Bye-Bye, Shale-Oil Boom!

Submitted by Bill Bonner – Chairman, Bonner & Partners

The days left to us in 2014 are dwindling to a precious few. It gets darker and darker. The Fed doesn’t seem to be able to do anything about it.

Yesterday, the Dow fell another 112 points. Gold is stuck at under $1,200 an ounce.

Less than a week from today: the shortest day in the Northern Hemisphere. Then Sol Invictus (“Unconquered Sun”) will have its day… growing day by day until June 21.

But today is the first day of the ancient Roman festival of Saturnalia; the sun fades.

In Rome, it was a time for free speech and role reversals. Masters served their slaves and all enjoyed gambling and drunkenness.

Master and Slave

Meanwhile in Washington a group of suits at a nearby breakfast table:

“We’ve got a much better shot now.”

“Yeah, I talked to Mitchell. I think we can get it through. But we have to be patient.”

“Christ, we’ve been waiting three years for this thing.”

“Yeah, but that was before November… we’ve got a much better shot now.”

We are sitting in the lobby of our hotel, our feet on a footstool. We are waiting for a GS-13 to wash them for us.

So far, none has presented himself or seemed interested in the task. Saturnalia’s role reversal has not made its mark on the nation’s capital – yet.

That is part of the problem with our modern democracy. Master and slave: It’s hard to tell who is who. The slaves go into the voting booth and think themselves masters. Pulling the levers, they think they command their “public servants.”

But the bureaucrats, politicians and lobbyists know who is boss.

We are interrupting our crash course on money. So much is going on in the world, we need to keep up with it. Most interesting, from a financial point of view, is the crash in the price of crude oil.

“Plunging crude prices threaten the axe for $1 trillion of energy projects,” screams a headline in the Financial Times.

Lower on the front page:

“Russia ramps up interest rate to 17% in ‘shock and awe’ bid to shore up the ruble.”

Stripper wells, offshore wells, shale wells, the Russian economy – all are in danger. Prices are not high enough to justify further investment or operations.

But imagine you have borrowed heavily for expensive oil extraction. You have to service your debt, whether the price falls or not.

What do you do? You pump all you can! And the increased supply further depresses oil prices.


On display is the whole bubble-mongering humbug – from Alpha to Omega – of the Fed’s zero-interest-rate policy.

US oil producers borrowed some $500 billion of high-yielding (junk) debt and used it to increase oil production from shale by four times. This was proclaimed as a kind of New Deal for US industry.

But now we see it’s the same old false shuffle by the central bankers. Bubbles… bubbles… bubbles. From dot-coms… to houses… and now to energy.

The idea of the ultra-low rates is to bring about investment, jobs, and spending. Paul Krugman still believes in it. The author of End This Depression Now! is urging the Fed to continue with its zero-interest-rate program:

It’s a pretty weak world economy out there, we don’t see any inflation, and the risk if we raise rates and it turns out we were mistaken is just so huge.

What about the risks in choking, squeezing and beating down interest rates? As the great Austrian School economist Ludwig von Mises tells us, every boom caused by cheap credit ends in a bust.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The only question is whether the crisis comes sooner, as a result of the voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the fiat currency system.

The oil production boom was largely a product of the Fed’s low rates. Without them, the industry would not exist in its current form. It couldn’t have financed so much risky capital investment.

But there’s always a snake in the woodpile. Low rates alone weren’t enough. Oil prices had to stay high too.

The Fed may control the earth, the moon and the stars. But the House of Saud controls oil prices. And the Saudis are happy to see prices fall further to put the hurtin’ on their higher-cost competitors.

And so… the bubble bursts!

And since so much money ran into energy products… and so many jobs came from it… mightn’t the “recovery” turn out to be a bubble too?

We wait to find out.