US Shale Oil Production to Decline by 2015?

[verdo]

The interviewee runs an oil and gas company, and he sees the shale oil boom going the other direction starting in 2015. I'm not sure if i agree with all of his reasoning, but I do recall Eric saying something to this effect himself, how much of the current boom was temporary, and how the US was simply bringing future production forward, siphoning away what they had left at prices which are too cheap, etc

[GRG55]

Re: US Shale Oil Production to Decline by 2015?

Lower commodity (oil) prices brings less investment capital (in an extraordinarily capital intensive business) which brings less production additions to offset declines from existing production.

However, with a bit of a lag, lower commodity prices also bring cuts in the cost structure (drilling rig day rates, labour costs, trucking costs, railway tariffs, and so forth).

In the oil game there's a LOT of moving parts. Contrary to much of the current media noise, there is no one number at which shale oil or fracking suddenly does not work. It's a spectrum depending on the characteristics of the play, the reservoir quality, the petroleum composition, the distance and cost to market, the jurisdictional regulatory and tax regime, and a host of other factors. And that spectrum is constantly moving; for any given economic cut off in a particular field today, it will be a different number tomorrow.

While oil has been falling here is what has happened recently to natural gas prices (it is also up from about $3.50 this time last year):

P.S. A very happy Thanksgiving to all you iTulipers in the USA

[don]

Re: US Shale Oil Production to Decline by 2015?

As always in the energy field, insightful.

Happy Turkey Day!

[jpetr48]

Re: US Shale Oil Production to Decline by 2015?

Article confirming GRG55-yes happy thanksgiving to all- we do have much to be thankful for

At OPEC Meeting, Saudi Arabia Stares Down Texas and North Dakota

By Matthew Philips November 25, 2014

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Photograph by Haidar Mohammed Ali/AFP via Getty Images
An oil tanker docked at a floating platform on Sept. 21, offshore from the southern Iraqi port city of Al Faw

On Thanksgiving Day, what used to be the world’s most powerful oil cartel will gather in Vienna to decide how much oil to produce. Right around the time that the Bears and Lions are getting underway at in Detroit, delegates of the 12-member Organization of Petroleum Exporting Countries will finish a closed-door meeting and announce to the world how much oil they intend to collectively pump over the next year.
In another setting, a group of people who sell the same product getting together to talk about ways to manipulate prices would be seen as blatant collusion. But this is OPEC—that’s basically the whole point. The founding premise back in 1960 was to wrest control of oil production—and the ability to set prices—from the handful of large Western oil companies that had taken over much of the Mideast after World War II.
By 1973, OPEC controlled roughly 53 percent of the world’s total oil production. That’s why its embargo was so effective in driving up oil prices about 400 percent within a year. Today, however, OPEC’s share of total world production is down to 42 percent, according to data from the Energy Information Agency. This comes as OPEC pumps near-record amounts. For the first time in a long time, the ability to determine the price of oil no longer clearly resides with OPEC. Instead, it’s increasingly U.S. producers at the controls.
Story: It Looks Like $80 Oil Is Here to Stay
This shift has big geopolitical implications, affecting everything from Iran’s nuclear program to the fight against ISIS. And it helps explain why most OPEC members come to the meeting having spent the past few weeks talking about the need for cuts. Venezuela and Ecuador want to “protect prices.” Libya’s wants a cut of 500,000 barrels a day. Iran may propose an overall cut of up to 1 million barrels a day, although “under no circumstance” is it willing to cut itself. Sanctions have taken more than a million barrels of Iran’s production offline since 2012. Its oil minister has vowed that Iran will not cut its production “even by one barrel.”
Russia won’t be in the room. But as the world’s top oil producer, it wants cuts, too. Over the weekend, Russia and Saudi Arabia agreed to cooperate on oil prices. And Russia is reportedly considering joining OPEC in production cuts next year—that is, if the cuts happen at all.
As of Tuesday morning, Nov. 25, traders were starting to bet that whatever cuts OPEC does make on Thursday will be limited at best. Brent oil prices tumbled on midmorning news that a meeting of Venezuela, Mexico, Saudi Arabia, and Russia failed to produce an agreement to coordinate a cut.
Video: Does OPEC Really Matter?
BloombergOil prices began falling Tuesday morning
Then there’s Saudi Arabia, which is still at the wheel of OPEC as its top producer. The Saudis still enjoy some of the lowest production costs in the world, so they can sustain a much lower price and still not worry about financing themselves. That’s a luxury many OPEC members don’t have. Venezuela, Iran, Iraq, Libya, and even Russia all need oil prices higher than $100 a barrel to keep their deficits in check.
Right now the Saudis are a lot less worried about the budget deficits of their fellow oil exporters as they are about what’s happening in North Dakota and Texas. The biggest threat to the power the Saudis have wielded as the de-facto head of OPEC for the past 30 years isn’t cheap oil; it’s the 9 million barrels a day coming out of the U.S. The Saudis would much rather play a game of chicken with U.S. producers than bow to the wishes of Iran, which they’re in no hurry to accommodate given their disagreements over the Assad regime in Syria, not to mention Iran’s burgeoning alliance with Iraq.
For decades Saudi Arabia has been the preferred partner of the U.S. in the Middle East. At the heart of that partnership was America’s clear dependence on Saudi Arabia for its oil. But that dependence has diminished significantly over the past few years as U.S. refiners have substituted oil from the shale boom for imported oil.
Video: JBC Energy's Benigni on Crude Oil, OPEC Meeting
BloombergU.S. oil imports from Saudi Arabia
The Saudis are perfectly willing to watch the price of oil keep falling to see if they can’t drive some of those U.S. companies out of business. So the game becomes how low can they go. Recent analysis by Bloomberg New Energy Finance finds that 19 regions across Texas, Oklahoma, Louisiana, Kansas, and Arkansas stop being profitable at $75 a barrel. Which is roughly where things are at the moment.
BloombergCan Texas shale stay profitable at $75 a barrel?
But those regions account for only about 400,000 barrels of daily production. The real test will be if prices dip below $70. That could start eating into the profits of Bakken production and the hottest parts of Texas in the Permian Basin and Eagle Ford shale regions, which account for more than half of all U.S. production.
Story: Why Russia Said 'No Deal' to OPEC on Cutting Oil Production
Video: Oil Prices Tumble Again: How Long Will This Go On?





Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

[touchring]

Re: US Shale Oil Production to Decline by 2015?

Article confirming GRG55-yes happy thanksgiving to all- we do have much to be thankful for

At OPEC Meeting, Saudi Arabia Stares Down Texas and North Dakota

I'm just wondering on the global basis, who really benefits from this great dip in oil prices.

Non-oil producers such as Japan, South Korea and India will benefit tremendously without doubt. Countries with lots of cash and rising oil consumption like China are next - China is now hoarding as much oil as possible and will doubt be traveling all over the world acquiring oil assets.

The worst losers are oil producers with high costs such as the oil sands of Canada and we are told that Russia will be hit hard as well.

As for the US, it remains to be seen how lower oil prices will generate enough "burger flipping" jobs to replace the jobs lost from the "high paying" oil and support industries and not to mention, the US has tons of huge companies (Exxon, Chevron, etc) drilling oil all over the world.

Conclusion: Asia (China, India, South Korea and Japan) are the only clear beneficiaries.

[GRG55]

Re: US Shale Oil Production to Decline by 2015?

I'm just wondering on the global basis, who really benefits from this great dip in oil prices.

Non-oil producers such as Japan, South Korea and India will benefit tremendously without doubt. Countries with lots of cash and rising oil consumption like China are next - China is now hoarding as much oil as possible and will doubt be traveling all over the world acquiring oil assets.

The worst losers are oil producers with high costs such as the oil sands of Canada and we are told that Russia will be hit hard as well.

As for the US, it remains to be seen how lower oil prices will generate enough "burger flipping" jobs to replace the jobs lost from the "high paying" oil and support industries and not to mention, the US has tons of huge companies (Exxon, Chevron, etc) drilling oil all over the world.

Conclusion: Asia (China, India, South Korea and Japan) are the only clear beneficiaries.

Once again, simplified analysis applied to the petroleum business is inappropriate.

First, Canada's oil and gas industry is roughly 70% natural gas biased, and nat gas prices are rising as you will have noted from my earlier post. Second, the Canadian $ is highly correlated to oil prices, and as the Canuck Buck falls (against the US Dollar) it means Canadian oil industry operating costs are also falling while the commodity (oil and gas) is still being priced and sold in rising US Dollars. Third, unlike many other petroleum jurisdictions that have to import a lot of American manufactured technology and petroleum equipment priced in US$, Canada has a very well developed petroleum industry services sector and domestic supply chain, and thus is shielded considerably from the effects of our falling $ (in fact I expect to see rising Canadian exports of petroleum equipment to the USA as producers south of our border work hard to cut their input costs).

Canada is not entirely immune from falling oil prices, but as I mentioned in previous posts, there are a LOT of moving parts in this business.

[don]

Re: US Shale Oil Production to Decline by 2015?

Ripping Apart @ the Seams?

Giving Thanks For The Oil Collapse: It Reveals The Phony Recovery And Speculative Rot Beneath
by Raúl Ilargi Meijer

We should be glad the price of oil has fallen the way it has (losing another 6% today as I write this). Not because it makes the gas in our cars a bit cheaper, that’s nothing compared to the other service the price slump provides. That is, it allows us to see how the economy is really doing, without the multilayered veil of propaganda, spin, fixed data and bailouts and handouts for the banking system.
It shows us the huge extent to which consumer spending is falling, how much poorer people have become as stock markets set records. It also shows us how desperate producing nations have become, who have seen a third of their often principal source of revenue fall away in a few months’ time. Nigeria was first in line to devalue its currency, others will follow suit.

