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"You Can Only Fool Reality So Long"

Tyler Durden's picture




 

Submitted by James H. Kunstler via Kunstler.com,

“Oil prices have dropped $50 a barrel. That may not sound like much. But when you take $107 and you take $57, that’s almost a 47 percent decline…!”

 

–James Puplava, The Financial Sense News Network

May not sound like much? I guess when you hunker down in the lab with the old slide rule and do the math, wow! Those numbers really pop!

This, of course, is the representative thinking out there. But then, these are the very same people who have carried pompoms and megaphones for “the shale revolution” the past couple of years. Being finance professionals they apparently failed to notice the financial side of the business, for instance the fact that so much of the day-to-day shale operation was being run on junk bond financing.

It all seemed to work so well in the eerie matrix of zero interest rate policy (ZIRP) where investors desperate for “yield” — i.e. some return more-than-zilch on their money — ended up in the bond market’s junkyard. These investors, by the way, were the big institutional ones, the pension funds, the insurance companies, the mixed bond smorgasbord funds. They were getting killed on ZIRP. In the good old days of the late 20th century, before Federal Reserve omnipotence, they could depend on a regular annual interest rate churn of between 5 and 10 percent and do what they had do — write pension checks, pay insurance claims, and pay clients, with a little left over for company salaries.

ZIRP ruined all that. In fact, ZIRP destroyed the most fundamental index in the financial universe: the true cost of borrowing money. In doing so, it twerked and torqued the concept of “risk” so badly that risk no longer had any meaning. In “risk-on” financial weather, there was no longer any risk. Imagine that? It also destroyed the entire relationship between borrowed money and the cost-structure of the endeavors it was borrowed for. Take shale oil, for instance.

The fundamental limiting factor for shale oil was that the wells were only good for about two years, and then they were pretty much shot. So, if you were in that business, and held a bunch of leases, you had to constantly drill and re-drill and then drill some more just to keep production up. The drilling cost between $6 and $12-million per well. What happened the past seven years is that the drillers and their playmates on Wall Street hyped the hoo-hah out of the business — it was a shale revolution! In a few short years they drilled to beat the band and the results seemed so impressive that investment money poured into the sector like honey, so they drilled some more. It was going to save the American way of life. We were going to be “energy independent,” the “new Saudi America.” We would be able to drive to Wal-Mart forever!

Be careful what you wish for, the old saw goes. The shale oil “miracle” was an epochal stunt. They goosed so much oil out of the ground in a short period of time that they killed the goose — demand for oil at a price that made it worth drilling for. Now, much of the junk financing will default, and the result of that is no more junk financing for a long, long time, meaning that a lot of planned wells will not be drilled and completed, meaning that the current crop of short-lived wells will crap out in the 24 months ahead, and production will not be replaced by new wells, which will not be there. When and if the riggers get busy again in the Bakken and the Eagle Ford, you can be sure it will be at a much lower level of activity than the glorious year 2014. Of course, it remains to be seen how much financial illness the spoiled junk bond paper will spread through the derivatives markets, not to mention the boring old stock and bond markets and the big banks that traffic there. You can only fool reality so long. Eventually risk-on returns for real and swipes the ground with its mighty tail.

Finance was the lifeblood of the global economy and scam after scam left it riddled with wormholes of fragility. That fragility has been waiting to express itself and the ability of bank wizards to squelch and conceal it may have come to an end. There will be no quick cure for cratering oil prices and the damage it will wreak among the shale drillers. Does that sound like much?

 

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Mon, 12/15/2014 - 15:48 | 5554851 sTls7
sTls7's picture

Let's take bets, when is the 10yr going to hit   <1.

Mon, 12/15/2014 - 16:15 | 5554916 El Oregonian
El Oregonian's picture

Mr. T says: If you don't have Phyzz-You be outta Bizz... FOOL!".

Mon, 12/15/2014 - 16:17 | 5554973 kliguy38
kliguy38's picture

Nature has its own timetable. IF you think she gives a shit about the manipulation then you are going to be in for a rude awakening. I wanna see how they worm out of this blowup

Mon, 12/15/2014 - 16:32 | 5555021 Divided States ...
Divided States of America's picture

I dont know but FIVE years is a lot of time to be fooled.

And trust me Wall Street shows no pity for the old foos like me.

