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Daniel Yergin: ‘hard times’ ahead for producers

Daniel Yergin: ‘hard times’ ahead for producers thumbnail

In a Q&A, the vice chairman of IHS explains why crude prices are plunging anew and predicts “there’s going to be a lot of turmoil and hurt.”

It’s getting ugly in the oil patch again.

On Monday, the price of benchmark West Texas Intermediate crude closed at $38 per barrel, the lowest level since the depths of the financial crisis in 2009. But that’s just the latest low in what has been a gut-wrenching ride for the oil industry over the past year.

As recently as June of 2014, WTI prices were above $100 per barrel. By January, they had tumbled by half thanks in large part to a supply surge driven by booming U.S. production of shale oil (which I wrote about in a Fortune magazine piece called Oil’s New Math). Producers got a reprieve when prices rallied to around $60 in early summer—only to see a new swoon in recent days.

The immediate reason for the current drop in oil prices is largely the same as the overall market sell-off—new fears about weakness in the Chinese economy. But the stocks of big oil companies have suffered much more than the broader market so far this year. Shares of majors such as Exxon XOM -0.01% , Chevron CVX -2.91% , and Shell RDSA 0.00% are all off by more than 25% year-to-date vs. an 8% decline for the S&P 500.

To get a better sense of where oil prices might go from here and what the consequences will be, I called up Daniel Yergin, author of a pair of essential books on the history of the energy industry, The Prize and The Quest and easily the most erudite expert on the oil and gas industry. As vice chairman of global information and analytics company IHS, Yergin has access to incredible stores of data about what’s happening in the field. His view? Hard times are coming. Edited excerpts:

We started 2015 with oil prices falling dramatically. They rallied in the early summer to above $60 per barrel. Are you surprised to see prices plunging again?

No, because [in the spring] we could see that the companies thought that they were in for a longer period of low. I don’t think anybody was thinking this low. We were hearing six weeks ago how $70 was the new $100 and $65 was the new $90. But the thing that we kept seeing was that the oversupply of oil was actually growing, not decreasing. Since the big price collapse started last fall, Saudi Arabia, Iraq, and the U.S. have added about 2 million barrels per day of new production to the world market. And with demand growing at about 1.4 million barrels per day, it was clear that this renewed optimism about higher prices was misplaced.

What’s the catalyst for the price reversal happening now?

I think the new factor, although it’s been a factor all along, is the apparent greater weakness and economic uncertainty in China. What we’re seeing now is that what China giveth, China taketh away. And in this case China really gave us the supercycle of commodities. But the relative weakness of the Chinese economy and how it affects demand for commodities is the big new factor because it’s become so much more apparent.

So the China-driven demand story has really turned?

My colleagues in Beijing point out that as the Chinese economy shifts, and there’s less construction, less expansion of cities, less heavy industry, that leads to less demand for oil—because an awful lot of the oil consumption is the form of diesel is really trucks that were part of the giant build-out of China. And if that slows down it means a disproportionate decline in oil demand. Even though people are buying more cars in China than they are in the U.S., they’re not driving them anywhere near as much. People always say ‘China,’ but it was really the build-out of China that was driving global commodity markets.

There has been a confidence that the Chinese really controlled the levers of their economy and could act in ways that other countries could not, and keep this amazing growth story going. But now, obviously, the concern is whether that is in fact true. Or is China in for a weaker period? They’re committed to 7% growth for all of the economic, social, and political reasons, but maybe they don’t control all the tools.

U.S. oil production, including shale oil, has stayed pretty robust this year despite lower prices. Can that continue?

What we’ve seen is not just momentum, but also that the industry got a lot more efficient. We have this tool that we’ve created at IHS called the Performance Evaluator that allows us to look at every oil well, every oil field, every shale play, and what you see is a very wide disparity in the performance of these unconventional wells. In 2014, 30% of the wells were responsible for 80% of the growth. So costs have come down a lot—and the balance between company and service provider has certainly changed a lot in favor of the company—and companies just became a lot more efficient and cut out the peripheral activities. And that’s how they’ve been able to keep going.