OPEC today decided not to cut production, but whatever decision they would have come to, nothing would have made one iota of difference. The fact that prices only started falling again after the decision was made public shows you how senseless financial markets have become, dumbed down by easy money for which no working neurons are required.

OPEC has become a theater piece, and the real world out there is getting colder. Oil producing nations can’t afford to cut their output in some vague attempt, with very uncertain outcome, to raise prices. The only way to make up for their losses is to increase production when and where they can. And some can’t even do that.

Saudi Arabia increased production in 1986 to bring down prices. All it has to do today to achieve the same thing is to not cut production. But the Saudi’s have lost a lot of clout, along with OPEC, it’s not 1986 anymore. That is due to an extent to American shale oil, but the global financial crisis is a much more important factor.

We are only now truly even just beginning to see how hard that crisis has already hit the Chinese export miracle, and its demand for resources, a major reason behind the oil crash. The US this year imported less oil from OPEC members than it has in 30 years, while Americans drive far less miles per capita and shale has its debt-financed temporary jump. Now, all oil producers, not just shale drillers, turn into Red Queens, trying ever harder just to make up for losses.

The American shale industry, meanwhile, is a driverless truck, with breaks missing and fueled by cheap speculative capital. The main question underlying US shale is no longer about what’s feasible to drill today, it’s about what can still be financed tomorrow. And the press are really only now waking up to the Ponzi character of the industry.

In a pretty solid piece last week, the Financial Times’ John Dizard concluded with:

Even long-time energy industry people cannot remember an overinvestment cycle lasting as long as the one in unconventional US resources. It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it.

While Reuters on November 10 (h/t Yves at NC) talked about giant equity fund KKR’s shale troubles:

KKR, which led the acquisition of oil and gas producer Samson for $7.2 billion in 2011 and has already sold almost half its acreage to cope with lower energy prices, plans to sell its North Dakota Bakken oil deposit worth less than $500 million as part of an ongoing downsizing plan. Samson’s bonds are trading around 70 cents on the dollar, indicating that KKR and its partners’ equity in the company would probably be wiped out were the whole company to be sold now. Samson’s financial woes underscore how private equity’s love affair with North America’s shale revolution comes with risks. The stakes are especially high for KKR, which saw a $45 billion bet on natural gas prices go sour when Texas power utility Energy Future Holdings filed for bankruptcy this year.

And today, Tracy Alloway at FT mentions major banks and their energy-related losses:

Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. [..] if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.

That’s just one loan. At 60 cents on the dollar, a $340 million loss. Who knows how many similar, and bigger, loans are out there? Put together, these stories slowly seeping out of the juncture of energy and finance gives the good and willing listener an inkling of an idea of the losses being incurred throughout the global economy, and by the large financiers. There’s a bloodbath brewing in the shadows. Countries can see their revenues cut by a third and move on, perhaps with new leaders, but many companies can’t lose that much income and keep on going, certainly not when they’re heavily leveraged.

The Saudi’s refuse to cut output and say: let America cut. But American oil producers can’t cut even if they would want to, it would blow their debt laden enterprises out of the water, and out of existence. Besides, that energy independence thing plays a big role of course. But with prices continuing to fall, much of that industry will go belly up because credit gets withdrawn.

The amount of money lost in the ‘overinvestment cycle’ will be stupendous, and you don’t need to ask who’s going to end up paying. Pointing to past oil bubbles risks missing the point that the kind of leverage and cheap credit heaped upon shale oil and gas, as Dizard also says, is unprecedented. As Wolf Richter wrote earlier this year, the industry has bled over $100 billion in losses for three years running.

Not because they weren’t selling, but because the costs were – and are – so formidable. There’s more debt going into the ground then there’s oil coming out. Shale was a losing proposition even at $100. But that remained hidden behind the wagers backed by 0.5% loans that fed the land speculation it was based on from the start. WTI fell below $70 today. You can let your 3-year old do the math from there.

I wonder how many people will scratch their heads as they’re filling up their tanks this week and wonder how much of a mixed blessing that cheap gas is. They should. They should ask themselves how and why and how much the plummeting gas price is a reflection of the real state of the global economy, and what that says about their futures.

Happy Thanksgiving, and don’t be the Turkey.

[don]

Re: US Shale Oil Production to Decline by 2015?

a case in point . . .