Mon, 12/15/2014 - 17:18 | 5555257 SeattleBruce
SeattleBruce's picture

"ZIRP ruined all that. In fact, ZIRP destroyed the most fundamental index in the financial universe: the true cost of borrowing money. 

In other words, ZIRP/the FED destroyed any semblance of true markets (price discovery).  This is why we constantly talk about misallocation of resources around here.  These people (lackies/criminals) are supposed to be doing the nation's business (not to mention 'God's work')?  Don't think so.

Mon, 12/15/2014 - 17:47 | 5555353 max2205
max2205's picture

Where's the bonus tattoo comments? 

Mon, 12/15/2014 - 16:49 | 5555084 Agstacker
Agstacker's picture

"I ain't gonna fly with no Helicopter Ben!"

Mon, 12/15/2014 - 16:09 | 5554947 sun tzu
sun tzu's picture

Negative rates for the 2-year across many European countries. 

Mon, 12/15/2014 - 15:59 | 5554898 Dr. Engali
Dr. Engali's picture

Mid point 2015.

Mon, 12/15/2014 - 16:01 | 5554910 NoDebt
NoDebt's picture

Impossible.  That's right when the Fed will be raising rates.

Mon, 12/15/2014 - 16:09 | 5554948 Dr. Engali
Dr. Engali's picture

Lol, yeah right. It will be funny to see them invert the curve again.

Mon, 12/15/2014 - 16:34 | 5555023 Jethro
Jethro's picture

There is no point in them even trying to maintain any semblance of veracity any longer.  They may as well use the same chart, over and over again.

Mon, 12/15/2014 - 17:46 | 5555354 Amish Hacker
Amish Hacker's picture

We have always been at war with_________ (fill in the blank).

Mon, 12/15/2014 - 18:28 | 5555568 alangreedspank
alangreedspank's picture

Inverting the yield curve is actually the only tool they have to burst bubbles. It's like a giant reset button.

Mon, 12/15/2014 - 15:51 | 5554855 disabledvet
disabledvet's picture

So I'm not saying the collapse of Wall Street (again) won't "yield" lower production. All I'm saying is that this isn't true in natural gas...and the price collapse there was FAR larger.

Mon, 12/15/2014 - 15:52 | 5554856 MATA HAIRY
MATA HAIRY's picture

what if the central banks start buying oil futures?

Mon, 12/15/2014 - 15:59 | 5554906 Jayda1850
Jayda1850's picture

Who is to say they are not the catalyst for this move down? Every "market" I look at I question the movement in price. Kinda hard to find price discovery when every market has enormous entities actively participating to set prices. I, frankly, cannot tell what is real anymore.

Mon, 12/15/2014 - 16:17 | 5554972 Dr. Engali
Dr. Engali's picture

Maybe this has always been the reality and the real difference is you are awake to realize it.

Mon, 12/15/2014 - 16:38 | 5555047 Jayda1850
Jayda1850's picture

There is no spoon.

Mon, 12/15/2014 - 16:18 | 5554975 SheepDog-One
SheepDog-One's picture

Well, they are......this is the big 'punish Putin' move. I don't believe for a second it will work though, probably just blow up in their faces.

Mon, 12/15/2014 - 21:47 | 5556357 Who was that ma...
Who was that masked man's picture

Hint:  Nothing is "real".  All is illusion, opinion, and conjecture.  Difficult for most to accept I know but, it is what it is.

Mon, 12/15/2014 - 16:03 | 5554923 new game
new game's picture

do u have a clue? do u know wtf a futures contract is?

so where are they going to store the oil? or sell to whom and at what price.

 

anybody think about where all this oil will go - w is storage cap ww?

Mon, 12/15/2014 - 16:47 | 5555074 JR
JR's picture

Danny Schechter made a strong case in April 2011 that speculators and financiers were the cause of the oil and food crisis.

Schechter quoted finance expert Phil Davis  (“a professional’s professional”) and petroleum industry official Dan Gilligan in his April 2011 article, The Scam Behind the Rise in Oil, Food Prices: Speculation on the futures maker, rather than supply and demand in driving up costs, analysts say.

Sixty to seventy percent of the oil contracts in the futures markets are not held by companies that need oil, not by the airlines, not by the oil companies,” says Dan Gilligan, president of the Petroleum Marketers Assn. (representing 8000 retail and wholesale suppliers), “but they’re held by investors who profit from their speculative positions.”

