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Will The Oil Patch Bust Trigger Recession?

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

This seemingly inexhaustible credit line is now drying up, with severely negative consequences for oil producers with debt that's coming due.

Could the oil patch bust triggered by oil plummeting from $100/barrel to $50/barrel kick the U.S. into recession? Longtime correspondent B.C. recently observed: The question is whether the incipient recession in the energy and energy-related transport sectors is sufficient this time around to be the proximate cause of a US/global recession and real estate bust.

To help answer the question, B.C. sent this FRED chart of key measures of economic activity in Texas, America's GDP and industrial production and the price of oil. The chart may look busy but the key indicators are oil (the blue line that fell off a cliff and has formed a fish hook), the red line (GDP adjusted for inflation, i.e. real GDP), the dotted line (industrial production) and the remaining two lines that reflect the leading indicators and economic activity in Texas.

Six months into the energy bust, the leading index for Texas has hit the zero line, U.S. industrial production has rolled over but real GDP hasn't budged. So far, the impact of dramatically lower oil revenues has been limited to the oil patch, but the potential for contagion is still present.

As B.C. noted:

The last time the energy sector experienced a similar bust as is emerging today and clearly evident in Texas was in 1985-86, which occurred coincident with the crash in the price of oil and the onset of the S&L Crisis.

 

However, the US economy overall did not experience recession, but Industrial Production (manufacturing) decelerated to around 0% even as real GDP did not get close to "stall speed", owing primarily to the effects of Baby Boomers entered the phase of life for peak spending and household formation.

 

Also, it did not hurt that the constant-US$ price of oil fell from $37 to $16 (similar scale as the recent drop from $100+ to $50/barrel) and the price of gasoline to below $2/gallon.

In other words, back in the 1980s oil bust, the drop in gasoline prices helped consumer spending and the mass entry of Baby Boomers into the housing market provided a source of broad-based economic stimulus.

The recent drop in gasoline prices has not stimulated consumer spending much, thwarting economists' expectations of a big dividend from the oil bust.

Housing formation remains historically weak as home prices have soared out of reach of young families struggling with stagnant wages, crushing student loans and an uneven job market that rewards a few and leaves many with insecure incomes.

So these positives are either weak or missing in action.

But what's different this time is the $550 billion that has been loaned to energy producers: Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.

This seemingly inexhaustible credit line is now drying up, with severely negative consequences for oil producers with debt that's coming due and has to be rolled into new loans: Is The US Shale Industry About To Run Out Of Lifelines? (Zero Hedge).

Should oil resume its slide (and there are plentiful reasons this is likely--Saudi Arabia's stated intention to increase market share, Iran's plans to double its production and shale oil producers needing to maintain cash flow to make interest payments), then the well of ready credit could quickly dry up completely, pushing marginal producers and their lenders into insolvency.

What's also different is a looming global recession, a $900 billion subprime auto-loan bubble that's about to burst and an echo-bubble in housing that's threatening to follow the first housing bubble's trajectory of crash and burn.

The row of dominoes swaying unsteadily in these stiff winds won't take much to topple.

 

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Wed, 07/22/2015 - 11:20 | 6341449 JustObserving
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Will The Oil Patch Bust Trigger Recession?

The Nobel Prize Winners full spectrum war against Russia backfiring at home?  Who could have thunk that?

Besides, we have been in a depression since 2008 if you use accurate inflation data such as the Chapwoood Index.

Forward

Wed, 07/22/2015 - 11:25 | 6341479 PartysOver
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Don't Dis the Smartest Man to ever occupy the WhiteHouse.

/sarc in case you missed it.

Wed, 07/22/2015 - 11:35 | 6341512 medium giraffe
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Even as a joke I find your misuse of the word 'man' deeply offensive.

Wed, 07/22/2015 - 12:47 | 6341731 Amish FinEng
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OMG! I feel the crashing coming!

Wed, 07/22/2015 - 11:55 | 6341577 KnuckleDragger-X
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Optimists and bullshit artists has created this magic place where nothing bad ever happens, except for that tiny reality thing which refuses to go away. Texas and the pessimists who are waiting to buy up 'distressed' assets will survive the bust just like the previous ones.......

Wed, 07/22/2015 - 11:19 | 6341453 SelfGov
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Find me an oil production peak that isn't followed by turmoil...

Wed, 07/22/2015 - 11:36 | 6341515 Iam Yue2
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"Saudis cannot blink even as it burns through foreign reserves."

 

http://blogs.platts.com/2015/07/13/saudi-arabia-foreign-reserves-oil-pri...

Wed, 07/22/2015 - 11:38 | 6341518 Urban Roman
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No, it was actually the spike, before the bust, that triggered the recession.

It goes like this: spike ? recession ? bust. It's not like rocket surgery.

Wed, 07/22/2015 - 12:48 | 6341736 Amish FinEng
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OMG. The crash will wipe out everything and cause The English to go hungry. I feel the crash coming!