So you’ve had companies saying that with oil at $65 they would be back in business with as many rigs as they would have at $100 per barrel. We expect that at the end of this year every dollar spent on unconventional oil will be 65% more efficient than in 2014. This is a very innovative, flexible industry. With that said, I think that with prices where they are, it’s basically panic level.

What will that panic mean for oil companies?

It means that in the autumn as banks are reviewing their loans, if oil continues as this level for another couple of months, we’re going to see a lot of distress in the oil patch.

Back in the winter, there were dire predictions of bankruptcies and acquisitions this year but that scenario hasn’t materialized as quickly as some thought.

Exactly. So I think the dire straits that were anticipated—it’s a delayed reaction and we’re going to see it now. The banks review loans twice a year. I think they could be more flexible in the spring. But at this level, there’s going to be a lot of turmoil and hurt.

Do you see signs that the major oil companies are dialing back their expectations even more than they were earlier this year?

Yes, I think companies are now expecting that prices are going to be in a lower range, longer. This is definitely not a V-shaped recovery. And it’s going to be more of a stretched-out U, with the right-hand side never quite getting back to the level of the left. Because certainly the [Persian] Gulf producers have made it clear that they don’t want to see $100-a-barrel oil again because of what it does to their competitive position.

It was the refusal of the Saudis to cut production last fall that caused prices to really tank. They wanted prices lower to slow down non-OPEC production, such as U.S. shale oil. With prices this low and perhaps staying low for longer, will the Saudis be forced to buckle and cut production?

We don’t think so. We think they’re going to stay resolute. I think this is a shock. But I think from their point of view this is probably a one- to two-year process. They have the wherewithal to withstand it. And were they to step forward and cut now, they would have to ask themselves what they accomplished. They’re whole thesis starting last year was that if they cut production they’d have to cut again and again. So I think they’re going to stay the course.

And then there’s the other key factor, which is the nuclear agreement with Iran. If it goes ahead, that means that some time early next year Iran starts putting maybe 400,000 to 600,000 barrels per day into the market. This is a battle for market share and market position. Given the geopolitics in the region now, the Gulf producers are not keen to make room for Iran. So they’re looking at not only who’s in the market now—and of course Iran is in the market but not with full volumes—but also next year with Iran coming back in. That’s adding to the more bearish outlook of the market.

It’s hard to see what would push prices much higher any time soon.

Yes, it’s kind of like everything has been turned upside down. In recent years we’ve had strong demand growth and tight supplies. Now we have tepid growth and oversupply. But this is part of a cycle. The impact of the cutbacks will not be seen quite as quickly as might have been anticipated last November when OPEC made its historic decision. But it will show up in supplies that are not developed a few years from now.

Can you attach a dollar figure to the projects that won’t get done now?

The industry response is canceling, delaying, and postponing projects that, if you add it all up, would be worth hundreds of billions of dollars. If you exclude the impact of lower service costs, IHS projects as much as a $600 billion reduction in upstream oil and gas spending between 2015 and 2019, compared to what was expected a year ago.

Play prognosticator for me: By the end of the year, are we more likely to have oil prices below $40 or above $50?

Well, who knows because events will intervene that will change things. But at this point for the fourth quarter we’re seeing Brent crude prices below $50. We think that the next few quarters are going to be tough, really into the spring when oil demand goes down and Iran is presumably coming into the market. You say, What could change things? Well, something from left field, some geopolitical event that affects supply. But if you look at it from the point of view of supply and demand, the downward pressure on prices is going to continue.

So oil’s new math is getting enough harder?

Yeah, the new math is going to be even tougher. There was a period of renewed optimism but I think the hard times are really now at hand.


36 Comments on "Daniel Yergin: ‘hard times’ ahead for producers"

  1. Truth Has A Liberal Bias on Tue, 25th Aug 2015 7:44 pm 

    The credit redetermination cycle in October is going to be a trainwreck. Loans will go unpaid and corporations will go bankrupt.Credit is based on the value of a drillers producing reserves. Once Saudi Arabia with their low prices strategy finishes runnihg the LTO producers off the road this fall the future appetite for lending the LTO industry money will be forever undermined. Those investors that got into the naked credit default swaps and bet against those loans are going to make big winnings at the Wall Street casino table.