Phil Davis (Phil’s Stock World) goes into detail on how speculators and financiers make their profits while oil moves and doesn’t move around the world - money changing hands. He said that market manipulation and rigging by a cartel actually has loaded tankers crisscrossing the oceans but only landing when the price is right.

“Since the discovery of petroleum, its economics has never been about cutting a square deal for the consumer, corporate or individual, let alone the little guys or the working poor. It has to do with squeezing the most financial value out of this black gold.” -- Henry C.K. Liu,  Rising Oil Prices and the Falling Dollar, June 2008

And lest we forget,oil dipped below $10 per barrel after the Asian financial crisis of 1997 as demand fell when the global economy stalled.”

 

Tue, 12/16/2014 - 12:15 | 5555251 MalteseFalcon
MalteseFalcon's picture

^^^^THIS^^^^^

And at first the "speculators" were the big banks that needed to be re-capitalized.  YOU PAID FOR THIS WITH HIGHER GAS AND FOOD PRICES.

Of course the big banks got out of Dodge before the slaughter.  That's YOUR PENSION FUND taking the hits.

Just keep in mind, when the big boys need your cash, they will raise the price of things that all people need to live day to day.  One way or another, you'll pay.

NEXT TIME THEY'LL JUST SEIZE YOUR SAVINGS.

Mon, 12/15/2014 - 22:46 | 5556558 New Kid
New Kid's picture

Surely this drop on prices is hurting speculators badly?

Mon, 12/15/2014 - 19:01 | 5555714 Stormtrooper
Stormtrooper's picture

new game

We've got some abandoned salt mines in Ohio and cheap rent.  Water is already bad due to fracking so nobody will notice a little petroleum taste.

Mon, 12/15/2014 - 17:56 | 5555403 sTls7
sTls7's picture

Good one.

Mon, 12/15/2014 - 15:51 | 5554857 becky quick and...
becky quick and her beautiful mouth's picture

shareef don't like it.

Mon, 12/15/2014 - 15:59 | 5554905 NoDebt
NoDebt's picture

Rock the Casbah.

 

Mon, 12/15/2014 - 15:53 | 5554859 reader2010
reader2010's picture

It's a social violence waged against the working class. 

Mon, 12/15/2014 - 15:53 | 5554860 i_call_you_my_base
i_call_you_my_base's picture

I've never thought to use percentages to analyze change. This James Puplava is a genius.

Mon, 12/15/2014 - 15:53 | 5554866 falak pema
falak pema's picture

risk and return are to capitalism what God and devil are to the creationist world : Balance.

We have to balance as humans as both extremes are unattainable to humans; we will never be totally good nor totally bad; we will never be totally without risk nor totally without return. 

Its our choice that defines where we place the cursor. My comments only apply to the temporal construct; it goes without saying, but for ZH I'll say it. (as here anything goes! Its fight club)

Mon, 12/15/2014 - 18:20 | 5555528 TeethVillage88s
TeethVillage88s's picture

Philosophically we bring the same Ethos to Capitalism as we do to War and Spying on our whole population. Well and QE, Operation Twist, ZIRP, and the Bailout of TBTF/No Prosecutions of Huge Wall Street Fraud.

We seem to lack Ethos in the USA, in DC Politics, in Big Government, and in Banking.

Perhaps it is Logos & Ethos are to Government what God & the devil are to Creationists.

Audit the FED
End the FED
Audit the Federal Government
Audit CBO, GAO, DOJ, FBI, SEC, FINRA, FTC, FDIC, OCC, Treasury, Lobbyists, Foundations, Pentagon, TBTF, WB, IMF, BIS, OECD

Mon, 12/15/2014 - 15:57 | 5554883 kchrisc
kchrisc's picture

Another way to think about ZIRP is as a giant rubberband stretched further and further apart. Eventually it's going to snap, and those on both ends are going to get smacked in the face.

An American, not US subject.

 

When it snaps, you want to be standing well clear in "physical" land.

Mon, 12/15/2014 - 15:59 | 5554900 skbull44
skbull44's picture

Cue the next reincarnation of QE...

 

htpp://olduvai.ca

Mon, 12/15/2014 - 15:59 | 5554902 SillyWabbits
SillyWabbits's picture

Looks like oil financing is on a slippery slope.

