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The shale oil bubble ready to be popped

Apr 18, 2015

The collapse of oil prices in the past year is having a disastrous effect on the oil industry and (by extension) upon the banks that have loaned money to companies that have focused on extracting expensive oil from shale. If you have investments in oil or financials, Bill Engdahl’s article below is a good analysis of what lies on the horizon.


Since the shale oil boom took flight in 2011 Wells Fargo and JP Morgan have both issued shale oil company loans of $100 billion. There has been a huge rise in high risk high return bonds, so called “junk bonds.” They earned the appropriate name because in event of a company’s going bankrupt, they become just that—junk. The bonds have been issued by Wall Street banks to shale oil and gas companies since the bubble started in 2011. The US oil and gas industry share of junk bonds has been the fastest growing portion of the overall US junk bond sector of the bond market….

The collapse of the shale oil junk bond market will be the start of the next Tsunami underwater financial earthquake. The entire Junk Bond market has boomed as banks in the USA and even in the EU and elsewhere assumed so long as the Fed kept rates at zero, and so long as oil was at $100 a barrel. Bank risk was zero and rewards were double digit interest rates on junk. In the end that junk, shale and other, is now in an early wave Tsunami despite zero fed interest rates, because of the falling oil prices. Martin S. Fridson, a prominent analyst of the high-yield junk bond market, sees as much as $1.6 trillion in high-yield defaults coming in a new wave he expects to begin shortly.

Fridson said that five months ago. The “shortly” has now arrived. The next months promise a bare knuckle ride in the rotted debt-bloated US financial sector that will promise an even more dangerous rerun of the global crisis after 2008. The banks most exposed are JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.—the same criminal enterprises that created the 2007 mortgage-backed-securities collapse and virtually every financial collapse crisis since 1907.

In the same article Engdahl also gives some political background to the current oil crisis and how it began last year:

Recall that in September 2014, in a misguided attempt to up the heat on the Russian economy and weaken Vladimir Putin, Secretary of State John Kerry flew to Saudi Arabia to meet with the dying King Abdullah. Kerry reportedly proposed the Saudis dump oil, then selling for around $100 a barrel, onto the market at drastically lower prices. It was crude, in the sense not of crude oil but of a poorly thought-out crude rerun of a tactic then Vice President Bush and Secretary of State George Schultz made with the Saudis in 1986 when oil prices plunged to below $10 a barrel and prepared the financial backdrop for the collapse of the Soviet Union three years later.

What Kerry and the Washington neo-conservatives neglected to look at was the double agenda of those sly Saudi Wahhabite royals. They gleefully agreed to Help Washington deepen Russia’s financial crisis and to hitting their Shi’ite foe Iran by hitting oil. But they also saw a golden chance to rid themselves of their new rival for global oil supremacy, namely, the United States, specifically the shale oil sector.

The Saudis can extract oil for about $32/barrel, so they can afford such a price war. But shale oil costs at least $65/barrel in a best-case scenario, and many wells require at least $100/barrel to make them profitable.

The bottom line is that the US government’s attempt to destabilize Russia and to unseat Vladimir Putin is backfiring. Russia has very little debt; the US is choking on debt. So while this US policy has certainly hurt Russia’s economy and has devalued the rouble, they have been able to adjust to the war-time reality. The real question is whether the US economy can do the same.

Bill Engdahl is pointing out that we are now very near the time when the financial pressure is going to collapse the big banks who have invested $100 billion in the shale oil companies. If that happens, the Fed will not be able to lower interest rates, as it did in 2008. The interest rates are already at zero. The Fed has run out of ammunition. The only defense left is to begin confiscating money from bank accounts.

But they have already cleaned out most of the pension funds. The Social Security funds was cleaned out earlier in the 1990’s. Technically, the government did not steal those funds, because they replaced the funds with IOU’s. In other words, they forced those pension funds to buy US bonds. But today those bonds pay almost nothing and certainly do not keep up with the rate of inflation.

The US economy is in a precarious position, even though it gives the appearance of being strong. The reports indicate strength, but the actions of the Fed indicate weakness. If the economy was really so strong, the Fed would have raised interest rates by now. They keep talking about it, but no action is ever taken. Watch what they do, not what they say.

Two years ago the Fed was going to begin raising interest rates when the unemployment rate got down to 6%. So they said. Now their figures are at 5.4%, but they still have not raised interest rates. Of course, they know that the official unemployment figures are unrealistic, because they do not account for all the people who have dropped out of the work force. Unemployment figures only reflect the number of people who collect unemployment insurance, ignoring those who are long-term unemployed.

If this were the 1930’s, we would have long “soup lines.” But soup lines are visible to all and force the government to admit that there is a problem. So now we just send people food stamps, so that they may get their soup at the grocery stores and remain invisible. More than 50 million people in America are now getting food stamps.

The true unemployment rate is about 15%, and this rises to 23% if we include those who are underemployed. It may not be as bad as Greece or Spain, but it is enough to sink the economy in the end. The only thing that has kept the ship afloat is the ability of the Fed to create money out of nothing and loan it to the government at zero interest. But this only increases the national debt, and if the Fed were to raise interest rates, the US government would be unable to pay the interest on that debt.

At some point the oligarchs will come to the end of their ability to manipulate things. Any further collapse of the economy—or any part of it—could prove disastrous. Engdahl seems to think that the collapse of the oil industry could trigger a much wider collapse, including the collapse of the big banks. Since 2008 the oil industry has been the one sector that has prospered and provided employment. What happens if that sector runs into troubled waters?

As always, I have to remind everyone that the collapse of the present economic order (Babylon) is bad news only to the Babylonians and those who have invested in Babylon. It is good news to those who are of the Kingdom, because God is engineering events to set us free from the dominion and oppression of Babylon. There is a great light at the end of the Babylonian tunnel. When the original city of Babylon fell in Daniel 5, God raised up kings from the east to overthrow the city, in order that God could set His people free to return and to build the Kingdom. So it is today.

So as Jesus said, when you see these things come to pass, look up for your redemption draweth nigh.

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Category: News Commentary
Blog Author: Dr. Stephen Jones