  2. Plantagenet on Tue, 25th Aug 2015 9:51 pm 

    When LTO operators go bankrupt big oil will pick up their assets and leases for pennies on the dollar, and LTO production will continue when oil prices go back up

  3. GregT on Tue, 25th Aug 2015 10:25 pm 

    And when, or rather if, oil prices go back up, further damage will be done to the world’s already faltering economies, and big oil will be the next to lose money and possibly also go bankrupt.

    It is the affordability of the oil that matters lil planter, not the volume.

  4. Makati1 on Tue, 25th Aug 2015 11:28 pm 

    Yergin – Fortune LMAO!

  5. marko on Wed, 26th Aug 2015 12:18 am 

    the final play of ksa and usa

  6. Brent on Wed, 26th Aug 2015 1:20 am 

    Last time I checked big oil was also cutting back.

  7. Boat on Wed, 26th Aug 2015 2:49 am 

    We get it,
    When prices go up, it’s a train wreck, when prices go down it’s a train wreck. If prices remain stagnant it’s a train wreck. Did I mention that you think were in the middle of a train wreck?

  8. Davy on Wed, 26th Aug 2015 3:37 am 

    Boat, when prices per the consumer and producer are not in a range of market efficiency the market will be stressed. Prices currently are too low for producers. This is true across the board. Even the ones still making money are cannibalizing to maintain their income stream they need. Much needed investment is not being made as it should. When prices were high the global culture built on cheap energy to maintain 3% or better growth rates was under pressure. I am not sure what you mean by stagnant prices. Is that stagnant high or low? I guess you are being facetious.

    The facts are pointing to a collapsing goldilocks range for oil prices that is increasingly difficult to maintain because oil is depleting in quantity of quality is constantly lowing the economic value of oil. All the crowing about efficiency and technological innovation in the oil patch is cheerleading. There has not been significant innovation in the oil patch since the application of digital technologies. We are at macro limits and declining marginal returns to investments. This is across the board and the oil patch is very much a part of this global condition. In fact much of our problems trying to maintain over consumption and over population is related to oil depletion preventing these twin conditions of overshoot to progress without pain.

  9. Boat on Wed, 26th Aug 2015 4:12 am 

    Prices don’t mean shyt. The lowest cost producer and it’s value is always determined by the customer. If some business is priced out of the market it just means consumers have moved on to something different.
    There has always been pain. Why don’t you look at the growth of cars and trucks as showing how many ten’s of millions that have less pain. In the old days the number of cows and horses symbolized wealth. What is so different.
    This rant about the quality of oil argument is in shambles. Fracking has shut down about 2/3 of drilling rigs and tar sands workers are being laid off but this oil is being replaced by conventional oil. And the world is still growing their economies.
    After the crash the world contracted some but not much and recovered quickly to growth. Maybe not the 3% you claim we need but growth nevertheless.
    Every human that uses oil has more money to spend until the 2.5 mbpd glut is gone. This just a transfer of wealth back to consumers who were paying to much to begin with. This was just market forces in overshoot. Not any decline.

  10. Davy on Wed, 26th Aug 2015 4:37 am 

    Boat you are eating road kill “prices don’t mean shyt” that’s a funny!

    Growth of cars and trucks is a stupid indicator of wealth and shows just how unprepared the world will be for a deindustrializing future. A car without gas is going to make a fine nostalgia piece. I will tell the kids that come by the farm all the things we did with them.

    Cars and trucks are sold on credit and increasingly subprime financing. They are reaching farther out on the payment schedule (72 months????) and getting creative with down payment. Wow, Boat, that is really indicating wealth?

    Boat who’s growth and who’s reporting of growth. I guess you just buy into what you are told our growth is by the manipulative jawboning corrupt establishment. IOW, Boat, you are showing your sheepleness. Many of us here dig deeper and see it is not the growth that they are saying it is.

    Your wealth transfer to the consumer is not materializing much Boat. Just look around at the markets. That should tell you something. Ask the fed why that can’t normalize Boat and get back to me.