Storied weapons maker Colt Defense LLC is in a pickle. But it’s not the only junk-rated company in a pickle. The money is drying up. Selling even more new debt to service and pay off old debt is suddenly harder and more expensive to pull off, and holders of the old debt – your conservative-sounding bond fund, for example – are starting to grapple with the sordid meaning of “junk”: Colt announced on Wednesday that it might not be able to make its bond payment in May.

Colt’s revenues plunged 25% to $150 million for the three quarters this year. It’s spilling liberal amounts of red ink. It has $246.5 million in assets, including $61.5 million in Goodwill and intangible assets. Without them, Colt’s $185 million in assets are weighed down by $416.8 million in liabilities, leaving it a negative “tangible” net worth of -$231.8 million. Cash was down to $4 million. In its 10-Q released on Wednesday, Colt admitted that there was “substantial doubt about the Company’s ability to continue as a going concern.”

Moody’s rates the company a merciful Caa2, reflecting “its very high leverage and weak liquidity position,” with negative outlook. This babe is deep into junk territory – and headed for default.

As is to be expected after this much financial engineering, the company is largely owned by a private equity firm: Sciens Management holds “beneficial ownership” of 87% of Colt’s LLC interests.

Last week, it got some reprieve, if you can call it that: Morgan Stanley agreed to provide a $70 million senior term loan. This new money replaces Colt’s existing $42.1 million loan that the company said it would have otherwise defaulted on by the end of December. That’s how that original lender got bailed out: new debt to pay off old debt.

The new loan will also permit Colt to make a $10.9 million interest payment. Otherwise, the company would have been in default by December 15. That’s how those bondholders got bailed out (for the moment): more new debt to service old debt.

The loan would leave Colt with an additional $4.1 million in cash: new debt to pay for new losses.

It also disclosed that “notwithstanding the additional cash the Company obtained from the MS Term Loan, risk exists with respect to the Company achieving its internally forecasted results and projected cash flows for the remainder of 2014 and 2015.” And if a number of miracles fail to occur, “it is probable that the Company may not have sufficient cash and cash equivalents on-hand along with availability under its Credit Agreement, as amended, to be able to meet its obligations as they come due over the next 12 months….”

So management has a plan to deal with its “increased liquidity challenges”: in addition to a number of operational goals, it would be “seeking ways to restructure the Company’s unsecured debt.” Owners of that unsecured debt are going to squeal. And if that doesn’t work, well….

This scenario is starting to play out company by company, hitting the most fragile ones first, as investors are becoming at least somewhat reluctant to throw good money after bad. That reluctance has to be overcome with additional compensation in form of yield, thus a greater expense for the companies when they can least afford it.

The junk-debt-funded oil and gas shale revolution is particularly on the hot seat. Its ever-faster moving fracking treadmill of steep decline rates and costly drilling is now smacking into the plunging price of oil [read… How Low Can the Price of Oil Plunge?].

Hoping that the price of oil and gas would only go up, energy companies have drilled $1.5 trillion into the ground since 2000, and they’re now shouldering a huge pile of debt – much of it junk rated. This year, energy companies have issued 15.2% of all new junk bonds. Yet, oil and gas production is only a small part of the US economy. In 2013, their junk bond issuance made up 10.3% of all junk bonds. Back in 2004, it made up 4.3%. That’s how the fracking party has been funded.

The more the price of crude drops, the deeper these companies sink into the morass. At some point, defaults will begin to cascade through the system. The total return on the Merrill Lynch High Yield Energy Index for the last three month was a loss of 5.8%, the worst performance since the fourth quarter of crisis year 2008.

More broadly, the average yield of CCC or lower rated bonds, the riskiest junk out there, shot up from 8% in early July to over 10% on Tuesday, according to the BofA Merrill Lynch US High Yield Index. And the High Yield Total Return Index for these types of bonds lost 5.3% over the same period.

Meanwhile the BofA Merrill Lynch US High Yield BB Index, which groups together less risky junk bonds, has barely budged with yield at a historically low 4.8%. It’s still fully suspended in the middle of a magnificent bubble.

This is just the beginning. Yield-desperate investors, driven to near insanity by the Fed’s zero-interest-rate policy, were holding their noses and closing their eyes, and picked up the riskiest junk just to get a tiny bit of extra yield, and that demand drove down yields to ludicrous levels.

But reality – as Colt bondholders are finding out – cannot be pushed out forever. Now investors decide to take a whiff and glance at the junk they’re picking up, and they suddenly see some of the risks that have been obvious all along, and they’re either walking away or clamoring for more compensation. That’s what is happening at the riskiest end so far.

Junk debt can swoon with stunning speed. The market becomes illiquid as buyers evaporate before your very eyes. If a financial institution faces redemptions and has to sell in that environment, its fund would take terrible losses on those bonds.