Mon, 12/15/2014 - 16:01 | 5554907 j0nx
j0nx's picture

What people have failed to ask so far is why has oil been so expensive for the past 5 years? Was it demand and scarcity that drove up the price or blatant manipulation by the financial oligarchs who are no longer able to do it anymore? If manipulation then what is to be done about the hundreds of billions in profit that was made and redistributing it to the American people?

Mon, 12/15/2014 - 16:20 | 5554984 BandGap
BandGap's picture

It's called conditioning and manipulation.

You have to set the trap before you can spring it. Note the US military build up during the period and before. Now how are our "enemies" going to buy their bombs when their money is heading down the drain? Almost perfect timing.

The added benefit is that the prices added to the illusion of coming out of this depression. Someday we'll bounce off the bottom. Someday soon.

 

Mon, 12/15/2014 - 16:01 | 5554911 NoWayJose
NoWayJose's picture

< There will be no quick cure for cratering oil prices and the damage it will wreak among the shale drillers>

 

Actually the 'cure' will be both quick and easy -- once Goldman flips the switch from 'sell' to 'buy' on its oil trading algos...

Mon, 12/15/2014 - 16:03 | 5554924 101 years and c...
101 years and counting's picture

"There will be no quick cure for cratering oil prices ...."  Not true.  There's always WW3 AND some money printing by the Fed.  Possibly over $100B per month so the banks can get their gambling fix.  And, lets not forget the "unforeseeable" outside events such as attacks on oil infrastructure in Saudi Arabia, Iran, Iraq, etc......

Mon, 12/15/2014 - 16:06 | 5554931 deflator
deflator's picture

 Why cheap oil isn't good for the economy?

 Cause it ain't cheap oil!

Mon, 12/15/2014 - 16:05 | 5554933 new game
new game's picture

you do know someone somewhere takes delivery?

Mon, 12/15/2014 - 16:08 | 5554938 williambanzai7
williambanzai7's picture

Man has an invincible inclination to allow himself to be deceived and is, as it were, enchanted with happiness when the rhapsodist tells him epic fables as if they were true, or when the actor in the theater acts more royally than any real king.--Frederich Nietzsche

Mon, 12/15/2014 - 16:11 | 5554949 yogibear
yogibear's picture

QE 4 some time in 2015. The Fed has to keep the party going.

Mon, 12/15/2014 - 16:21 | 5554985 Monty Burns
Monty Burns's picture

" ZIRP destroyed the most fundamental index in the financial universe: the true cost of borrowing money"

Never a truer word. And the full impact hasn't even begun to be seen.


Mon, 12/15/2014 - 16:21 | 5554987 TheRideNeverEnds
TheRideNeverEnds's picture

 

Are you implying the FED cannot just buy up those junk bonds?  because they can.

 

The real question is will they and that can be answered by figuring out how much exposure do Goldman and JPM have to this because that will determine if the FED or .gov bails this mess out.

 

 I would guess they have long since passed the risk onto pension funds and retail by now, probably when oil was still over 100 in which case look out below!

Mon, 12/15/2014 - 16:55 | 5555000 Barnaby
Barnaby's picture

Grand Junction, Colorado, 1980-1981. Same thing as now, Fool. Only it's more expensive.

Mon, 12/15/2014 - 18:52 | 5555672 ClassicalLib17
ClassicalLib17's picture

Douglas Fir is premium material.  Did you mean undersized?

Mon, 12/15/2014 - 16:27 | 5555004 coast
coast's picture

my only comment for today is a song from youtube...chris rea, gone fishing....I wont make a habit of sending a music link, but it was strong on my spirit to do so today....enjoy.

  https://www.youtube.com/watch?v=Wt0nFwtQZGc

Mon, 12/15/2014 - 16:32 | 5555019 ebworthen
ebworthen's picture

Bill Gross was on CNBC and was asked by Brian Williams about the price drop in oil and the affect it might have.  Gross said something along the lines of this (not a direct quote): 

"An important commodity like oil affects FX trading, which affects high yield credit, which affects other markets, which might lead to insovencies and bankruptcies, and countries defaulting."

Mon, 12/15/2014 - 16:40 | 5555057 undilutedopinion
undilutedopinion's picture

Russia will introduce QE,

Mon, 12/15/2014 - 17:11 | 5555204 Typing Typer
Typing Typer's picture

Quite possibly, they might.