  11. Boat on Wed, 26th Aug 2015 5:16 am 

    Boat who’s growth and who’s reporting of growth. I guess you just buy into what you are told our growth is by the manipulative jawboning corrupt establishment. IOW, Boat, you are showing your sheepleness. Many of us here dig deeper and see it is not the growth that they are saying it is

    manipulative jawboning corrupt establishment

    Had to copy that twice. Lol

    Geeze Davy I just look at the charts and numbers, the same ones we have all looked at for decades. I got no dog to pick in this fight. If the numbers were down I would point that out as well. I see what I see, not what you tell me to see. No government or doomer looks for me.

    You say wealth transfer isn’t materializing? How about the 4-5 thousand I will save on gas this year. I look at my own wallet. When I dig I see $300+ dollars per month there that wasn’t there last year.
    I don’t have time to follow the Fed. I am self educated. I use common sense and a lifetime of living. I have found a lot of formal educated people live on the ideas and writings of others. I choose another route to live life. Rely on my own intuition.
    I have trained many what I call educated idiots. Some catch on faster than others. Same as with those who didnt choose education. It’s just a mixed bag. Some got skills, some don’t.

    Same with the market, some got skills, some don’t. When I was young I got into a baseball league. I took out the USA newspaper. By reading the paper I read the money section and started investing. I found a S&P fund had the lowest fees and out performed 80% of funds over time. Why pay for brains when they are not needed. I have done quite well doing nothing else. Yes I am an expert by doing nothing and sticking with the plan. I watch the markets but I don’t live in fear like most humans do. What would happen if I never see a penny? Live on, never had the money in my hand in the first place. Although I do admit to having some sense of peace knowing it’s there. Quit worrying about the Fed and have some peace.

  12. BC on Wed, 26th Aug 2015 5:57 am 

    Boat, WRT wealth, take a look at the following:

    The last time this version of household net worth fell this much was in 2008, 2001, 1981, and 1974.

    A bear market for stocks will only worsen the condition along with subprime auto loan growth at 5- to 7-year loans.

    And the metric at the link above is the reciprocal of the differential rate of so-called “health” care spending to personal consumption expenditures per capita. Yes, it’s recessionary, too.

    This is in part why retail sales ex autos are at the slowest 3- and 6-month average YoY rates since the onset of the previous recession in 2008.

    The bottom 80%+ of US households have no discretionary disposable income. The US economy is structurally and cyclically much weaker than is generally understood.

    Once incremental growth of subprime auto loans ceases and delinquencies for bank C&I loans to the shale sector increase, there will be no denying recession.

    This is what the commodities crash has been indicating since Q4 ’14. The stock market is only now beginning to reflect the incipient global recession. (The stock market has become a “lagging” indicator of recession since the late 1990s.)

    I expect the 10-year yield to fall to 1% or below with outright price deflation along the way, post-2007 nominal GDP trending below 2%, another housing bust, and more debt/asset deflation worsening household net worth.

    Thus, the Fed cannot raise rates this year, if not for years to come. The Fed will likely resume QEternity, perhaps before year end.

  13. JuanP on Wed, 26th Aug 2015 6:10 am 

    I don’t read anything written by Yergin, so I skipped this propaganda piece. I just came here to post this link,

  14. shortonoil on Wed, 26th Aug 2015 7:32 am 

    “But the thing that we kept seeing was that the oversupply of oil was actually growing, not decreasing.”

    The quality of oil produced has declined to the point that it has become so poor it can no longer drive its own demand. This is not surprising as producers have for the last 150 years taken the best that could be found. The process is known as depletion, but apparently Yergin is not familiar with it!

    Petroleum’s cost of production is now greater than what the economy can afford to pay for it. One dollar of oil products can no longer power $1 of economic activity. That results in this graph:

    All of this comes out of the energy balance equations that we post at our site, and is fully explained in our 67 page report. But common sense informs us that as the best of the resource is constantly extracted the per unit value of what remains must go down. Most of the world’s liquid hydrocarbon resource is essentially worthless. It takes more energy to produce it than what is gotten out of it. So essentially worthless is what the world’s reserve is constantly approaching.