During the financial crisis, when the new money dried up for highly leveraged companies, yield on CCC-rated bonds soared above 40%, and the value of the bonds collapsed. The Fed sacrificed savers and retirees to bail out these bondholders with a flood of liquidity and interest-rate repression, no questions asked. With the arrival of ever cheaper money, defaults were pushed into the future.

During the taper tantrum last summer, the yield of the Merrill Lynch High Yield CCC Index jumped from 10% to 16% in no time, only to get another Fed-inspired reprieve. But now, even the Fed frets about the bubble in that space, about excess risk taking, and investors blindly “reaching for yield.” It’s worried about banks and large institutional investors getting caught with their pants down again, and how that could – given the enormous amounts – jeopardize “financial stability,” which has become the Fed’s mantra. So the Fed has been hammering on them, and it has sent its regulators into the fray to put an end to the frenzy, and another instant rescue when the bloodletting starts in serious is now doubtful.

[Mega]

Re: US Shale Oil Production to Decline by 2015?

Why black gold’s low prices won’t last long

The current oil price dip is temporary and crude will return to $100 a barrel by mid-2015

Over the last two months, crude prices have fallen by well over 30pc Photo: AP









By Liam Halligan

3:29PM GMT 29 Nov 2014

42 Comments


Attempting to forecast the oil price is a mug’s game. But that hasn’t stopped me in the past (ahem!)

The reality is that crude is so important to modern life, and the path of the global economy, that for all the pitfalls of prediction, any serious economist needs to have a view on the future cost of the black stuff.


Pivotal not just in terms of energy and transport, but also the manufacture of vital inputs from polymers to fertilisers, the dollar oil price is perhaps the world’s single most important economic variable.


My view is that the current price dip is temporary, partly illusory and that oil is now heavily over-sold, having fallen way below its fundamental value. As such, I’d venture that, in the absence of a 2008-style systemic meltdown on global markets, $100-a-barrel (Ł64) oil will return by the middle of 2015.


I’d also say – and I know this won’t be popular but here goes – that against the temporary boost which cheaper oil provides crude importers such as America and the UK, must be set a significant future cost.

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While cheaper oil feels good, acting like a tax cut for producers (and consumers if lower costs are passed on), it seriously curtails investment in future crude production.

In other words, a period of low oil prices can create the conditions for a pretty sharp upswing. That’s especially true today, given that a relatively high share of the recent increase in global oil supply has come from relatively expensive “non-conventional” sources such as tar sands, ultra-deep water and tight “shale” oil.

The aerial view of an open cast mine near Fort McMurray, Alberta, Canada, which is being used to extract oil from the Athabasca tar sands fields

From late 2010 until August this year, Brent crude traded within a relatively narrow range, averaging close to $110 per barrel. In each of the three years from 2011 to 2013 inclusive, the average crude price has been in triple-digit dollars. It won’t be far short in 2014 either, seeing as oil stayed well above $100 during the first eight months of this year and was just shy on average during September.

Over the last couple of months, though, crude prices have fallen by well over 30pc. From a high of $115, oil dipped below $72 last week, a four-year low, after the Opec exporters’ cartel – in particular Saudi Arabia – decided not to bolster prices by cutting their production quota from 30m barrels daily. Prices fell 5pc on Thursday alone, the day Opec announced that decision at the end of its annual Vienna summit.

Some commentators of a conspiratorial disposition suggest that the Saudis are colluding with America, keeping oil prices low in a joint bid to damage their respective enemies, Russia and Iran.

I would politely suggest that this is hokum.

Yes, cheaper oil suits America because, despite all the hype surrounding increased domestic production, the US remains the world’s biggest energy importer by far, still reliant on other countries for a net 9m barrels a day – amounting to over 10pc of total global production. And there’s certainly no love lost these days between the US and Russia.

It should be remembered, though, that the relations between Riyadh and Washington are also extremely strained. This is not least due to American overtures to cooperate with Iran in the battle against Islamic State and US support for Qatar – a key backer of the Muslim Brotherhood, whom the Saudis detest. Once a key feature of post-War geopolitics, the US-Saudi axis is now seriously bent out of shape.

Remember, too, that while the Saudis are powerful within Opec, the likes of Venezuela and Iran are also influential. Clearly, the Saudis have managed to convince recalcitrant members to bite their tongues and accept that the 30m quota remains in tact. But it’s absurd to think that Riyadh could persuade other, far poorer members to keep prices low in order to please America, even if the Saudis wanted to, which they don’t.

Opec agreed what it agreed in Vienna for one reason only; to suppress prices in order to squeeze US shale producers, many of whom have high production costs and are shouldering lots of debt.

The Saudis won the argument that the US shale boom must be countered by undermining the profitability of North American producers, curtailing current US production and future investment. At $70 for a barrel of oil, an awful lot of shale producers – particularly relatively small outfits that have driven much of the increase in US production from 7.5m barrels daily to 10m over the past four years – won’t be able to operate.

