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Page added on May 22, 2018

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The Shale Oil Ponzi Scheme Exposed

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Few Americans realize that the U.S. economy is being propped up by the Shale Oil Industry.  However, the shale oil industry is nothing more than a Ponzi Scheme, so when it collapses, it will take down the U.S. economy with it.  Unfortunately, the reason few Americans understand how lousy the economics are in producing shale oil and gas is due to the misinformation and propaganda being put out by the industry and energy analysts.

I am quite surprised how bank analysts and brokerage firms can continue to fund the shale oil and gas or advise clients to purchase stock when the industry is behaving just like the Bernie Madoff Ponzi Scheme.  The only big difference is that the U.S. Shale Industry is a Ponzi at least four times greater than Madoff’s $65 billion fiasco.

I decided to discuss in detail why the U.S. Shale Oil Industry is a Ponzi Scheme in my newest video.  I provide some interesting charts that explain how the huge decline rates and massive debt are going to bring down the industry, much quicker than the market realizes.

In the video, I show just how quickly two of the largest U.S. shale oil fields decline.  The chart below was developed by Enno Peters at the ShaleProfile.com websiteThe Permian, the largest shale basin in the United States, decline rate was a stunning 60% in just two years.  Thus, the companies producing oil in the Permian are forced to spend boatloads of Captial Expenditures (CAPEX) to grow or just maintain production:

Furthermore, I explain how many of these shale oil companies are using debt to fund operations.  However, lousy shale economics are not allowing these companies to pay back debt, so they must borrow new debt to pay back existing debt.  This is the very definition of a Ponzi Scheme.  The table below shows how EOG has structured its debt to be repaid over two decades:

Unfortunately, for the majority of investors holding EOG debt, they will not receive the return of their funds.  When the stock market suffers the next major leg lower, probably in the fall, it will pull down the oil price.  As the oil price drops back to $40 and on its way to $30, it will destroy the already weakened U.S. Shale Oil Industry, thus dragging down the economy along with it.

All Ponzi schemes collapse.  Just like the collapsing stock market destroyed the Bernie Madoff Ponzi Scheme, the falling oil price, lousy shale economics, and the massive decline rates will also kill the U.S. Ponzi Scheme.

Lastly, when the U.S. economy and financial markets were collapsing in 2008, the domestic oil industry was still in relatively good shape.  Today, it’s quite the opposite.  The Federal Reserve’s massive monetary stimulus was able to provide the shale energy that helped pull the United States out of the recession, but this time around, there is no PLAN B.

Today, the entire market is full of massive bubbles and Ponzi Schemes.

Zerohedge

 



33 Comments on "The Shale Oil Ponzi Scheme Exposed"

  1. DerHundistlos on Tue, 22nd May 2018 6:41 pm 

    Chinese giant salamander being eaten into extinction:

    https://phys.org/news/2018-05-giant-chinese-salamander-distinct-species.html

  2. marmico on Tue, 22nd May 2018 7:15 pm 

    Steve St Angelo is a funny guy full of WAG projections.

    On January 28, 2016, he wrote (and even highlighted it in red):

    I believe U.S. oil production will decline 30-40% from its peak (9.6 million barrels per day July 2015) by 2020 and 60-75% by 2025.

    2018 US production will be 10.5+ million barrels per day.

  3. MASTERMIND on Tue, 22nd May 2018 7:23 pm 

    marmico

    Peak oil is now..

    IEA Chief warns of world oil shortages by 2020 as discoveries fall to record lows
    https://www.wsj.com/articles/iea-says-global-oil-discoveries-at-record-low-in-2016-1493244000

    Saudi Arabia’s Energy Minister Warns of World Oil Shortages Ahead
    https://www.wsj.com/articles/saudi-minister-sees-end-of-oil-price-slump-1476870790

    Saudi Aramco chief warns of looming oil shortage
    https://www.ft.com/content/ed1e8102-212f-11e7-b7d3-163f5a7f229c

    According to the German Army leaked study. When the oil shortages hit, Wall street will crash, the public will lose all faith/trust in their institutions, and the global economy and world governments will collapse..
    http://www.energybulletin.net/sites/default/files/Peak%20Oil_Study%20EN.pdf

    marmico you will die of conflict or starvation in the next decade..Remember MM when it happens…

  4. MASTERMIND on Tue, 22nd May 2018 7:55 pm 

    CEOs earn 361 times more than the average U.S. worker

    https://www.reuters.com/article/us-usa-compensation-ceos/ceos-earn-361-times-more-than-the-average-u-s-worker-union-report-idUSKCN1IN2FU

    They better enjoy it while they can..Because when the oil starts to run out soon..they are off to the gallows! And we will let their blood run in the streets..We can use their brooks brothers suits to clean it up!

