Executive Summary

• Why prices under $100 per barrel just aren’t cash flow positive for shale oil producers
• VIDEO: all you need to know about the shale oil industry
• Why the Boom/Bust cycle is swinging to ‘Bust’ for shale companies
• Why a prolonged ‘Bust’ in oil prices will create massive economic shockwaves

If you have not yet read Part 1: About That Shale ‘Miracle’… available free to all readers, please click here to read it first.

The Shale Reality

Now, let me build on the case that not only are shale companies not profitable at $50 per barrel oil, but they are often not profitable at prices nearly 100% higher than that.

I’m not about to make the case that all shale operators are unprofitable or about to go bust on the plays, but I am going to make the case that any sweeping statements like “technology will bring us Shale 2.0” are utterly adrift from the evidence at our disposal.

Let’s go back to September 2014, before any oil price weakness had crept into the picture.  At that point in time, according the WSJ author, the shale operators should have been swimming in cash.

Well, that’s just not the case. And some of them were losing their shirts:

Sumitomo’s US shale oil foray turns sour

Sept 29, 2014

Sumitomo Corp of Japan has drawn a line under its disastrous two-year foray into shale oil in the US, with writedowns connected to the project almost completely erasing its full-year earnings.

On Monday, Sumitomo, the fourth biggest of Japan’s trading companies by market capitalisation, said that an impairment loss of Y170bn ($1.6bn) on a “tight oil” project in west Texas would form the bulk of Y240bn of charges for the fiscal year to March 2015.

(Source)

Hmmmm. I guess Sumitomo just failed to use enough smart technology or something, because otherwise how is it possible to lose $1.6 billion at a time when oil was solidly priced in the $100 range?

Sarcasm aside, the truth is that it’s all too easy to lose money in the shale plays, something I believe is already completely indicated by the negative free cash flows of the industry.

In fact, that negative free cash flow evidence tells me that…

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This is a critical update on the Peak Cheap Oil front. 

Yes, I am talking about that tired old concept that was allegedly slain by American drilling ingenuity. It's back in the news… if you know where to look.

I remain steadfastly interested in the oil outlook because everything, and I do mean everything, in our exponential monetary and associated economic system is hinged upon there being more cheap oil next year than last.

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Executive Summary

• Why the insolvency hole the U.S. is in may be much deeper than appreciated.
• Current 'best case' assumptions show us doubling the size of our economy TWICE over the next 75 years. Why that's just not achievable.
• Why the above assumptions get even worse when the energy story is taken into account.
• Why action at the individual level is your best bet now.

If you have not yet read Part I: "Endless Growth" Is the Plan & There's No Plan B available free to all readers, please click here to read it first.

A Big Hole

When the Treasury Department estimates that the U.S. has a ~$65 trillion NPV (Net Present Value) shortfall in its main accounts, it's saying that using its assumptions, the U.S. government would need to have $65 trillion – today – in an account, earning a stated rate of interest, in order to be solvent.

Since the U.S. government don't have that have that kind of scratch, it's insolvent. 

But the real picture is likely worse. The Fed calculates the NPV shortfall to be closer to $100 trillion. And if you believe Lawrence Kotlikoff's math, the figure is closer to $200 trillion. Either way – $65 trillion, $100 trillion, or $200 trillion – the sum cannot be paid.

So it won't be.

And the real trouble is that all of these numbers make the same implicit assumption: The future will more or less resemble the past. That is, some form of future growth – exponential future growth – of the economy is at the heart of every single calculation.

But we might question that, because somewhere between here and there, economic growth will have to come to an end. Or at least a pronounced deceleration. Why? Quite simply, because the earth is finite.

Now, we might comfort ourselves with the belief that our future date with hard limits is lifetimes away. But when we do, we shortchange ourselves (if we're wrong) and our progeny (if we're right). After all, the time to make an adjustment is when the resources and energy exist to make that change.

And that's now. Or, really, decades ago…

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