    Of course, don’t expect Yergin to say that. His employers may get upset to learn that no one is going to buy the essentially worthless part of their production. He will keep stacking up paychecks, and they will keep stacking up oil that no one wants at Cushing. Maybe no will notice?

  15. rockman on Wed, 26th Aug 2015 9:01 am 

    “When LTO operators go bankrupt big oil will pick up their assets and leases for pennies on the dollar, and LTO production will continue when oil prices go back up”. Hmm…so when oil was $90+ per bbl Big Oil for the most part didn’t give a sh*t about the shales. The independent pubcos dominated those plays. The one big exception was Shell Oil that pissed away the better part of $3 BILLION on one Eagle Ford Shale lease. And the Shell ran away from all the US shale trends.

    Yeah…Big Oil is just waiting for $60/bbl oil so they can jump into the shales. LOL

  16. Nony on Wed, 26th Aug 2015 9:26 am 

    Rock: Statoil bought Brigham. Exxon bought XTO. Conoco Phillips is deep into shale also.

    [Also Shell may have run away from shale LTO, but let’s be precise…not all shale…they have very significant investments in gas in PA and have a distinctive position in the NE Utica play.]

    The assets will move to whatever operator makes sense, including possibly private equity. The issue with big oil company ownership of shale is that it requires more cost control, more hands on local decisions than they are good at. Just because they have cash is not the right reason for them to be involved.

    But the big thing is the assets just don’t have the same value at 40 as they did at 100. 60+ (maybe 65 or 70) is a whole ‘nother ball game. Yeah fringe acreage won’t make money but lots of sweet spots will do so and there are a lot of ready downspacing opportunities. Can even leverage infrastructure. But 40 is tough.

  17. GregT on Wed, 26th Aug 2015 10:43 am 

    “But 40 is tough.”

    Strange that, how 20 something wasn’t tough for much of the last hundred years. I wonder why that would be?

  18. marmico on Wed, 26th Aug 2015 10:49 am 

    It takes more energy to produce it than what is gotten out of it. So essentially worthless is what the world’s reserve is constantly approaching.

    What a crock of shit. You belong in this class: Davy, Hermann, Mo… fucking demented innumerate word salad prattle asshole

    World oil spending is 5% of world income.

  19. BC on Wed, 26th Aug 2015 11:22 am 

    marmico, what is the marginal value-added multiplier of oil for the rest of the economy?

    What is oil’s share of industry requirement costs for the economy in order to produce value-added output?

    What happens when oil’s share of industry requirement costs and the growth of costs no longer permit growth of value-added output per capita for the rest of the economy?

    That’s where we have been since 2005-08.

    This is another way of saying what short is illustrating.

    US real gross output per capita is back to “stall speed”, which previously occurred when the Fed went “all” in, the recession in 2008, and the peak and bursting of the housing bubble before that.


  20. shortonoil on Wed, 26th Aug 2015 12:23 pm 

    Marmico, the obscene. obnoxious, ill mannered little troll is back?

    The Etp Model projects almost exactly what Campbell-Leharrere estimated as recoverable reserves in the 2000 WEO. 1760 Gb and 1800. It now requires more energy to produce petroleum, and its products than what is delivered to the economy. Petroleum can no longer pay for itself on an energy equivalency bases. That also means that it can no longer pay for itself on a $ equivalencey bases. When the $75 trillion in capital stock held by the petroleum industry is gone, so also will be the petroleum industry.

    The trolls, shrills and industry cheerleaders will be denying this until the end. Just like they have been denying depletion since the beginning.

  21. Davy on Wed, 26th Aug 2015 1:20 pm 

    Marm, I love when you talk dirty! BTW Hermann, Mo is the old address. Living in the Ozarks now. Hermann is a good example of a transition town. Check it out folks. It is a great place if you like wine too.

  22. Nony on Wed, 26th Aug 2015 1:39 pm 


    1. We’ve depleted a lot of the $20 oil. (IOW, we used it up. It’s gone. We burned it.)

    2. Demand is higher now.

    3. Restrictions on drilling (Federal lands off limits in the US, political issues in bumfuckitan).

    P.s. You are supposed to hate me. Don’t communicate with the enemy.