Mon, 12/15/2014 - 16:46 | 5555073 walküre
walküre's picture

are you fucking kidding me?

Finance was the lifeblood of the global economy

the lifeblood of the global economy is LABOR!!

nobody would starve when pencil pushers and paper queens bit the dust but when farmers and workers became all incapacitated, humanity would cease to be

death to the moneychangers!

there's a reason why the J man surrounded himself with guys who actually worked honest jobs and made a living by contributing with their skills and labor

Mon, 12/15/2014 - 17:53 | 5555383 DFCtomm
DFCtomm's picture

Labor is dead as disco. Off shoring took all the money out of it, and now automation will actually kill it in the next 20 to 50 years.

Mon, 12/15/2014 - 16:52 | 5555104 Fix It Again Timmy
Fix It Again Timmy's picture

As Dr. Seuss says, "Zirp goes burb"...

Mon, 12/15/2014 - 17:03 | 5555158 Motorhead
Motorhead's picture

Ah, yes, Jim Puplava, Mr. "Peak Oil" himself.

Mon, 12/15/2014 - 17:13 | 5555233 breadonwaters
breadonwaters's picture

THANK THE GODS THE CONGRESS HAS WALL STREET'S BACK.

Mon, 12/15/2014 - 17:14 | 5555239 breadonwaters
breadonwaters's picture

mAY I SUGGEST EACH INDIVIDUAL CONGRESSMAN BAILS IN TO SHOW THEIR SUPPORT.

Mon, 12/15/2014 - 17:17 | 5555254 undilutedopinion
undilutedopinion's picture

walkure, I agree.

The decline in oil is mainly to punish Russia. If Putin intoduces QE it will take the steam out. Start loading up on RSX, you'll thank me later

Mon, 12/15/2014 - 17:50 | 5555375 DFCtomm
DFCtomm's picture

That's a nice article explaining the obstacles that are now facing the shale oil business. Much better than fracing sucks!

Mon, 12/15/2014 - 18:12 | 5555492 Consuelo
Consuelo's picture

Glad to see JHK bring up Poop-lava's site...   It's been a full on dick-pulling party over there since he told his crew in 2012 to change the meme from cautious and real to unicorns-shitting-skittles...   Same guy who couldn't blubber on enough about 'peak oil', only to spin it on a dime to the 'American Century', led by shale & fracking.    Then again, what could one have expected from yet another $$$Fee-based rip-off member of the 'Financial Services Industry'...  

Mon, 12/15/2014 - 19:16 | 5555783 SgtShaftoe
SgtShaftoe's picture

Good to see another person caught on to the drastic change over there. I don't know if the death of Matt Simmons spooked him, or if he was "talked to" by someone, or he lost his balls to speak something close to truth. Either way, they got really fucked up over there.

Mon, 12/15/2014 - 18:29 | 5555578 alangreedspank
alangreedspank's picture

So, could all these shale oilers going out of business be the black swan that brings it all down ?

Mon, 12/15/2014 - 18:31 | 5555584 rsnoble
rsnoble's picture

Something shittys going to happen or taxpayers wouldn't had just been fucked again the latest sack of shit bill introduced from our overlords.

Mon, 12/15/2014 - 19:28 | 5555839 Clowns on Acid
Clowns on Acid's picture

Jacob Lew has to bring a 3 page bailout letter to Obama just like Paulson did for Bush. I really think that $1 Trillion should do the trick.

Whats the problem mofo's ?... It worked for the Inv banks in 2008 why not for ther far more important oil industry in 2015? I mean Goldman Sachs was bankrupted, until the bailout lofted the Stawk proice to new highs.

Mon, 12/15/2014 - 20:56 | 5556184 noben
noben's picture

Wow, with a 47% drop, a 35% drop in Gold don't look so bad.

Even so, who'd have thought that the most sought real assets (gold and oil) would BOTH stink & sink, and that paperware would gloat & float.

I just don't understand the world anymore. Which way is Up?

Mon, 12/15/2014 - 21:44 | 5556349 Who was that ma...
Who was that masked man's picture

Oils well that ends well.

Unfortunately, this ain't gonna end well.

Do NOT follow this link or you will be banned from the site!