This is the big one……

11 02 2016

This article from The Great Recession Blog just arrived in my news feed, straight from Nicole Foss no less…… written by David Haggith, it’s an amazing read, and you better hang onto your seat, we’re in for a pretty wild ride.

 

 

DavidHaggith-269x300

David Haggith

Only a couple of weeks ago, I said we were entering the jaws of the Epocalypse. Now we are sliding rapidly down the great beast’s throat toward its cavernous belly. The biggest economic collapse the world has ever seen is consuming everything — all commodities, all industries, all national economies, all monetary systems, and eventually all peace and stability. This is the mother of all recessions.

That’s a big statement to swallow, especially when many don’t see the beast because we’re already inside of it. You need to look down from 100,000 feet up in order to observe the scale of this monster that is rising up out of the sea and to see how rapidly it is enveloping the globe and how the world’s collapse into its throat is accelerating. The belly of this leviathan is a swirling black hole, composed of all the word’s debts, that is large enough to swallow every economy on earth.

Mexican retail billionaire Hugo Salinas Price has looked long into the stomach of this mammoth, and this is what he has seen:

 

[Global] debt [as a percentage of GDP] peaked in August of 2014. I’ve been watching this for 20 years, and I have never seen anything like it. It was always growing, and now something has changed. A big change of this sort is an enormous event. I think it portends a new trend, and that trend will be to get out of debt. Deleverage and pay down debt. That is, of course, a contraction. Contraction means depression. The world is going into a depression. It’s going to get very nasty. (USAWatchdog)

 

So, let’s step back and look at the big picture in order to see how immense this thing is: (One thing that you’ll notice is common in the statements of many sources below is comparisons to 2008, when we first entered the Great Recession. You hear that comparison every day now, which says many people feel that, after piling on trillions of dollars and trillions of euros and trillions of ___ in debt to save ourselves, we are right back where we started … but exhausted from the effort.)

 


Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy


 

Toxic debt flush heard round the world

 

As Hugo Salinas Price warns, toxic debt may have hit a ceiling where it has stopped going up because individuals, industries, and now nations have reached real debt limits they cannot support. According to the New York Times, toxic loans around the world are weighing heavily on global growth:

 

Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come. The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising.

 

The Times lists China as leading the world for personal and industrial bad debt at $5 trillion, which in terms of its economy is half of China’s GDP. As a result of hitting this ceiling, Chinese banks reeled in lending in the last month of 2015.

And this is just bad debt. It does not include debts that are being properly paid or China’s national debts. These are the loans already failing. Likewise with the global debt problem The Times is writing about. Bad loans in Europe, for example, total about $1 trillion. Again, that’s just the loans that are already falling into the abyss.

Many national debts are more than the entire annual GDP of the nation, including the enormous US national debt, which will reach $20,000,000,000,000 by the time the next president takes office. (You can’t even see wide enough to focus on that many zeroes at the same time. The “2” gets lost in your peripheral vision.) And many places like Greece and Brazil and Puerto Rico are defaulting on their debts.

The United State’s debt alone is only payable so long as interest rates stay near zero; but rates are now rising, and the number of financiers has greatly retreated. The only thing to save the US from its toppling debt problem in the short term may be that people all over the world run to the shelter of US bonds when everything else is caving into the black hole.

 


Between Debt and the Devil: Money, Credit, and Fixing Global Finance. One of Financial Times Best Economics Books of 2015. “A devastating critique of the banking system. Most credit is not needed for economic growth — but it drives real estate booms and busts and leads to financial crisis and depression.”


 

Bulls become bears

 

The first sign that this global change is now consuming the US is in how many of the market’s permabulls are becoming neobears and which sizable institutions are making the switch quickly. Citi has been bullish over the years, but now they have stepped out of the back half of the bull suit and put on a toothy bear suit, expecting oil to drop to the mid-twenties and geopolitical change that “is maybe unprecedented for the last decades”:

 

The global economy seems trapped in a “death spiral” that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi … strategists have warned…. “The stakes are high, perhaps higher than they have ever been in the post-World War II era.”(Yahoo)

 

Here’s a 100,000-foot-high look at the US stock market that is now swirling down the throat of the beast: Last year, the number of stock dividend reductions surpassed 2008. In fact, 2015’s number of cuts — now that the year is barely past — was 35% higher than the number of cuts going into the Great Recession. That gives you some sense of the scale of corporate pain that is just starting to be felt. Companies cut dividends when they have less profit to share with their owners. Bloomberg referred to it as “equity investors … suffered death by 394 cuts.”

Another high-view snapshot of corporate collapse can be see everywhere in US retail: Walmart, Macy’s, J.C. Penny’s, K-Mart, The Gap and many smaller retailers have all announced a large number of store closures and layoffs to come.

US Corporate earnings across all industries are on track for their third quarter in a row of year-on-year declines. That is an ominous signal because back-to-back periods of decline for just two quarters are always followed by a decline of, at least, 20% (a bear market) in the S&P 500.

 

This weakness in overall corporate earnings growth could bode badly for the broader stock market, as it represents the actual impact of geopolitical concerns, the slowdown in China, the weakness in oil prices and productivity, said Karyn Cavanaugh, senior market strategiest at Voya Investment Management. “Earnings discount all the noise…. It’s the best unbiased view of what’s going on in the global economy.” (MarketWatch)

 

As earnings fall, the much watched price-earnings ratio gets more top-heavy, putting pressure on stocks to fall. Thus, on Friday:

 

The willingness of U.S. stock investors to abide price-earnings ratios stretching into three and four digits all but ended Friday as the Nasdaq Composite Index fell to its lowest since October 2014. The … tumble in American equities turned into a full-blown selloff in stocks with the highest valuation. The Nasdaq Internet Index sank 5.2 percent, as Facebook Inc. lost 5.8 percent. (NewsMax)

 

The most significant part of this picture is that tech stocks have finally started making the big drop with the few that have been holding the stock market’s average up being the ones now taking the biggest plunge. Facebook, Amazon, Apple, and Microsoft are all falling fast. LinkedIn is getting “destroyed.” The time at the top is over, which leaves the market with zero levitation. Therefore, it’s no surprise that we saw another major sell-off on Monday.

Said USA Today, Bye, Bye Internet Bubble 2.0,” calling this “the worst start of a year for technology stocks since the Great Recession.

 

Collapse of the petrodollar opening sink holes everywhere

 

It’s no secret that Russia has outlawed trading oil in dollars among its satellite nations and that China and Russia trade in yuan now, not dollars, but Iran is the latest to stick it to the US, announcing that it will no longer trade oil in US dollars either but will sell its oil only for euros. So, we have the gargantyuan and the petroeuro, taking major bites out of the petrodollar now. China and Russia have also been divesting from US treasuries for some time and investing in gold, something I started point out here a few years ago.

All of this means that the US dollar is rapidly ceasing to be the trade currency of the world, and that prized status is the only thing that has made the US national debt manageable over the years, as the high demand for trade dollars guarantees low interest on the most colossal debt in the world because national treasuries and businesses sop up US bonds as a safe way to store trade dollars. The Federal Reserve has become the buyer of last resort for US debt; but it has maxed out.

The move away from the petrodollar is momentous. Losing its status as the reserve currency of the world will take a massive bite out of US superpower status, and that, of course, is exactly what Russia, China and Iran are counting on. With so many countries now trading oil exclusively in non-dollar currencies, one has to wonder how much longer overstretched Saudi Arabia can hold out as an oil supplier that trades oil only in dollars. Most likely they will feel a lot of economic pressure to start trading in other currencies, especially now that US support of Saudi Arabia appears to have weakened.

Iran’s announcement may be why the dollar dropped drastically in value last week. The high value of the dollar makes oil very expensive to other nations, who have to convert their low-valued currency to dollars to buy oil. This is surely another reason the price of oil has been falling, though almost no one talks about it … almost as if the economic geniuses of the world can’t figure this simple relationship out. As nations compete to lower the value of their currency with zero interest policies and quantitative easing, they are burying the petrodollar.

In nations with currencies priced very low compared to the dollar, oil is like an American export — too expensive for people in that nation to afford, causing demand to fall off and, thus, further increasing the problem of oversupply and lowering the price of oil. This creates another big reason for many nations to want to stop trading oil in dollars.

I’ve been reporting on this site for a few years now on this global campaign to kill the petrodollar, and that campaign is finally nearing maturity. For the US, it will mark a horrible transformation in the world, as it will hugely erode US superpower status because it will become much more difficult to finance a massive military machine.

 

The banks that are too-big-to-fail are falling FAST!

 

Deutsch Bank‘s derivative bonds (the kind that caused the Great Recession) are pealing away. The top-tier bonds of Germany’s largest bank have lost about 20% since the start of the year. Investors are fleeing as tumbling profits cause them to doubt the issuer’s ability to support the coupon payments on the bonds. InvestmentWatch reports that “Deutsche Bank is shaking to its foundations” and asks “is a new banking crisis around the corner?” DB stock has fallen off its high last July by 50%.

By how much is Deutsch Bank too big to fall? DB’s exposure to derivatives is over 55-trillion euros. That’s five times more than the GDP of the entire Eurozone or three times the amount of debt the United States has accumulated since it was founded. Its CEO says publicly he’d rather be somewhere else. Looking up at a leaning tower like that, I imagine so.