Many of them will default on their borrowings, potentially dealing a serious blow to America’s “shale revolution”.
Opec Secretary General Abdullah al-Badri basically admitted in Vienna that his members were now engaged in a battle to defend their current one-third share of global oil markets. Asked at a press conference how Opec would respond to rising US oil output, he said: “We answered. We kept the same level of production. That is our answer”.

The main reason that the dollar price of oil has fallen so sharply in recent months has nothing to do with US-Saudi conspiring and an awful lot to do with Janet Yellen. At the end of October, the chairman of the Federal Reserve announced that the US is to end its latest bond-buying programme, otherwise known as quantitative easing.
Since then the dollar has rallied on the strength of less virtual money-printing.

The passing of the QE baton back to Japan, with the eurozone soon to follow, has also helped drive the greenback to a near seven-year high against the yen and the single currency to an 18-month dollar low.

Oil is priced in dollars. All the major Opec producers peg their currencies to the dollar. Given that, when the dollar rises, all other things being equal, the price of oil falls. This is an axiomatic truth.

Having said that, I accept that we’ve recently seen higher Libyan production and also rising oil output from Iraq – both of which have contributed to lower prices. Also important is the fact that, earlier this autumn, the International Energy Agency cut its oil demand forecast for 2015.

Why, then, do I think that oil prices will bounce back next year and remain relatively elevated in the medium-to-long term? One reason is that more than two thirds of the 12m-barrel rise in daily global oil production over the past decade has come from “unconventional” sources.

While conventional crude costs up to $60 per barrel to produce, unconventional production generally absorbs $80-$100. So lower prices make some current production uneconomic and deter investment in future capacity, sowing the seeds of an forthcoming price rise.

At the same time, the fundamental trends still point to expensive energy. The big populous emerging markets, while they’ve slowed down in recent months, are still consuming more than half of total crude output. They’re the reason why oil consumption has outstripped production for years; by more than 4m barrels a day last year, and 3.7m the year before, with the shortfall coming from reserves.

Note, also, that the IEA didn’t “cut” its demand forecast for next year, as many newspaper headlines suggested. It actually said oil demand would merely rise more slowly in 2015 than previously forecast, with total consumption growing by 1.1m to 92.4m barrels daily next year, rather than to 92.7m. That still amounts to a 20pc increase in oil demand in not much more than a decade. The global crude industry meanwhile struggles to keep up, as it’s increasingly forced to tap more and more expensive unconventional oil.

The recent fall in the oil price is spectacular and, if we’re lucky, motorists may even see a decent drop in petrol prices. But, unfortunately, it’s likely to be short-lived.

[jk]

Re: US Shale Oil Production to Decline by 2015?

re colt's problems. it's just another instance of corporate looting. from an article at businessweek:


Over the next several years, Colt Defense went through the private equity leverage wringer. Sciens Capital and its affiliates loaded the company with debt while taking out cash in the form of “distributions” and “advisory fees.” The 2005 SEC filing shows payouts totaling $40 million over the two prior years—a significant amount for a company in such fragile financial health. In 2006, another SEC filing shows, the company redeemed “members’ equity” worth $41 million. In 2007, Colt Defense agreed to borrow $150 million in a “leveraged recapitalization” that featured distributions to “members” of $131 million. In 2009 it borrowed an additional $250 million, while multimillion-dollar payouts continued. For 2010, Colt Defense had sales of $176 million—more than double what they were in 2004—but registered an $11 million loss. “You didn’t have to work at Colt Defense to know it had put itself in a dire situation,” says Merrick Alpert, a Connecticut businessman who began advising the shriveled remains of Colt’s Manufacturing in late 2010 and later became its senior vice president.

[Ghent12]

Re: US Shale Oil Production to Decline by 2015?

These predictions are getting to be ridiculous. I'll add another one into the mix. Oil production will experience numerous technological breakthroughs, allowing the gravy train to keep on rolling until long after everyone reading this post is dead. Price will fluctuate due to changes in the supply and demand of oil and US dollars, but only political catastrophes (i.e. oil embargo) will pave the way for economic catastrophes rooted in the energy sector.

[don]

Automatic Earth: Cheep, Cheep

Cheap Oil A Boon For The Economy? Think Again



‘Daly’ Somewhere in the South, possibly Miami 1941

I thought it might be a nice idea to question a certain someone’s theories using their own words, while at the same time showing everybody what the dangers are from falling oil prices. There are many ‘experts and ‘analysts’ out there claiming that economies will experience a stimulus from the low prices, something I’ve already talked about over the past few days in The Price Of Oil Exposes The True State Of The Economy and OPEC Presents: QE4 and Deflation. And I’ve also already said that I don’t think that is true, and I don’t see this ending well.