  5. twocats on Tue, 22nd May 2018 8:13 pm 

    To bag a billionaire would be a life-dream fulfilled for sure. So rare. And it contributes to the health of the population – thinning out the older stock.

  6. marmico on Tue, 22nd May 2018 8:32 pm 

    marmico you will die of conflict or starvation in the next decade..Remember MM when it happens…

    Turdburger changes your diaper today, doomer. In 10 years, you’ll be changing hers.

  7. Bloomer on Tue, 22nd May 2018 8:34 pm 

    I wonder if the motivation of walking away from the Iran nuke deal was an attempt to remove some oil supply out of the market. Afteralk, the odds of shale oil plays being sustainable at 80 dollars a barrel is much higher then at $40.

    However, as I blogged when oil prices plummeted, cheap oil is a boon to the economy. On the otherhand, higher oil prices works like a brake on the economy.

    There is already signals of a consumer slow down. The higher wages that was suppose to come from the corporate tax cut never came, instead higher lending rates and higher cost for goods and services came instead.

    In the end as always, the lower and middle class will bear the brunt of higher interest rates, higher inflation and slow to no growth. Welcome to the world of persistent stagflation.

  8. MASTERMIND on Tue, 22nd May 2018 8:47 pm 

    Bloomer

    Yes and Paul Krugman said in 2014..We are in a permanent slump..

  9. MASTERMIND on Tue, 22nd May 2018 8:50 pm 

    marmico

    Dont worry when the lights go off and there is no more TV..There will be plenty of action going on right outside your window..

  10. MASTERMIND on Tue, 22nd May 2018 9:01 pm 

    Marmico

    And when those oil shortages come..Gas stations only have a few days worth of supplies..And that will be gone in a few hours with preppers gassing up their bug out trucks, and bankers gassing up their private jets..

  11. Outcast_Searcher on Tue, 22nd May 2018 11:36 pm 

    But, is zerohedge EVER right?

  12. deadly on Wed, 23rd May 2018 4:08 am 

    Another 100,000,000 barrels of oil and condensates available again today.

    Everything is under control.

  13. pointer on Wed, 23rd May 2018 4:17 am 

    I grew up in the Marcellus shale region. Many people I know there are being kicked in the teeth by the gas companies who are scrambling to minimize their losses by actually charging the landowners to take their gas under the guise of fine print in the leasing contracts that said that “expenses” would be deducted from royalties. The little detail the gas companies’ Ivy League-credentialed lawyers failed to mention is that “expenses” could exceed royalties.

  14. Antius on Wed, 23rd May 2018 6:49 am 

    This article seems to be saying exactly the opposite of what Rockman was saying the other day. So who is right?

  15. twocats on Wed, 23rd May 2018 8:08 am 

    I wouldn’t be surprised if CIA drug-money out of Afghanistan was funding shale oil. As Watcher on another blog puts it “If the oil is needed it will be pumped”. The financial system and the CBs have shown time and again that they are willing to go to any level of market distortion to keep a recession from happening and keep this state of affairs going.

    Granted – some things are out of their control.

    The Goldilocks theory has been more of less disproven as a harbinger of production decline. The Goldilocks window probably closed in 2014 if not earlier and its never coming back. Infinite credit available on the upside, and debtors prisons galore on the downside.