As DB bleeds red ink from its throat, its cries to the European Central Bank are burbled in blood. DB has warned the central bank that zero-interest-rate policies and quantitative easing are now killing bank stocks, but that didn’t stop giddy ECB president, Murio Draghi, from announcing a lot more easing to come … as much as it takes. As much as it takes to what? Kill all of Europe’s banks now that stimulus is working in reverse with negative interest making new money in reserves expensive to hang on to?

Is the ECB waging war on it major banks, or is it just too dumb to realize that QE is far beyond the high point on the bell curve of diminishing returns to where it is now killing stock values while doing nothing to boost the economy? (Hence, the move to negative interest rates to go to the ultimate extreme of easing because you have to push the accelerator through the floor when returns are diminishing that fast). As ZeroHedge has said, we are now entering a “monetary twilight zone”where …

 

Europe’s largest bank is openly defying central bank policy and demanding an end to easy money. Alas, since tighter monetary policy assures just as much if not more pain, one can’t help but wonder just how the central banks get themselves out of this particular trap they set up for themselves.

 

Credit Suisse reported a loss of 6.4 billion Swiss francs for the fourth quarter of 2015, suffering from its exposure to leveraged loans and bad acquisitions.

 

DoubleLine Capital’s Jeffrey Gundlach said it’s “frightening” to see major financial stocks trading at prices below their financial crisis levels…. “Do you know that Credit Suisse, which is a powerhouse bank, their stock price is lower than it was in the depths of the financial crisis in 2009?” (NewMax)

 

Credit Suisse has announced it will cut 4,000 jobs after posting its first quarterly loss since 2008. The Stoxx Europe 600 Banks Index has also posted its longest string of weekly losses since 2008, having posted six straight weeks of decline. The European Central Bank’s calculus says banks in Europe should be benefiting from QE, but it’s clearly lost all of its mojo or is now  actually more detrimental than good like a megadose of potent medicine. Negative interest rates are particularly taking a toll because banks have to pay interest on their reserves, instead of making interest.

Banks have rapidly become so troubled that NewsMax ran the following headline “Bank Selloffs Replacing Oil Rout as Stock Market Pressure Point.”  In other words, bank stocks are not just falling; they are falling at a rate that is causing fear contagion to other stocks. It’s not easy these days to beat out oil as a cause of further sell-offs in the stock market.

How quickly we moved from a world of commodity collapse to what now appears to be morphing into a banking collapse like we saw in 2008. Financial stocks overall have lost $350 billion just since 2016 began. Volatility in bank shares has spiked to levels not seen since … well, once again, 2008.

Consider how big the derivatives market is — that new investment vehicle that turned into such a pernicious demon in 2007 and 2008 because they are so complicated almost no one understands what they are buying and because they mix a little toxic debt throughout, like reducing the cancer in one part of the body by spreading its cells evenly everywhere. Instead of learning from the first crash into the Great Recession, we have run full speed into expanding this market. Estimates of the value of derivatives in the market range half a quadrillion dollars to one-and-a-half quadrillion dollars (depending on what you count and whether you go by how much was invested into them or their face value). Either way, that’s a behemoth number of derivatives floating around the world, many of them carrying their own little attachment of metastasizing toxins! (That’s, at least, a thousand trillions! More than ten times the entire GDP of the world.)

Still think 2016 isn’t the Year of the Epocalypse? Well, if you do, the rest of the ride will convince you soon enough. If I were the Fed, I’d be really, really worried that my star-spangled recovery plan was starting to look more like Mothra in flames.

 

The oil spillover

 

But don’t think oil is loosing its shine as a market killer. Another bearish prediction by Citi, now that it has change suits, is to expect “Oilmegeddon.” (Hmm, sounds like something that would be found in an epocalypse to me.)

 

“It seems reasonable to assume that another year of extreme moves in U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks,” the analysts add. “Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon….We should all fear Oilmageddon,” Citi concludes. “Global recession, as we define it, would leave nowhere to hide in equities. Cash wins.” (NewsMax)

 

In the first months of the crash in oil prices, most analysts felt that the only companies that would be seriously hurt would be marginal fracking companies — the speculative little guys jumping into the oil shale. Now that fourth-quarter results are coming in from the world’s largest refineries, we find that isn’t true:

 

British Petroleum kicked off the European oil and gas reporting season with an ugly set of fourth-quarter results. The company reported a sharp drop in earnings for the fourth quarter. It’s own measure of underlying profit dropped 91%.… All of this is a recipe for two things — more cost cutting and more job cuts… What’s worrying for investors is that the first quarter, so far, doesn’t look much better. (MarketWatch)

 

That’s massive. BP has already announced the elimination of 7,000 jobs. Chevron and Shell also saw profit declines. Royal Dutch Shell has announced it will be making 10,000 job cuts.

