dailyimpact | The dominoes are toppling, just as we have been expecting for nearly a
year now, but slower than we thought. The fact-resistant strain of
humans (Thank you, Borowitz Report)
now in charge of the world are trying to use vast amounts of money to
counteract gravity, and, counterintuitively, succeeded in slowing the
dominoes’ fall. But not for long.
To review our expectations of last summer: the hideous decline rate
of fracking wells (of up to 90% in three years) was forcing frackers to
borrow huge amounts of money to put up large numbers of new wells at a
breakneck pace in order to preserve the illusion (it was always an
illusion) of a revolution in American oil leading to prosperity and
“energy independence.” On average, it cost the frackers over $4 to get $1 of revenue in the door
during the first quarter of this year. A year ago, with oil commanding
$100 a barrel, they were still spending $2. As the old joke goes, the
only way to make any money when you’re losing on every transaction is to
make up for it with volume. But since most of the money spent was
capital expenditure — i.e. new wells — their operating statements showed
profits and nobody looked at the balance sheets.
We ran this scenario on our abacus and concluded that these guys were
going to go broke. And that when they did, not only would U.S. oil
production resume its long slide toward zero, begun in 1970, but they
would blow up the junk-bond market, almost certainly the bond market,
and probably the stock market. These expectations were in place before
the price of oil tanked last fall, and set the expectations in concrete.
Now, let’s review the state of play:
