Thursday, December 04, 2014

How Keynes Destroyed the Bakken

I wanted to believe that it was only going to be the banking industry that was destroyed by the "Dudebro Frat Boy Jocks from the 1970's." Middle aged men who couldn't do math and were too lazy to become engineers, so instead got their MBA's and relied on lying "sales" as a way to enrich themselves.  Slowly, but surely, they rose through the ranks so by the time 2005 rolled around they were thoroughly ensconced in positions of power in the only industry that would promote such idiotic scum - banking.  Sure enough, their greed and idiocy caught up with them, the banking industry imploded, but not without the taxpayers bailing them out.  Today they merely work at the bank down the street, thankfully relegated to the banking industry and not pouring out into and corrupting other sectors of the economy.

Or so I thought.

Enter the Bakken oil field.

With gas prices high investment into alternative means of pumping oil were produced.  One such technique was fracking and as luck would have it practically the entire middle part of the North American continent had oil reserves that were conducive to this technique.  An oil boom occurred resulting in quite literally the only silver lining to Obama's economy.  Hundreds of thousands of jobs were created, there was a cap put on the price of oil, not to mention it turned out the US now had a such supply of oil that it no longer needed to rely on or answer to OPEC.

Now, not that I was thinking we'd become the next Norway where their entire population is effectively millionaires due to their oil reserves, but I did think this oil boom would be more permanent.  At least not certainly a bust.  For while Dotcom and the Housing Bubbles were caused (primarily) by idiot investment bankers and banks, this was an oil boom.  Started by much smarter and saner engineers, scientists and geologists.  This was a STEM industry, not a cock-sucking, ass-kissing "dudebro" east coast cronyismfest. 

Add two more ingredients.

Engineer naivety about economics and Keynes.

Engineers, god bless 'em, are not economists.  I've known this because during most of college the engineering majors wish they could study more finance and economics and the finance majors wish they would have studied engineering.  Even after college many engineers go back to get their MBA's with a concentration on accounting or finance.  But at their core they're still engineers.  They're on the rigs, in the design room, or out exploring.  They're not reading up on OPEC or EIA reports about the glut of oil hitting the market.  And it wasn't OPEC that's been driving prices down as much as it was themselves.

Once I saw there was trouble in Bakken Land, I prayed, PRAYED,

"Please don't let them have a ton of debt on their books
Please don't let them have a ton of debt on their books
Please don't let them have a ton of debt on their books."

Annnnnnd they have a ton of debt on their books.

Once again, Keynesianism and the ignorance of how central-bank-induced artificially lower interest rates result in companies and governments loading up on debt, has now caused a credit bubble in the Bakken oil field.  And while some companies maintain a nice margin of equity on their balance sheets, many do not.  And with the price of oil going down, it doesn't matter how low of an interest rate they have on their newly acquired debt, they are going to shut down and file for bankruptcy.

The lesson to pull from this is you don't need lazy, middle aged MBA, Dudebro Salesmen to destroy an industry.  You just need a central bank, ZIRP monetary policy, and a dash of economic naivety on the part of industry leaders and ANY industry will be inflated and then destroyed.  Alas who knew Keynesians would be the ultimate economic "Dudebro Douches?"


Samuel E. Hancock said...

Check this out:

Anonymous said...

Guess I'll just apply for welfare instead of working in the oil fields then.

Laird Broadfield said...

When have Keynesians not been dudebro douches of their age?

For illustration, see EconStories "Fear the Boom and Bust". The dudebro character will be pretty evident within the first minute or so.

Anonymous said...

They'll only shut down or file for bankruptcy if they don't get a bailout. You forgot that step.

Anonymous said...

Was reading this earlier. The bakkens greatest asset is how cheap and small its wells are. One rig closes down and more will spring up if there's demand.The bankpuptcies are just corporate natural selection

Paul, Dammit! said...

OK, I'm absolutely one of the STEM guys who got involved with oil, and admit to being ignorant of much of economics...these are all upstream (production and production support) companies, and there's an increasing number of midstream (transshipment and refining) and downstream (delivery) companies diversifying out of their traditional places. Won't this create opportunities for consolidation and increased efficiency?