If that’s how bad things got during the fourth quarter of 2015, imagine how bad they will get this quarter now that oil prices have gone down a lot more. Hence, the talk of “Oilmageddon.”

As if the industry wasn’t already burning up, President Obama is trying to impose a $10 carbon tax on each barrel of oil. At today’s oil prices, that is a 30% tax. At tomorrow’s prices, it may be a 50% tax! One has to wonder how far out of touch economically, a president can get in order to propose a hefty tax like that at a time like this.

Naturally, oil magnate T. Boone Pickens calls it “the dumbest idea ever.” While I have a general hatred for gigantic oil companies, especially since gasoline prices in my area have not dropped much, I have to agree that a $10/barrel carbon tax could cinch the noose around the neck of an already strangle industry.

Maybe that’s the plan. While the tax would hit the end user more, no tax helps an industry thrive.

 

The Epocalypse swallows everything whole

 

The reason the Epocalypse is going to be a far worse bloodbath than the first plunge into the Great Recession is that all of the central banks of the world have, by their own admission now, “exhausted their ammunition” to fight back against another recession. Back at the start of the Fed’s Goliath recovery plan, I posited that we would be falling back into the abyss right at the time when all central banks had exhausted their strength and when all nations had maxed their debt.

Here we are.

Many central banks are already doing negative interest; yet, their economies are still sinking. It appears that more negative interest could actually sink them faster by eroding their banks with internal ulcers. It will certainly require going cashless in order for those banks to start handing the negative interest down to their customers. They have to absorb the cost of negative interest if they cannot loan out their funds fast enough. That’s why some banks are now pleading with their government’s for a cashless solution … so they can prevent their customers from switching to the cash-under-the-mattress exit plan.

The world faces a tsunami of epochal defaults. William White, former economist for the International Bank of Settlements, says,

 

Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief…. It was always dangerous to rely on central banks to sort out a solvency problem … It is a recipe for disorder, and now we are hitting the limit… It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something. (The Telegraph)

 

We have finally reached that time in our decades of astronomical debt-based economic expansion where it is time to pay the piper. We traveled blithely along many decades on currency cushions filled with hot air. In an article titled, “Debt, defaults, and devaluations: why this market crash is like nothing we’ve seen before,” The Telegraph says,

 

A pernicious cycle of collapsing commodities, corporate defaults, and currency wars loom over the global economy. Can anything stop it from unravelling…? Commodity prices have crashed by two thirds since their peaks in 2014…. China, the emerging world, and financial markets – are all brewing to create a perfect storm in a global economy that has barely come to terms with the Great Recession…. “We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before.”

 

Yes, this is the big one. The times we now face are the reason I started writing this blog four+ years ago. The Federal Reserve’s Goliath recovery plan was cloned all over the world for seven years, and for seven years all nations have done nothing to rethink their debt-based economic structures that are now cracking and groaning and falling into … the Epocalypse.

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Mad Max according to Russell Brand

21 05 2015





The Real Reason behind the Oil Price Collapse

14 03 2015

This article originally appeared at TomDispatch.com. To stay on top of important articles like these, sign up to receive the latest updates from TomDispatch.com.

Michael T. Klare on Energy Policy and Sustainability

Michael T Klare

By Michael T Klare

Many reasons have been provided for the dramatic plunge in the price of oil to about $60 per barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation; overproduction at shale fields in the United States; the decision of the Saudis and other Middle Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers in the US and elsewhere); and the increased value of the dollar relative to other currencies. There is, however, one reason that’s not being discussed, and yet it could be the most important of all: the complete collapse of Big Oil’s production-maximizing business model.

Until last fall, when the price decline gathered momentum, the oil giants were operating at full throttle, pumping out more petroleum every day. They did so, of course, in part to profit from the high prices. For most of the previous six years, Brent crude, the international benchmark for crude oil, had been selling at $100 or higher. But Big Oil was also operating according to a business model that assumed an ever-increasing demand for its products, however costly they might be to produce and refine. This meant that no fossil fuel reserves, no potential source of supply—no matter how remote or hard to reach, how far offshore or deeply buried, how encased in rock—was deemed untouchable in the mad scramble to increase output and profits.

In recent years, this output-maximizing strategy had, in turn, generated historic wealth for the giant oil companies. Exxon, the largest US-based oil firm, earned an eye-popping $32.6 billion in 2013 alone, more than any other American company except for Apple. Chevron, the second biggest oil firm, posted earnings of $21.4 billion that same year. State-owned companies like Saudi Aramco and Russia’s Rosneft also reaped mammoth profits.

How things have changed in a matter of mere months. With demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional.

