August 17, 2015
True Believers
There is a special species of idiot at large in the financial media space who believe absolutely in the desperate and tragic public relations bullshit that this society churns out to convince itself that the techno-industrial high life can continue indefinitely, despite the mandates of reality — in particular, the fairy tales about oil: we’re cruising to energy independence… the shale oil “miracle” will keep us driving to WalMart forever… our wells doth overflow as if this were Saudi America… don’t worry, be happy…!
Such a true believer is John Mauldin, the investment hustler and writer of the newsletter Thoughts From the Frontline, who called me out for obloquy in his latest edition. After dissing me, he said:
“I have written for years that Peak Oil is nonsense. Longtime readers know that I’m a believer in ever-accelerating technological transformation, but I have to admit I did not see the exponential transformation of the drilling business as it is currently unfolding. The changes are truly breathtaking and have gone largely unnoticed.”
Mauldin is going to be very disappointed when he discovers that the vaunted efficiencies in shale drilling and fracking he’s hyping will only accelerate the depletion of wells which, at best, produce a few hundred barrels of oil a day, and only for the first year, after which they deplete by at least half that rate, and after four years are little better than “stripper” wells. The PR shills at Cambridge Energy Research (Dan Yergin’s propaganda mill for the oil industry) must have pumped a five-gallon jug of Kool-Aid down poor John’s craw. He believes every whopper they spin out — e.g. that “Right now, some US shale operators can break even at $10/barrel.”
The truth is the shale oil industry couldn’t make a profit at $100/barrel. The drilling and fracking boom that began around 2005 was paid for with high-risk, high-yield junk bond financing and other sketchy, poorly collateralized financing. Most of the earnings in the early years of shale oil came from flipping land leases to greater fools. Now that the price of oil has fallen by more than 50 percent in the past year, the prospect dims for that junk financing to be repaid. Since that was “bottom-of-the-barrel” financing, the odds are that the shale producers will have a very hard time finding more borrowed money to keep up the relentless pace of drilling needed to stay ahead of the short depletion rates. They are also running out “sweet spots” that are worth drilling.
We will look back on the shale oil frenzy of 2005 to 2015 as a very interesting industrial stunt borne of desperation. It gave a floundering industry something to do with all its equipment and its trained personnel, and it gave wishful hucksters something to wish for, but it never penciled-out economically. Shale oil production turned down in 2015 and the money will not be there to get the production back to where it was before the price crash. Ever.
Some additional uncomfortable truths should temper the manic fantasies of hypsters like Mauldin. One is that we are no longer in the cheap oil age. All the new oil available now is expensive oil — whether it’s Bakken shale or deep water or arctic oil — and it costs too much for our techno-industrial society to run on. That is why the world financial system is imploding: we can’t borrow enough money from the future to keep this game going, and we can’t pay back the money we’ve already borrowed. We have to get another game going, one consistent with contraction and with much lower energy use. But that is not an acceptable option to the people running things. They are determined to keep the current matrix of rackets going at all costs, and the certain result will be very messy collapse of economies and governments.
Industrial economies face a fatal predicament: Oil above $75/barrel crushes economies; under $75/barrel it crushes oil companies. We’ve oscillated back and forth between those conditions since 2005. The net effect in the USA is that the middle class is rapidly going broke. All the financial shenanigans aimed at propping up Wall Street and Potemkin stock markets was carried out at the expense of the middle class, now deprived of jobs, incomes, vocations, stability, and prospects. They may already be at the point where they can’t afford oil at any price. That “energy deflation” dynamic, in the words of Steve Ludlum at the Economic Undertow blog, is a self-reinforcing feedback loop that beats a path straight to epochal paradigm shift: get smaller, get local, get real, or get out.
The hypsters and hucksters won’t believe this until it jumps up and bites them on the lips. These are the same idiots who believe we are going to continue Happy Motoring by other means — self-driving, all-electric cars — and who think there is some reason for human beings to travel to other planets when we haven’t even demonstrated that we can plausibly continue life on this one.
As I averred last week, America is at the bottom of a self-knowledge low cycle in which we are incapable of constructing a coherent story about what is happening to us. The techno-industrial fiesta was such a special experience that we can’t believe it might be coming to an end. So, one option is to believe stories that have no basis in reality. As Tom McGuane wrote some forty years ago: “Life in the old USA gizzard had changed and only a clown could fail to notice. So being a clown was a possibility.”