  16. gilbert prud'homme on Wed, 23rd May 2018 8:38 am 

    iF THE bANKERS AND iNVESTORS WOULD GET OFF THE oPERATOR’S bACK HE COULD wITHDRAW MAYBE 1/2 AND WAIT FOR THE REST- SO DECLINE IN pERMIAN BE 200bopd RATHER 400K. bUT WHO WANTS TO BE THE “lAST fOOL” AND HAVE cRUDE IN THE GROUND AT $30.00. tEXAS sHOULD rEINSTATE pRORATION aLLOWABLES MONTHLY NOTICE TO oP;ERATORS GIVING THEM THEIR mONTHLY “aLLOWABLE”. gILBERT

  17. MASTERMIND on Wed, 23rd May 2018 10:00 am 

    Twocats

    Keep those Afghan poppy fields popping!

  18. Sissyfuss on Wed, 23rd May 2018 10:13 am 

    By the style and haphazard quality of your prose, Gilledfish, I’d say you have alot of experience in crafting ransom notes to your kidnapped victims relatives.

  19. Tim Cooper on Wed, 23rd May 2018 10:48 am 

    Not even worth watching the video as the author obviously doesn’t understand the oil industry or the under-pinnings of a Ponzi scheme. Ponzi schemes yield nothing, Scale O&G yields a salable resource.

    Shale O&G have rapid declines….short high rate production rates. Simply put, nobody is going to invest money in something that doesn’t yield a profit.

  20. joe on Wed, 23rd May 2018 11:00 am 

    Where is MBS?

    “Social media is ablaze with rumours of the young ruler’s murder. Users are sharing reports of a supposedly secret intelligence dossier that states MBS, as the Crown Prince is known, has been shot twice.

    The editor-in-chief of Tehran-based daily Kayhan (unlikely, it must be said, to be an impartial source for Saudi news coverage) has written in an editorial: ‘At least two bullets have hit bin Salman in April 21 clashes in Riyadh and it is even possible that he is dead.’

    According to a well-placed source at the British Foreign Office, however, the Crown Prince is alive and well. He was also photographed at the opening of the Qiddiya project, Saudi Arabia’s biggest cultural, sports and entertainment site on April 28.

    So the story must be Iranian fake news, mustn’t it? Perhaps to head off talk of assassination, a palace courtier has released a photo of MBS socialising with King Hamad of Bahrain, President Sisi of Egypt and Abu Dhabi ruler Mohammed bin Zayed.

    But that picture seems a strange way to convince the world MBS is fighting fit. It certainly looks like the man himself, even if a cap is obscuring his eyes. But it’s impossible to verify when the photo of the four men standing by a swimming pool was taken. Surely – given the gravity of the claims – MBS could have recorded a video statement by now? Is he in hiding? Or incapacitated?”

    “https://usa.spectator.co.uk/2018/05/are-the-reports-of-mohammed-bin-salmans-death-greatly-exaggerated/”

  21. MASTERMIND on Wed, 23rd May 2018 11:30 am 

    Joe

    I bet MBS is injured someway..Why else wouldn’t he just come out and make an appearance somewhere so he could shut down all of the rumors..

  22. Raymond Bauman on Wed, 23rd May 2018 11:40 am 

    the declines were due to low oil prices and abiuld up of wells awating completions. He does not accountfor this factor

  23. robert cibik on Wed, 23rd May 2018 11:40 am 

    Jim Rogers said the same thing years ago! No big wells and they are going down every year! Saudi Arabia has been lying for years as they are going down and No new wells are coming in.

  24. george on Wed, 23rd May 2018 1:29 pm 

    The great American shakedown continues.

  25. rockman on Wed, 23rd May 2018 5:13 pm 

    A – “This article seems to be saying exactly the opposite of what Rockman was saying the other day.” I babble on so much I lose track. What were the big points one might agree or disagree with? Thanks in advance.

  26. Antius on Wed, 23rd May 2018 5:29 pm 

    Rockman, do you agree with the basic premise of the article I.e. that shale oil is a poorly profitable resource and propped up by low interest rate money that is soon to disappear? If what the article is saying is true, then come the next recession and $40 oil, there will be massive bankruptcy and a huge reduction in investment. Come to think of it, those sorts of things happen anyway in a recession. But if the shale resource is as poor as the article makes out, it would appear to make more sense in the long term to focus investment in what remains of conventional onshore and offshore oil, which have less than 30% depletion rates. What are your thoughts?