To fully appreciate the nature of the energy industry’s predicament, it’s necessary to go back a decade to 2005, when the production-maximizing strategy was first adopted. At that time, Big Oil faced a critical juncture. On the one hand, many existing oil fields were being depleted at a torrid pace, leading experts to predict an imminent “peak” in global oil production, followed by an irreversible decline; on the other, rapid economic growth in China, India and other developing nations was pushing demand for fossil fuels into the stratosphere. In those same years, concern over climate change was also beginning to gather momentum, threatening the future of Big Oil and generating pressures to invest in alternative forms of energy.

A “Brave New World” of Tough Oil

No one better captured that moment than David O’Reilly, the chairman and CEO of Chevron. “Our industry is at a strategic inflection point, a unique place in our history,” he told a gathering of oil executives that February. “The most visible element of this new equation,” he explained in what some observers dubbed his “Brave New World” address, “is that relative to demand, oil is no longer in plentiful supply.” Even though China was sucking up oil, coal and natural gas supplies at a staggering rate, he had a message for that country and the world: “The era of easy access to energy is over.”

To prosper in such an environment, O’Reilly explained, the oil industry would have to adopt a new strategy. It would have to look beyond the easy-to-reach sources that had powered it in the past and make massive investments in the extraction of what the industry calls “unconventional oil” and what I labeled at the time “tough oil“: resources located far offshore, in the threatening environments of the far north, in politically dangerous places like Iraq, or in unyielding rock formations like shale. “Increasingly,” O’Reilly insisted, “future supplies will have to be found in ultradeep water and other remote areas, development projects that will ultimately require new technology and trillions of dollars of investment in new infrastructure.”

For top industry officials like O’Reilly, it seemed evident that Big Oil had no choice in the matter. It would have to invest those needed trillions in tough-oil projects or lose ground to other sources of energy, drying up its stream of profits. True, the cost of extracting unconventional oil would be much greater than from easier-to-reach conventional reserves (not to mention more environmentally hazardous), but that would be the world’s problem, not theirs. “Collectively, we are stepping up to this challenge,” O’Reilly declared. “The industry is making significant investments to build additional capacity for future production.”

On this basis, Chevron, Exxon, Royal Dutch Shell and other major firms indeed invested enormous amounts of money and resources in a growing unconventional oil and gas race, an extraordinary saga I described in my book The Race for What’s Left. Some, including Chevron and Shell, started drilling in the deep waters of the Gulf of Mexico; others, including Exxon, commenced operations in the Arctic and eastern Siberia. Virtually every one of them began exploiting US shale reserves via hydro-fracking.

Only one top executive questioned this drill-baby-drill approach: John Browne, then the chief executive of BP. Claiming that the science of climate change had become too convincing to deny, Browne argued that Big Energy would have to look “beyond petroleum” and put major resources into alternative sources of supply. “Climate change is an issue which raises fundamental questions about the relationship between companies and society as a whole, and between one generation and the next,” he had declared as early as 2002. For BP, he indicated, that meant developing wind power, solar power and biofuels.

Browne, however, was eased out of BP in 2007 just as Big Oil’s output-maximizing business model was taking off, and his successor, Tony Hayward, quickly abandoned the “beyond petroleum” approach. “Some may question whether so much of the [world’s energy] growth needs to come from fossil fuels,” he said in 2009. “But here it is vital that we face up to the harsh reality [of energy availability].” Despite the growing emphasis on renewables, “we still foresee 80% of energy coming from fossil fuels in 2030.”

Under Hayward’s leadership, BP largely discontinued its research into alternative forms of energy and reaffirmed its commitment to the production of oil and gas, the tougher the better. Following in the footsteps of other giant firms, BP hustled into the Arctic, the deep water of the Gulf of Mexico, and Canadian tar sands, a particularly carbon-dirty and messy-to-produce form of energy. In its drive to become the leading producer in the Gulf, BP rushed the exploration of a deep offshore field it called Macondo, triggeringthe Deepwater Horizon blow-out of April 2010 and the devastating oil spill of monumental proportions that followed.

Over the Cliff

By the end of the first decade of this century, Big Oil was united in its embrace of its new production-maximizing, drill-baby-drill approach. It made the necessary investments, perfected new technology for extracting tough oil, and did indeed triumph over the decline of existing, “easy oil” deposits. In those years, it managed to ramp up production in remarkable ways, bringing ever more hard-to-reach oil reservoirs online.

According to the Energy Information Administration (EIA) of the US Department of Energy, world oil production rose from 85.1 million barrels per day in 2005 to 92.9 million in 2014, despite the continuing decline of many legacy fields in North America and the Middle East. Claiming that industry investments in new drilling technologies had vanquished the specter of oil scarcity, BP’s latest CEO, Bob Dudley, assured the world only a year ago that Big Oil was going places and the only thing that had “peaked” was “the theory of peak oil.”