  23. Nony on Wed, 26th Aug 2015 1:40 pm 

    Davy, they got wine in the city, too. I would personally never indulge, of course. 😉

  24. Davy on Wed, 26th Aug 2015 1:41 pm 

    China Stunner: Real GDP Is Now A Negative -1.1%, Evercore ISI Calculates

    How about that Corns! Your super hero China is looking rather bad these days. Oh and Mak, forgot to include you also.

  25. GregT on Wed, 26th Aug 2015 1:41 pm 

    Sounds like the Marmi/Noo is getting perilously close to a complete break-down.

    Get help before you hurt yourself Marm, or somebody else.

    If you can’t handle the truth, you shouldn’t be so fixated on

  26. apneaman on Wed, 26th Aug 2015 3:06 pm 

    We also built out a massive, never to be repeated, infrastructure on that $20 or less oil. The US has what 350 million folks and most of the biggest corporations and yet the US can’t keep up the maintenance on it’s infrastructure. Were really going to be fucked here in Canada only 35 million consumer-citizens. Canada is the second biggest country geographically (although some of it is in the arctic) yet with only 35 million apes we were able to build out a massive first world infrastructure because of our wealth of resources and a rapacious #1 customer next door. All on cheap and abundant energy. The peak survivors will get by for while though – until the climate gets them. My grand parents managed to survive on the Alberta prairie with no electricity until the mid 1950’s and it was much harsher winters back then – apes are tougher than you think.

  27. Boat on Wed, 26th Aug 2015 3:24 pm 

    Exactly apeman,
    I get called a worker drone by paying my way but my grandpa cut hedge wood with an axe and tilled 320 acres with a team of horses and a 2 bottom plow. It was in the 50’s they got a hand pump in the kitchen, before they hauled water one bucket at a time from the windmill about 100 yards away. You know, break the ice to get at it in the winter. Those days were not that long ago.

  28. shortonoil on Wed, 26th Aug 2015 3:50 pm 

    WTI $38.60, not many of them will survive for long at that price. The Chinese dumped 900 Rm into their market yesterday, and it went down today. The PPT pumped $billions into the market today to bring the VIX down to 30 from 50. The Chinese are selling Treasuries by the boat load to pay for propping up their crashing market. Interest rates are zero. The FED used up all its ammo shooting at tin cans, and the Indians haven’t even arrived yet!

  29. Boat on Wed, 26th Aug 2015 4:32 pm 

    Why would you want them to survive? As for funding what would you invest in, China or US fracking. Looks like there are plenty of billions laying around.

  30. apneaman on Wed, 26th Aug 2015 4:53 pm 

    Boat, but you are a worker drone and so are most of us, even the ones with shiny degrees hanging on their walls. We were born into it and it is essentially inescapable – no ones fault really. If one can manage to put ones inherent biases on hold and step back and take a look at the big picture it becomes crystal clear that we would have ended up here one way or another given our unique hyper intelligence that is still rooted in a reptilian operating system. If not capitalism, then some other system that encouraged our yeast like hunger for dominance and sugary goodies.

    Also boat if you’re willing to step back and take a look at our civilizations myths you will soon see that we have been lied to about many things. The claims do not match the evidence. I’m not saying we could or should go back because we can’t, nor would most of us choose that if we had a time machine. I’m saying we are not free and have been relentlessly propagandized to believe that we live at the height of human freedom – the pinnacle of progress. This too is necessary to keep the worker drones punching the clock and not asking too many questions. Any freedoms we have or had were only allowed because they did not inhibit the overall growth of the system and those at the top. Notice how some societies were able to abolish some of the harsher realities of life as the energy increased? Now that there are too many apes and thus less cheap energy to maintain, we are losing those freedoms in a hopeless bid to maintain the growth. The circle of freedom shrinks along with the energy/resources. It’s simple biology and because we are unable to slow it down voluntarily as a species, that’s why I say we mimic cancer. I think that’s just how the universe works. I know that’s not very easy for most to accept and while I myself find it disturbing, I simultaneously find it to be a satisfactory evidence based explanation. What do I know hey boat – just another crazy fucking ape.

  31. shortonoil on Wed, 26th Aug 2015 5:36 pm 

    “Why would you want them to survive? As for funding what would you invest in, China or US fracking. Looks like there are plenty of billions laying around.”

    The last time oil was $38 world production was 69 mb/d. Would you expect it to be any different on the way down as it was on the way up?

  32. Boat on Wed, 26th Aug 2015 5:37 pm 

    Once I hit 19 and moved out of the house I quit blaming anybody for anything. I was free. I was anti religion, anti war, anti authority of any kind. But hey, as you get older you find it is a waste of energy to get to excited about anything. I don’t need a future or a past. I use this saying….there were billions of us before this time and there will be billions of us after this time. I don’t care much what they thought before and don’t care what they will think in the future. Nobody is special, nobody has been or will be.
    The golden rule is common sense, most traditional rules are. Rational thinking is a good goal but always expect an opposing opinion. Just the way it is.

  33. Boat on Wed, 26th Aug 2015 6:46 pm 

    Yes I do. When frackers see the price jump, so will they. This time they don’t have to figure out how. This time a flury of wells will be drilling quick. A new paradigm, get used to it.

  34. Makati1 on Wed, 26th Aug 2015 11:52 pm 

    Boat, I doubt a ‘flurry of wells’ will ever be drilled again. When/If we get through this crash, it will be into a world no one wants, but everyone will get. And oil will be only provided for necessary needs, not personal wants. The age of the auto is dying. The age of foot leather is coming. And I don’t mean Nikis from the 3rd world. I meant real leather shoes that last and you value because they are very expensive.

  35. Davy on Thu, 27th Aug 2015 6:35 am 

    Boat, you are right we may see some well pickup but the “gold rush” is over. The gold rush was a bubble from a commodity super cycle intricately tied to the fed and China. Those days are over.

  36. Davy on Thu, 27th Aug 2015 7:17 am 

    Mak, this is not a crash. This is a collapse process. I would call it a mini crash in the commodity dominated emerging markets especially your beloved brics and another Asian crisis. The developed markets were already anemic but the system as a whole still has plenty of life.

    The point we are at is possibly the inflection point. It is the point where deflationary momentum is beyond the control of the central banks at all levels. I am referring to the bubbles they created. The real global economy never properly recovered from 08 but the central banks did manage to blow bubbles. This is why the fed can’t normalize. They could blow bubbles but not ignite real grass roots economic growth.

    What we had after 08 was huge credit/debt creation. We had massive bad debt extend and pretend by a laundry list of policies. The fed blowing bubbles and China building ghost cities was the result. This period was nothing more than an orgy of bad debt extend and pretend party, manufacturing overcapacity, non-productive infrastructure creation, and an overcapacity commodity super cycle.

    We are now at the inflection of a likely bumpy descent of demand and supply destruction across the spectrum of economic activity in the global system. This is the hangover phase from poor investments and policies. We are in effect in a new normal from the old (new) normal of post 08 crisis. This is a new crisis but not a crash.

    This new crisis and inflection to a bumpy descent does give us a better time frame for further descent and a likely crash. We saw the post 08 new normal last until the limits of credit and policy decline from all the major powers but especially China and the Fed. That took 7 years. I imagine this next cycle of decay will be under 7 years.

    We know we are in business cycles. So we can peg this as the start of the new cycle of bubble deflation. Since we are in a financial arrangement of rate repression and market controls with limited normal price discovery this new post 08 normal could limp on 3-5 years in a bubble deflation period. Decay with all its damaging effects of dysfunction, abandonment and irrational decisions will now likely accelerate. Cannibalization of productive resources will occur to cover the effects of mal-investment and overcapacity because bad debt and decisions must be dealt with eventually in the real world.

    We are in that period of paying the piper. Good productive efforts and investments will have to be bled to pay for 7 years of bad decisions and investments. Eventually the decay and cannibalization will destroy our system. I give that process a few years. This will not be a happy face time. The corns are going to be mentally dysfunctional and acting like fools. We see that currently on our board.

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