Today, our old friend Ambrose Evans-Pritchard starts out euphoric, only to cast doubt on his self-chosen headline. He’d have done better to focus on that doubt, in my opinion. And I have his own words from earlier in the year to support that opinion. Ambrose is bad at opinions, but great at collecting data; his personal views are his achilles heel as a journalist. That’s maybe why he fell into the propaganda trap of picking this headline; after all, if you write for the Daily Telegraph you’re supposed to write positive things about the economy.

Oil Drop Is Big Boon For Global Stock Markets, If It Lasts

Tumbling oil prices are a bonanza for global stock markets, provided the chief cause is a surge in crude supply rather than a collapse in economic demand

Roughly one third of the current oil slump is a shortfall in expected demand, caused by China’s industrial slowdown and Europe’s austerity trap. The other two thirds are the result of a sudden supply glut, which Saudi Arabia and the Gulf states have so far chosen not to offset by cutting output. This episode looks relatively benign. Nick Kounis from ABN Amro says it will add $550 billion of stimulus to world markets. “That is fantastic news for the global economy,” he said. But it comes at a time when stocks are already high if measured by indicators of underlying value. The Schiller 10-year price earnings ratio is at nose-bleed levels above 27.

Tobin’s Q, a gauge based on replacement costs, is stretched to near historic highs. Andrew Lapthorne from SocGen says the MSCI world index of stocks has risen 38% over the last three years but reported profits have risen just 3%. “Valuations, as measured by median price to cash flow ratios, are near historical highs. As US QE has come to an end, depriving the world of $1 trillion printed dollars a year, there are plenty of reasons to be nervous,” he said.

Ambrose’s gauge of share values is dead on, and far more important than he seems to realize. He knows full well there are tons of reasons to doubt his own headline. But he still leaves out many of those reasons in that article today. So let’s move back in time to look at what he wrote this summer, before the drop in oil prices.

Here are a few lines from Ambrose on July 9 2014:

Fossil Industry Is The Subprime Danger Of This Cycle

The epicentre of irrational behaviour across global markets has moved to the fossil fuel complex of oil, gas and coal. This is where investors have been throwing the most good money after bad. [..] oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building.

This has never happened before in US history, even during the Second World War when oil production was a strategic imperative. The International Energy Agency (IEA) says global investment in fossil fuel supply doubled in real terms to $900 billion from 2000 to 2008 as the boom gathered pace. It has since stabilised at a very high plateau, near $950 billion last year. The cumulative blitz on exploration and production over the past six years has been $5.4 trillion [..]

… upstream costs in the oil industry have risen 300% since 2000 but output is up just 14% [..] The damage has been masked so far as big oil companies draw down on their cheap legacy reserves.

… companies are committing $1.1 trillion over the next decade to projects that require prices above $95 to break even. The Canadian tar sands mostly break even at $80-$100. Some of the Arctic and deepwater projects need $120. Several need $150. Petrobras, Statoil, Total, BP, BG, Exxon, Shell, Chevron and Repsol are together gambling $340 billion in these hostile seas.

… the biggest European oil groups (BP, Shell, Total, Statoil and Eni) spent $161 billion on operations and dividends last year, but generated $121 billion in cash flow. They face a $40 billion deficit even though Brent crude prices were buoyant near $100 ..

… the sheer scale of “stranded assets” and potential write-offs in the fossil industry raises eyebrows. IHS Global Insight said the average return on oil and gas exploration in North America has fallen to 8.6%, lower than in 2001 when oil was trading at $27 a barrel.

What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?

A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut. One chief executive acidly told the TPH Global Shale conference that the only time his shale company ever had cash-flow above zero was the day he sold it – to a gullible foreigner.

… the low-hanging fruit has been picked and the costs are ratcheting up. Three Forks McKenzie in Montana has a break-even price of $91. [..]

“Under a global climate deal consistent with a two degrees centigrade world, we estimate that the fossil fuel industry would stand to lose $28 trillion of gross revenues over the next two decades , compared with business as usual,” said Mr Lewis. The oil industry alone would face stranded assets of $19 trillion, concentrated on deepwater fields, tar sands and shale.

By their actions, the oil companies implicitly dismiss the solemn climate pledges of world leaders as posturing, though shareholders are starting to ask why management is sinking so much their money into projects with such political risk.

Those numbers alone, combined with the knowledge that prices are off close to 40% by now, should be enough to give anyone the jitters, about the oil industry, and therefore about the global economy. Any industry that’s so deeply in debt cannot afford a 40% dip in revenue, not even for a short while. Dominoes must start tumbling in short order.

And of course saying ‘any industry so deeply in debt’ is already a bit misleading, because there is no industry like oil in the world (except maybe steel, and look how that’s doing), and it’s highly doubtful there’s another one with such debt levels. Oil stocks are down somewhat, but it’s hard to see how they could not fall a lot further. And as for the huge amounts invested in energy junk bonds, one can but shudder.