Wed, 07/22/2015 - 15:29 | 6342406 Baa baa
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Sounds more like the equipment list at a titty bar.

Wed, 07/22/2015 - 11:48 | 6341552 wrs1
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What stupid shit as usual.

In other words, back in the 1980s oil bust, the drop in gasoline prices helped consumer spending and the mass entry of Baby Boomers into the housing market provided a source of broad-based economic stimulus.

Interest rates were double digit and housing prices were stratospheric.  Gas prices only mildly abated.  I was raising kids at the time and working as an engineer, I was squeezed hard.  Things didn't really get better until Clinton came into office.

 

Wed, 07/22/2015 - 11:55 | 6341578 LawsofPhysics
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"Things didn't really get better until Clinton came into office."   ...and the final chain around the necks of the propietors of financial fraud was finally removed (overturning of Glass-Steagal)...

Yes, since then bullshit paper promises and financial "products" of mass destruction have gone exponential...

Congrats on the "win".

tick tock motherfuckers...

 

Wed, 07/22/2015 - 12:20 | 6341656 saints51
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I am so happy you are posting again. I missed you.

Wed, 07/22/2015 - 11:53 | 6341571 LawsofPhysics
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In the real eCONomy or the fake one?  If I have consumable calories and reduced hydrocarbons in my possession, I can make and do a lot of real shit!!!

The spice must flow motherfuckers...

Wed, 07/22/2015 - 12:14 | 6341636 froze25
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Love the dune reference.  Real things build real capital, paper pushing is an expense in production not an asset.

Wed, 07/22/2015 - 11:54 | 6341575 Mike Honcho
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The repo boys need to get those trucks tuned up and ready to haul.

Wed, 07/22/2015 - 12:02 | 6341584 JustObserving
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WTF is happening at Zero Hedge?  Why so few people here compared to a couple of years ago?  NSA shipping them to internment camps or converting them into Soylent Green?

Or Tylers banning so many like Truth in Sunshine that people are protesting by staying away in droves?

If I did not have dissociative identity disorder, I would be lonely here.

BTW, Alexa shows Zero Hedge rising:

http://www.alexa.com/siteinfo/zerohedge.com

Wed, 07/22/2015 - 12:16 | 6341647 froze25
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Market watch won't ban you they just make it so your comments aren't seen by anyone but you.  If you are a commenter on there and notice how no one is replying to what you are writing, most likely they have "banned" you.  I don't believe that has happened here.  After all it is summer vacation time.

Wed, 07/22/2015 - 12:33 | 6341672 Money Boo Boo
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JustObserving

 

I was on ZH for almost 4 years and was banned under a different alias about a year ago and have come back under this new alias.  I've noticed the same thing as you over the years.  A LOT of good commenters have disappeared like TIS and replaced by shills and trolls.  A big transformation at ZH happened about the same time as when I was originally banned and many commenters at the time said as much back then and promptly disappeared.  If you don't hear from Money Boo Boo again then I have been banned for bringing this up again.  ZH is not what it used to be.......there is another agenda here, and you're smart enough to know what I mean.

 

if you can see ths comment please reply

Wed, 07/22/2015 - 12:35 | 6341694 JustObserving
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Thanks for your reply.

Wishing you the best.

Wed, 07/22/2015 - 13:23 | 6341875 cosmictrainwreck
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This has been broght up enough times lately that silence of the Tylers is deafening...,

Wed, 07/22/2015 - 14:11 | 6342044 vq1
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thats sad. I just joined. Happy to be here so far. 

Wed, 07/22/2015 - 12:14 | 6341641 ejmoosa
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In a recession already....quit looking for reasons.

Wed, 07/22/2015 - 12:17 | 6341649 aliki
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the fed raising rates, which will send the USD even higher, will trigger the recession. oil will just be a 2nd derivative along with stocks, bonds, real estate, and any other asset thats tied to the USD. i can't fuggin wait. please, please, please mrs. yellen raise rates with oil on the ropes. if the UUP bases above $26.00 and grinds higher, oil will have a 30-handle in short-order.

HYG trading 87.57 (longer this trades sub-90.00, bigger the issues in the high yield market become). let the naked emperor viewings begin.

Wed, 07/22/2015 - 12:31 | 6341679 cassotto
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no no no, oil prices spike up just before a recession, 

Wed, 07/22/2015 - 12:37 | 6341702 post turtle saver
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trigger?

Wed, 07/22/2015 - 13:56 | 6341992 Doubleguns
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No, I think its Roy Rogers. 

Wed, 07/22/2015 - 14:06 | 6342025 Jack Burton
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Iran ramping production sanction free will be a killer to the frackers. They have all the cards stacked against them now. Huge production levels by the low cost producers. Massive debt overhang. The winding down of their hedges. Hedges gone, debts due = bankrupt.

Wed, 07/22/2015 - 14:44 | 6342212 TomJoad
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Signal to noise ratio got too low. Lots of us "old hands" bailed, now I sometimes lurk from my heavily shielded, underground bunker of doom.

 

Jump! You Fuckers!

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