junk bond debt. According to JP Morgan, three years of oil at $65 per barrel would result in 25 to 40% default rate across energy junk bonds. We’re now looking at worse than that. The former head economist for Morgan Stanley and the IMF believes that $60 oil will be normal for the next five years.
The shale oil boom turned out not to be the great savior for the American economy so many thought. In fact, proven oil shale reserves in the U.S. are only enough for 2 years of U.S. consumption. Saudi Arabia has vastly more reserves than the United States at over 8 times. This means even if the U.S. surpassed the Saudis in production it would be very short lived. The U.S. will never be oil self-sufficient; unless drastic cuts were made to consumption.
Peak Cheap Oil is still a near reality. In the context of current central bank money printing, deflation scares and currency wars; this could cause the most destructive economic situation since the Great Depression. We could see the oil price spike and crash in wild swings of volatility; further scaring already timid capital markets and destroying any thoughts of economic recovery. This will be felt the worst in the United States.
Continuing from oil wars volume 1, at the same time Russia cut off natural gas to Europe in January as we predicted, they announced the sale of some foreign currency reserves; potentially over $7 billion in U.S. dollars they will trade for Rubles by February. They also lowered their U.S. treasury holdings year over year for the 20th month in a row.
Combine this with the decreased oil price giving oil exporting countries much less revenue to recycle into dollar denominated assets. For the first time in 18 years, oil exporters are pulling liquidity out of world markets rather than putting money in. The world is now fast approaching a world reserve currency shift. If we see 8 to 12 months at these oil prices; U.S. shale industry will be wiped out. The effect on junk bonds will cascade to the rest of the stock market and U.S. economy.
…and this time there will be nothing left to catch the falling knife before it hits the American economy right in the heart. Not the FED nor the U.S. government can stop what’s coming. Liquidity will freeze up, our credit will be downgraded, the stock market will start to collapse, and then we can expect the FED to come in and hyper-inflate the dollar. This will cause the world to finish abandoning the world reserve currency in the last rungs of trade. This will be the end of the petrodollar.