That, of course, was just before oil prices took their leap off the cliff, bringing instantly into question the wisdom of continuing to pump out record levels of petroleum. The production-maximizing strategy crafted by O’Reilly and his fellow CEOs rested on three fundamental assumptions: that, year after year, demand would keep climbing; that such rising demand would ensure prices high enough to justify costly investments in unconventional oil; and that concern over climate change would in no significant way alter the equation. Today, none of these assumptions holds true.

Demand will continue to rise—that’s undeniable, given expected growth in world income and population—but not at the pace to which Big Oil has become accustomed. Consider this: in 2005, when many of the major investments in unconventional oil were getting under way, the EIA projected that global oil demand would reach 103.2 million barrels per day in 2015; now, it’s lowered that figure for this year to only 93.1 million barrels. Those 10 million “lost” barrels per day in expected consumption may not seem like a lot, given the total figure, but keep in mind that Big Oil’s multibillion-dollar investments in tough energy were predicated on all that added demand materializing, thereby generating the kind of high prices needed to offset the increasing costs of extraction. With so much anticipated demand vanishing, however, prices were bound to collapse.

Current indications suggest that consumption will continue to fall short of expectations in the years to come. In an assessment of future trends released last month, the EIA reported that, thanks to deteriorating global economic conditions, many countries will experience either a slower rate of growth or an actual reduction in consumption. While still inching up, Chinese consumption, for instance, is expected to grow by only 0.3 million barrels per day this year and next—a far cry from the 0.5 million barrel increase it posted in 2011 and 2012 and its one million barrel increase in 2010. In Europe and Japan, meanwhile, consumption is actually expected to fall over the next two years.

And this slowdown in demand is likely to persist well beyond 2016, suggests the International Energy Agency (IEA), an arm of the Organization for Economic Cooperation and Development (the club of rich industrialized nations). While lower gasoline prices may spur increased consumption in the United States and a few other nations, it predicted, most countries will experience no such lift and so “the recent price decline is expected to have only a marginal impact on global demand growth for the remainder of the decade.”

This being the case, the IEA believes that oil prices will only average about $55 per barrel in 2015 and not reach $73 again until 2020. Such figures fall far below what would be needed to justify continued investment in and exploitation of tough-oil options like Canadian tar sands, Arctic oil and many shale projects. Indeed, the financial press is now full of reports on stalled or cancelled mega-energy projects. Shell, for example, announced in January that it had abandoned plans for a $6.5 billion petrochemical plant in Qatar, citing “the current economic climate prevailing in the energy industry.” At the same time, Chevron shelved its plan to drill in the Arctic waters of the Beaufort Sea, while Norway’s Statoil turned its back on drilling in Greenland.

There is, as well, another factor that threatens the wellbeing of Big Oil: climate change can no longer be discounted in any future energy business model. The pressures to deal with a phenomenon that could quite literally destroy human civilization are growing. Although Big Oil has spent massive amounts of money over the years in a campaign to raise doubts about the science of climate change, more and more people globally are starting toworry about its effects—extreme weather patterns, extreme storms, extreme drought, rising sea levels and the like—and demanding that governments take action to reduce the magnitude of the threat.

Europe has already adopted plans to lower carbon emissions by 20% from 1990 levels by 2020 and to achieve even greater reductions in the following decades. China, while still increasing its reliance on fossil fuels, has at least finally pledged to cap the growth of its carbon emissions by 2030 and to increase renewable energy sources to 20% of total energy use by then. In the United States, increasingly stringent automobile fuel-efficiency standards will require that cars sold in 2025 achieve an average of 54.5 miles per gallon, reducing US oil demand by 2.2 million barrels per day. (Of course, the Republican-controlled Congress—heavily subsidized by Big Oil—will do everything it can to eradicate curbs on fossil fuel consumption.)

Still, however inadequate the response to the dangers of climate change thus far, the issue is on the energy map and its influence on policy globally can only increase. Whether Big Oil is ready to admit it or not, alternative energy is now on the planetary agenda and there’s no turning back from that. “It is a different world than it was the last time we saw an oil-price plunge,” said IEA executive director Maria van der Hoeven in February, referring to the 2008 economic meltdown. “Emerging economies, notably China, have entered less oil-intensive stages of development.… On top of this, concerns about climate change are influencing energy policies [and so] renewables are increasingly pervasive.”

The oil industry is, of course, hoping that the current price plunge will soon reverse itself and that its now-crumbling maximizing-output model will make a comeback along with $100-per-barrel price levels. But these hopes for the return of “normality” are likely energy pipe dreams. As van der Hoeven suggests, the world has changed in significant ways, in the process obliterating the very foundations on which Big Oil’s production-maximizing strategy rested. The oil giants will either have to adapt to new circumstances, while scaling back their operations, or face takeover challenges from more nimble and aggressive firms.





The Crash Ratchets Up…..