  27. rockman on Wed, 23rd May 2018 5:41 pm 

    pointer – “…by actually charging the landowners to take their gas under the guise of fine print in the leasing contracts..”. I’ve read those stories. A shame, But a couple of critical points. First, a minor one: I’ve never seen a leases contract with “fine print”. The fonts are always the same size. And you would never see such expense provision in Texas or Louisiana leases.

    I assume the problem came from folks who have never leased a property before. I can’t guess the number of land owners that have asked for my advice. And it’s always the same: go talk to an oil and gas lawyer. I’ve been in the business for over 4 decades and if I were offered to lease my property I would go to a lawyer. And I know a lot about leasing. Unfortunately many of those folks were unsophisticated in such matters and were probably dazed by the big dollars offered to them.

    OTOH if you sign a contract without understanding it then it’s difficult to put all the blame on the other party. And such advantages were not only given by individuals: PA hasn’t collected one dollar of severance taxes from the industry. Texas and Louisiana have collected tens of $BILLIONS in severance taxes. The Texas “rainy day fund” of over $10 BILLION came severance taxes.

  28. deadly on Thu, 24th May 2018 2:05 am 

    The Permian, Bakken are strategic oil plays. In other words, the debt doesn’t matter. What matters is where the oil is.

    If the gov needs it, they will have it.

    Oil doesn’t have to be profitable if the military has it all.

  29. Kat C on Thu, 24th May 2018 3:59 am 

    If you think money is separate from energy, debt doesn’t matter. But money is the way we trade energy and minerals (extracted using energy). So if you are going into debt to produce oil it means your ERoEI is negative. In a simple world if it took you 1.5 days to get 1 day of food you would die. In a complex world it takes longer. So food energy represented in $’s paid in taxes is being exploited to get hydrocarbon energy for the military and the people get poorer. At some point this can’t be sustained.

  30. twocats on Thu, 24th May 2018 5:52 am 

    Kat C – I disagree that the ERoEI is necessarily negative because although money represents energy in some form the nature of a currency strengthening or weakening at any given point has nothing to do with energy. If tomorrow the Euro goes up and the dollar goes down that doesn’t mean somewhere in Europe someone produced a bit a relatively cheap oil.

    So no – the concepts of money and debt are purely artificial and don’t tie easily to the physical world.

  31. Antius on Thu, 24th May 2018 6:13 am 

    Energy is the capacity to do work, i.e. to produce goods and services. That is why a graph plotting global GDP against energy use is a straight line.

    Money only has value because it represents real goods and services. Hence money is a claim on the future products of energy expenditure. High inflation tends to occur when money supply rises or remains constant, whilst the overall productivity of the economy is falling.

    A rise in the price of energy means that more money (and hence committed resources) are drawn into energy production (or procurement for imported energy). This has the same effect as raising interest rates. It draws money out of the real economy, suppressing inflation and also cooling economic activity, as less money is available for procurement of real goods and services. This is how rising oil prices and rising interest rates cause recessions. The effect of both can be delayed, as declining earnings tend to impact upstream investments.

  32. Hello on Thu, 24th May 2018 6:24 am 

    >>> It draws money out of the real economy

    That is not true. Rising energy prices does not draw money out of the economy. The energy generation business is part of the economy. The money paid for energy is not lost. It’s used to hire workers, buy steel, trucks, computers, services, sand etc.

  33. Davy on Thu, 24th May 2018 6:36 am 

    Permian and Bakken are also economic oil plays as well as strategic. This production is used in the refinery process and thus allows many other unconventionals economic potential. I read so many here harp on this resource and relate it to low interest rates and central bank easing. They speak of low EROI and nonperforming debt. This is true but the reality is more clouded. Get a grip folks so much of what is going on today is central bank influenced not just shale. Our global economy is significantly malinvested meaning many companies and governments will not function with higher rates and less liquidity. Price discovery is distorted making asset markets overpriced. Other parts of the economy are in deflation. Shale is just one of the economic sectors riding this wave.

    This shale component of our oil complex is very important. It has delayed negative peak oil dynamics. This delay has allow renewables, another economic energy source, to expand drastically. We live in a time of behavioral delusions and economic distortions. There is still plenty of growth so these delusions and distortions are obscured. The corruption and wealth transfer is likewise obscured. Just wait until real economic decline sets in which it surely will one day then all these unsustainable economic arrangements will fold.

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