“THE INCREASING ABUNDANCE OF CHEAP NATURAL GAS, COUPLED WITH RISING DEMAND FOR THE FUEL FROM CHINA AND THE FALL-OUT FROM THE FUKUSHIMA NUCLEAR DISASTER IN JAPAN, MAY HAVE SET THE STAGE FOR A ‘GOLDEN AGE OF GAS.”
WALL STREET JOURNAL SUMMARIZING AN INTERNATIONAL ENERGY AGENCY REPORT, JUNE 6, 2011
The very existence of the fracking industry depends on the long-term sustainability in oil prices. For them, that’s above $80. It’s like everyone behind the operation forgot that oil is one of the most volatile commodities on the planet.
30 years ago, oil fell off its peak (which at the time was just above the $30 mark) and lost more than two-thirds of its price in four months. Then during the last bubble, oil soared to $147, and crashed to $32. That was a 78% drop in roughly the same time– four and a half months.
The bigger the bubble the greater the burst… and almost all bubbles burst twice as fast as they are built. I have measured this by looking at every major bubble in history, from stocks to commodities to real estate to bonds to tulips. It’s always the same. –Harry S Dent
And now oil is on a crashing course again, on its way to test that $32 low from 2008. Until recently, we saw this happening by January. But at the rate it’s been going, now it could happen by mid-October.
Fracking is toast! It would have never been viable if QE hadn’t bubbled oil prices back up temporarily, and pushed junk bond borrowing costs from 8% to 5%.
Once their current wells go dry, Frackers will not be able to afford new ones. Not at these levels.
If oil ever does return to that $80 level where fracking operations break even, by then, the industry will be long-since dead. Commodities like oil take a long time to recover when free money isn’t artificially propping them up.
Soon the Frackers will start defaulting on the junk bonds they used to get the industry on its feet. When that happens, it could start a bond market crisis worse than the subprime crisis of 2006, as there are more junk bonds and much more global debt now.
Beyond all this, oil’s devastation bears deeper implications for the U.S. and global economies. And remember – it took defaults in just four U.S. states for the subprime crisis to develop into a full-blown global financial crisis in 2008.
It will happen again, this time for the frackers. And when it does, it’ll be worse than 2008 – possibly worse than 1929. Our US and global stockpiles of debt almost guarantee it.