13 07 2014

It’s often been said among Peakniks that ‘the crash’ is not an event that will occur smoothly or suddenly, but rather in steps… so a sudden downturn like what happened when the GFC first hit would hit a low, followed by perhaps another rise at best, or a plateau.  Then another sharp downturn would shape the next step down to an even lower plateau.  How long these plateaus last of course is anyone’s guess, and they are at the mercy of events.  Who can guess what might happen in the Middle East next?

Just such a downturn may now not be far away.

Bank lending, it seems, has been setting new records since mid-2013, especially in the USA.  If the last credit bubble – when too many dodgy loans were made by overenthusiastic loan officers before it all blew up in 2008 – was spectacular, this one is even more so….. Based on the loose principle that the US economy can only grow if bank lending balloons, it appears that the lowering ERoEI of the oil industry may be at its core.

This is what the auspicious chart of core bank loans outstanding looks like (via OtterWood Capital Management):

https://i0.wp.com/wolfstreet.com/wp-content/uploads/2014/07/US-Core-bank_loans.png

This time around, economists have been using the borrowing binge as proof that investment was suddenly picking up, that these investments would filter into economic growth, and that after all this time of mirages and sour disappointments, the ever elusive “escape velocity” would finally come……..

It turns out that that jump in investment – powered by bank lending, investment is a code word for debt – that economists have so enthusiastically shown as ‘proof of return to normal’ has been nothing but an illusion. And no, it wasn’t some blogger spouting off pessimistic data, but the Financial Times, quoting such sources as “senior executives” inside major US banks who “are privately warning” that this new lending binge “should not be seen as evidence of an economic recovery.”

Instead, much of the borrowed money was used “to fund payouts to shareholders” via dividends (remember Shell..?) and stock buybacks and to “finance acquisitions,” the source said.  None of these activities are productive, in fact, these acquisitions lead companies to boast about synergies and labour efficiencies – that is, redundencies – at either end, as these businesses get consolidated.

And here’s the sting……  Part of that borrowed money is being ploughed into the American fracking boom where drillers on the terrible treadmill that fracking really is have to contend with terribly sharp depletion rates, forcing them to drill ever more wells just to maintain production.  And they can never get off that treadmill because production would soon collapse if they did, and with each new well they have to borrow more, and then they require more production just to service the ballooning debt.  Revenues have risen 5.6% over the last four years while debt that drillers have piled on has nearly doubled [read… The Fracking Shakeout].

Watch this space, things might get awfully interesting soon…… because as soon as Peak Fracking hits, and that is bound to happen before 2020, all hell will break loose.





Going down…?

14 03 2014

Shell-SplatAndHorns (square)Oh boy……  the oil industry sure seems to be in a mess.  Remember Steven Kopits’ presentation?  The one where he announced Shell had to borrow money to pay its shareholders’ dividends?  Remember Shell pulling out of Australia..?  Well, it gets worse…

Shell Cuts Americas Spending by 20%, Extends Refinery Sales

Royal Dutch Shell Plc (RDSA) plans to lower spending in the Americas by a fifth as Europe’s largest oil producer focuses on more profitable operations.

It’s “not acceptable” that Shell, now deploying about 36 percent or $80 billion of its capital in North America, has been losing money, Chief Executive Officer Ben van Beurden said.

royal-dutch-shell-net-income-net-income_chartbuilder-1Shell expects to reduce capital investment in upstream operations, or exploration and production, in the Americas by 20 percent this year and North American resource spending by the same proportion, the company said today in a presentation.

“That leaves us with about $10 billion in total for the upstream Americas and about $4 billion for the shale,” Chief Financial Officer Simon Henry said. “Some of that does include Argentina and Canada. It’s not all in America.”

Van Beurden has pledged to shrink spending costs this year and speed up asset sales including refineries after The Hague-based company issued its first profit warning in a decade. He also scrapped targets for cash flow, delayed drilling off Alaska and promised to restructure shale operations in North America.

“Upstream Americas profitability has been impacted by losses in resources plays such as shales,” Shell said today in a statement. “The company intends to drive hard choices on capital allocation for selective growth and divestment of non-strategic positions.”

Now……  you can’t tell me this isn’t going to impact the “great big complex society”…….





The Great Unravelling has begun…….

1 03 2014

I have been warning of the Great Unravelling for years now.  It is becoming increasingly difficult to shrug off feelings it has begun.  Exactly what is causing me to feel this way today is hard to pinpoint.  I have thought for a long time that some event would trigger it, an event like 9/11, or the GFC collapse in 2008, but still the Matrix defies all the odds.  Today, however, too many ducks are lining up on the wall…….

