In this week's Off The Cuff podcast, Chris and Charles Hugh Smith discuss:

• The Crashing Treasury Curve
  • Interest rates are on the move
• Get Ready For Interest Rates To Start Rising
  • The end of a 30-year downtrend
• When Rates Rise, Prices Will Fall
  • Bonds, stocks, housing — nearly everything
• What's Next For Bitcoin?
  • We're witnessing a historical moment

Charles and Chris discuss the implications to anticipate should interest rates indeed start rising. The quick summary? It will change everything…

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Executive Summary

• How bad will "bad" get?
• What will happen to world supply and prices?
• Who is most vulnerable?
• How quickly could this occur?

If you have not yet read Part 1: Why The Shale "Miracle" Is Becoming A "Debacle" available free to all readers, please click here to read it first.

How to Position Yourself

Okay, here’s the summary so far.  The shale companies are burning cash and they’ve done so every year. At every oil price point. And there’s nothing in the data to suggest that will change this year, or next.

So the first question to ask is: When will investors wake up and stop funding these companies?

This should be immediately followed by: How much financial and economic damage will then result? And how soon afterwards?

Well, if the companies stop drilling because their funding dries up, the decline rates of the various shale basins would translate into the immediate and sudden loss of a huge amount of oil production.  

How much?

According to the EIA the decline rates each month for the three biggest shale fields would be between 53,000 and 158,000 barrels per month.

Taken together, one month of not bringing any new wells online for these three fields would result in a drop in oil output of -314,000 barrels.  And a similar (but slightly smaller) drop the next month.  And the month after that, the same thing.  And so on.

After just 3 months the US would be down more than -1,000,000 barrels per day when all the other shale fields are taken into account. 

Now that’s extreme, and it’s very unlikely that drilling would just suddenly stop one day. But the point here is that…

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Sometimes it helps to examine one narrow slice of the pie as a means to understanding the entire pie. In the case of the shale oil Ponzi scheme, we can both wrap our minds around the scale of the predicament and also answer the question of who the losses will be foisted on.

Once we’ve done that, you should be able to simply apply the same logic and learning to other sectors of the financial universe.  Learn one sub-bubble, learn them all; like a fractal foam of misadventure.

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There’s really nothing much more important than knowing where we are in the oil story…but if you follow the hypesters from Wall Street or the technology lovers, you're likely to be misled.  A particularly wrong piece of analysis was recently released by John Mauldin, who has both bought into the hype and loves technology.

He even singled out our friend James Howard Kunstler for being wrong, yet then goes on to be spectacularly wrong himself.

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Executive Summary

• Predicting when US shale oil production will peak
• Why these lower oil prices *must* result in substantially lower US shale production
• How the 'shale miracle' indeed has numerous ponzi elements that are on the brink of collapsing
• Expect a tsunami of shale bankruptcies to arrive soon

If you have not yet read Part 1:The Dangerous Economics of Shale Oil available free to all readers, please click here to read it first.

Predicting The Peak

Now we expand our focus from one hypothetical producer, to one actual shale region: the Bakken, located in North Dakota. My key source of information about the Bakken region is the Department of Mineral Resources in North Dakota. Every month the Director (Lynn Helms) produces the “Director's Cut”, a just-the-facts summary of oil production in North Dakota. Yes, it really is called the Director's Cut.

Regional data provided by EIA is smoothed and massaged and – less useful for seeing what is going on at the point of the spear. So knowing now about how all the parts of the shale operation works, we can use the Director's Cut stats to track all the stages of producing oil. We have, in order of execution:

• drilling permits

• rig counts

• wells awaiting completion

• well counts

• monthly production

In other words, before you can drill, you need …

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