A penny for a spool of thread,
A penny for a needle —
That’s the way the money goes,
Pop! goes the weasel.
The “weasel” known as the USA fracking revolution, America’s recent shale gas and shale oil boom, which has been touted by the Obama Administration as grounds for risking their radical regime change policies across the OPEC Islamic world, is going “pop!,” as the money goes…
The collapse of the five-year-old USA fracking revolution is proceeding with accelerating speed as jobs are being slashed by the tens of thousands across the United States; shale oil companies are declaring bankruptcy and Wall Street banks are freezing new credits to the industry. The shale weasel in America has just gone pop!, and soon the bloodbath will look like the aftermath of the Battle of Falkirk of Braveheart fame.
One of the unfortunate consequences of being in political blinders, as the leading figures around President Barack Obama today definitely are, is that their bold policy decisions tend to blow up in their faces with unintended consequences.
So it is with poor, pathetic Secretary of State John Kerry. Last September Kerry went to Saudi Arabia to the King’s summer palace on the Red Sea, to meet with the King of OPEC’s largest oil producer, Abdullah, and his advisers including by informed reports, Prince Bandar “Bush”, the former Washington Ambassador and former head of Saudi Intelligence responsible for the disastrous war against Assad in Syria. There, a deal was agreed, whereby the Saudis would flood the market, especially in Asia, with deeply discounted crude oil to force a price collapse. For Kerry and the Obama gang of myopics, it was a clever way to kill two birds—Iran and Russia—with one Saudi cheap oil stone.
Far from “killing” Putin’s Russia, it has dramatically accelerated a major consolidation of Russia-China energy cooperation in huge deals that shift the Russian energy market from west and the EU to the east—China, the two Koreas and Japan. Putin also boldly cancelled the EU South Stream gas project and opened negotiations with Turkey to make that key nation into a world “energy hub” instead, cutting the US-controlled Ukraine entirely out of the game of being transit to Russian EU gas traffic.
Far from killing Iran, it has accelerated major Iran energy deals with Russia including new nuclear power plants. And, despite all the best intentions of the CIA and Israeli intelligence services, who invested so much time and energy creating the psychopaths known as ISIS or as they now call it, IS, Bashar al Assad, backed by Russia and Iran, still is in Damascus. For Washington and its pathetic neo-cons, nothing seems to work anymore like they want.
What the not-so-well-thought-through Washington oil shock game has done, however, is to trigger an avalanche of bankruptcies and job cuts in the domestic US oil and gas industry, above all, the shale energy sector.
The USA shale oil catastrophe
The collapse of the domestic USA shale industry, which I predicted last year to become manifest sometime in the first quarter of 2015, is already visible. And this is just the beginning of what will be a snowballing of unpayable debts, shut-in oil wells, massive layoffs in the US oil and gas industry in the next several months.
According to OilPrice.com, spending on global oil and gas exploration and production could fall over 30 percent this year. That would be the greatest drop since 1986, the last time Washington tried to use the Saudis to collapse oil prices. Bank of America predicts Brent oil futures to fall to $31 by the end of the first quarter this year, over $5 below the lows of the 2008 financial crisis.
Right now the oil market is in a perverse situation where, not surprisingly, major producers like Russia and Iran and Iraq,predictably, are increasing production to offset falling prices and state revenues. That makes the existing glut even more dramatic.
The results in the USA are just emerging. A huge round of job cuts is sweeping the industry, especially in the USA. On January 13, the Dallas Fed projected that in Texas alone, 140,000 jobs could be eliminated. That, in only one state, albeit the largest oil state in the USA. Those are well-paid jobs in an economy which is already suffering huge job losses (despite fraudulent US Government labor statistics) since the 2008 financial crisis hit.
Schlumberger, the world’s biggest oilfield-services company, will cut 9,000 jobs, after its Fourth Quarter 2014 net income plunged 81% following €1.6 billion in write-offs that included its production assets in Texas. The second largest oil services giant, Halliburton, Dick Cheney’s old firm, and the company that made the shale bubble doable technically, has announced layoffs but declines to say how many. Oil-field services companies like Halliburton, suppliers of the fracking chemicals and drilling equipment, steel companies, housing accommodation providers all benefited. No more.
The US shale oil boom was a Wall Street bubble, as we noted before, fuelled by the Federal Reserve zero interest rates and Wall Street banks desperate for places to lend after the real estate bubble collapsed in 2008. They made nice fat profits by underwriting so-called junk bonds for the shale oil companies, many of them small-to-medium size companies that will go under now.
Shale drilling and fracking is a costly business, far more than conventional oil drilling. That’s why it is called “unconventional.” As long as US interest rates were at bottom the last six years and oil prices well above $100 a barrel, oil companies could take the risk and banks could lend with abandon. That’s come to a screeching halt as oil revenues have plunged 40-50% in the past seven months.
As long as prices were high, the shale oil companies could borrow like there was no tomorrow. And they did. According to a new estimate by Barclays Bank of UK, the USA and Canadian oil industry is likely to slash at least $58 billion from spending, a 30% cut from 2014 spending of $196 billion. That estimate was prepared from company data taken in December when the price was $74 a barrel, before the cuts began to hit and before prices plunged to $47 a barrel. The final number on spending will be far lower by yearend if prices remain low. The longer prices stay below $50 a barrel the bloodbath will grow. They estimate that the US oil industry will be hardest hit of all the world. Nice job, John Kerry and Co.
And new bank lending has also screeched to a halt. Oops…In the boom times until September 2014 when the Saudi price war began, US and Canadian small to midsized companies spent more than their cash income by an eye-popping average 157 percent. Larger firms overspent by around 112 percent. They made up the difference by issuing junk bonds and taking low-interest bank loans.
Now, with prospects very bleak for price recovery, the lending banks are turning off the money spigot. The losses will soon hit Wall Street as well.
In other words, the unintended consequences of the stupid Kerry strategy to bankrupt Putin’s Russia with aid of the Saudis has blown up in his face and may soon bury the over-hyped US shale oil bubble in a sea of red ink and bankruptcy filings. Stupid in this sense is in not comprehending the connections of everything in the real world.
F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.