2014 was the year many pundits forecast would be the beginning of the long decline from civilisation.  It’s barely two months old today, and so far this year we have had confirmation that all car manufacturing will end in Australia, that Shell has sold its entire interests (except for aviation interestingly) in this country, and that QANTAS and Virgin Australia are unprofitable, QANTAS announcing it would cut 5000 jobs to save money…… After seeing Steven Kopits’ presentation on what’s happening in the oil industry, surely even blind Freddy can see where this is all going now.  You even have to ask why Vitol bought Shell out…?

NScollapse

Even New Scientist is
talking about it……

It appears that all the oil majors are in such unprofitable positions due to Peak Oil, that they are all selling assets to prop up their bottom lines.  And just to add a few more roadblocks, even American Independent producers will spend $1.50 drilling this year for every dollar they get back.  Shale output drops faster than production from conventional methods, and it will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the International Energy Agency.  Iraq could do the same with 60.

Steven Kopits’ announcing that Shell had to borrow money to pay its shareholders’ dividends really did it for me.  As if the global debt situation wasn’t bad enough…..  This is like a dog chasing its tail, only worse; it’s begun eating its own arse to stay alive.  How long this state of affairs can go on for is hard to fathom.  The fact that it can’t is a certainty, however.

Then we have Chris Martenson, among many, saying that the stock market’s fundamentals are crumbling in both the short-term & long.  I’ve seen Alan Kohler say basically the same thing on ABC TV recently…..

The Ukraine has joined the increasingly long list of failed states with a huge and rapidly growing foreign debt, placing the country under constant threat of default. Its foreign exchange reserves are nearly depleted. Ukraine has a large negative trade balance and is desperately short on outside investment and private savings. Russia is the only country willing to extend financial assistance in exchange for Ukraine’s nearly worthless junk bonds.

And then we have the Climate…….  the numbers of record disasters happening globally defy listing.  From droughts in both hemispheres simultaneously, to record high and low temperature events again simultaneously occurring in the USA while the UK gets a pounding with three (more?) one in a hundred years storms in less than a month…  Even here in Cooran, we have now officially had the driest February on record.  By this time last year, we’d been flooded out twice and received 1200mm of rain in two months.  So far this year, we’ve had 59mm, 9 of those this month.  Whilst I normally have to mow twice a week at this time of year, I haven’t done so since before we went to Tasmania more than six weeks ago.  Check out this world map of extreme weather events in just January…. the whole planet is peppered with them!

So there you have it.  2014 will be an interesting year indeed.  What will it take for the authorities to wake up and admit everything they are doing is simply not working?  And how long before another large stock market correction visits us again..?  Only time will tell, but hang onto your seat, we’re in for an exhilarating ride!





Still on target……..

15 02 2014

Every year, I download the Bureau of Resources and Energy Economics’ oil production data.   BREE’s data comes in spreadsheet form, and are official Federal Government data…… they are not numbers I make up, and as anticipated, the news are not good.  The production rate has fallen year on year during 2013 by a whopping 18.3%……  as I keep saying, imagine if the economy itself shrank this fast…?

The spreadsheet is available at http://bree.gov.au/sites/default/files/files//publications/aps/2013/aps-209-201312.xls if you want to see for yourself.

Using this data, I produced the following chart:

oil2020

As you can see, we are still on target to totally run out of oil sometime around 2020, which is now just six years away.  The silence over this gobsmacking trend is deafening…..  Of course, it is just a projection, a trend.  Things could miraculously improve, but they could also get worse……  for instance, why does it say on the spreadsheet “Petroleum production by basin data is currently under review and publication of this data is suspended until further notice.”?  The cynic in me can’t resist the idea they’re hiding something…..  like, is Bass Straight on the cusp of collapse?

Meanwhile………:

Australia’s $50 billion petrol industry is set for its biggest shake-up in decades, with energy majors Royal Dutch Shell and BP considering the sale of refineries and petrol stations in order to free up cash for their core energy production businesses, reports The Australian Financial Review.

Shell chief executive Peter Voster said in November last year that the company was “entering into a divestment phase” amid rising costs for energy projects and investor concern about capital expenditure…..

It is believed BP is also examining a $3 billion sale of its petrol stations and refineries in Queensland and Western Australia. BP supplies fuel to about 1400 petrol stations of which it owns about 225….

There is speculation Chevron may follow BP and Shell and consider selling out of service stations in Australia. A spokesman would not comment.

You can add these as yet more red flags to the collection of automotive manufacturing collection.  I expect QANTAS will be the next bull in the china shop…..

The adults morons running this country not only have no idea of what’s going on, they want to make it all even facepalmworse….

APPROVAL for a second Sydney airport at Badgery’s Creek could be given within months, with federal Treasurer Joe Hockey pushing to fast-track a decision to include the project in the government’s first budget.

Wonders will never cease….. if this goes ahead, it will be finished right on time for no fuel available to run the planes.  And you wonder why I think we’re screwed…