Bear in mind that I'm a downstream guy and have only a peripheral awareness of what's what.

Anonymous said...

You’ve nailed it again Captain, I totally agree…
except for this one eenie-weenie faux-pas:

“Hundreds of thousands of jobs were created…”


The sentence should properly read: “Hundreds of thousands of jobs were “required”… or “in demand…”, or “needed…” or were “necessary…”, or whatever freakin adverb you’d like to choose. But those jobs were not CREATED! Jobs ARE NOT, and never were, CREATED. And here in the hell is why:

Oh yes, and the same rules apply for that other idiotic term the propagandized MSM loves to use, “job creator”.

beta_plus said...

These wells take enormous capital investments. How else are they supposed to raise funds for them without debt? I'm doubtful equity would cover everything. Are there statistics for what the ratio of debt/equity for an oil driller is?

Tom de Plume said...

I love seeing bankers criticized by those who actually know their shit rather than by leftist asshole liberal arts major occupying something.

Jamie NZ said...

Can't you guys cut back or ban foreign imports of oil or something??? I

Or is your oil being exported???

Anonymous said...

Share prices of the small companies pioneering in the Bakken tank due the drop in Oil Prices.

The "right" people buy up the stock and get control.

Oil prices head back towards $100 per barell.

Toilet Cleaner said...

They do teach engineering economics in engineering classes.

I will cite an example given by Don Lancaster in the late 1990's. Take solar panels. Given the total energy output of solar panels over the course of their lifetime and given the price of those solar panels amortized throughout their iifetime, you end up with solar energy being many times more expensive than petroleum.

Some will say that it's good for the environment that you use less oil to power your stuff by using solar.

But engineering economics said that you spent more oil by earning the money necessary to invest in solar panels to try and save oil.

So in a sense, solar panels inject more carbon in the atmosphere than burning oil.

That was Don Lancaster's example of Engineering Economics.

So engineers do know more about economics than you want to acknowledge.

Toilet Cleaner said...

During an oil glut, it makes perfect sense for investors to invest in oil and store the production of oil for sale in the future when prices will be higher.

Brian Tracy said that the market will never always go up nor always go down, it will fluctuate.

Toilet Cleaner said...

It is obvious that monetary creation is a ponzi scheme. Ever since Nixon abolished the gold standard and ever since the dollar was no longer redeemable in gold, inflation kept shooting up while interest rates kept falling.

Bank interest rates were as high as 10% in the 1980's, now banks will not pay 0.25% interest on savings.

It's a credit ponzi scheme which requires fresh new credit to pay off earlier credit.

So, either the Federal Reserve will have to back up this money float with tangible commodities or the entire scheme will come crashing to a halt.

Anonymous said...

He's criticizing leftists in general. They trained the bankers. They created the economic environment with their Keynesian policies.

They fact that leftists criticize the system they created like it's someone else's fault just shows what horrible douche canoes they are.

Anonymous said...

It actually won't be quite that bad, at least for the time being. Most of the more established Bakken players employ hedging strategies to guarantee revenues at a certain level--just like airlines and so forth. The "spot" price for Bakken crude is currently below $50, but, again, companies are going to be making considerably more than that ($70-80 a barrel) for the next 9-12 months, even as new pipelines come on line to bring prices paid for Bakken crude more in line with West Texas Intermediate.

Interestingly, a lot of the smaller players (wildcats, mostly) are doing stuff like 20% shared interest wells, with "accredited investors" buying in--you can even hear this offer advertised on XM. We're talking one or two fields for $5 mil. or something.

There's certainly a shakeout coming, and though I bet my portfolio on the Bakken five years ago (selling a portion of one company that was acquired this summer such that I'm now playing with profits), I'm not in a real hurry to jump in.

I also think this is a great time for the "majors" (Exxon, Valero, etc.) to buy up the smaller players for a song, like they've been doing in a downturn since the days of Standard Oil.

Alex in Montana said...


The industry is not destroyed. The oil is still there. New companies and those companies smart enough not to load up on debt will extract it.

Stop whining.