On August 11 2014, Ambrose had some more:

Oil And Gas Company Debt Soars To Danger Levels To Cover Cash Shortfall

The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry. The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106 billion in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time.

They also sold off a net $73 billion of assets. [..] The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568 billion over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly.

… the shortfall between cash earnings from operations and expenditure – mostly CAPEX and dividends – has widened from $18 billion in 2010 to $110 billion during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39 billion on repurchases since 2011.

… “continued declines in cash flow, particularly in the face of rising debt levels, could challenge future exploration and development”. [..] upstream costs of exploring and drilling have been surging, causing companies to raise long-term debt by 9% in 2012, and 11% last year. Upstream costs rose by 12% a year from 2000 to 2012 due to rising rig rates, deeper water depths, and the costs of seismic technology. This was disguised as China burst onto the world scene and powered crude prices to record highs.

Global output of conventional oil peaked in 2005 despite huge investment. [..] the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” ..

Analysts are split over the giant Petrobras project off the coast of Brazil, described by Citigroup as the “single-most important source of new low-cost world oil supply.” The ultra-deepwater fields lie below layers of salt, making seismic imaging very hard. They will operate at extreme pressure at up to three thousand meters, 50% deeper than BP’s disaster in the Gulf of Mexico.

Petrobras is committed to spending $102 billion on development by 2018. It already has $112 billion of debt. The company said its break-even cost on pre-salt drilling so far is $41 to $57 a barrel. Critics say some of the fields may in reality prove to be nearer $130. Petrobras’s share price has fallen by two-thirds since 2010.

… global investment in fossil fuel supply rose from $400 billion to $900 billion during the boom from 2000 and 2008, doubling in real terms. It has since levelled off, reaching $950 billion last year. [..] Not a single large oil project has come on stream at a break-even cost below $80 a barrel for almost three years.

… companies are committing $1.1 trillion over the next decade to projects requiring prices above $95 to make money. Some of the Arctic and deepwater projects have a break-even cost near $120 . The IEA says companies have booked assets that can never be burned if there is a deal limit to C02 levels to 450 (PPM), a serious political risk for the industry. Estimates vary but Mr Lewis said this could reach $19 trillion for the oil nexus, and $28 trillion for all forms of fossil fuel.

For now the major oil companies are mostly pressing ahead with their plans. ExxonMobil began drilling in Russia’s Arctic ‘High North’ last week with its partner Rosneft, even though Rosneft is on the US sanctions list. “Exxon must be doing a lot of soul-searching as they get drawn deeper into this,” said one oil veteran with intimate experience of Russia. “We don’t think they ever make any money in the Arctic. It is just too expensive and too difficult.”

Plummeting oil prices not only mirror the state of the – real – economy, they will also drag the state of that economy down further. Much further. If only for no other reason than that today’s oil industry swims in debt, not reserves. Investment policies, both within the industry and on the outside where people buy oil company stocks and – junk – bonds, have been based on lies, false presumptions, hubris and oil prices over $100.

The oil industry is no longer what it once was, it’s not even a normal industry anymore. Oil companies sell assets and borrow heavily, then buy back their own stock and pay out big dividends. What kind of business model is that? Well, not the kind that can survive a 40% cut in revenue for long. The industry’s debt levels were, in Ambrose’s words, at a ‘danger level’ when oil was still at $110.

Is Big Oil still a going concern? You tell me. I don’t want to tell the whole story bite-sized on a platter, there’s more value in providing the numbers, this time from Ambrose but there are many other sources, and have you make up your own mind, do the math etc.

Ambrose’s exact numbers can and will be contested three ways to Sunday, but his numbers are not that far off, and if anything, he may still be sugarcoating. WTI closed at $66.15 on Friday, Brent is at $70.15. Given the above data, where would you think the industry is headed? What will happen to the trillions in debt the industry was already drowning in when oil was still above $100?

And how will this be a boon to the economy even if, as Ambrose puts it, the ”oil drop lasts”? Do you have any idea how much your pension fund is invested in oil? Your money market fund? Your government? I would almost say you don’t want to know.

There can be very little doubt that oil prices will at some point rise again from whatever bottom they will reach. Even if nobody knows what that bottom will be. At the same time, there can also be very little doubt that when that happens, the energy industry’s ‘financial landscape’ will look very different from today. And so will the – real – economy.

Cheap oil a boon for the economy? You might want to give that some thought.

[vinoveri]

Re: Automatic Earth: Cheep, Cheep

Cheap Oil A Boon For The Economy? Think Again

I thought it might be a nice idea to question a certain someone’s theories using their own words, while at the same time showing everybody what the dangers are from falling oil prices. There are many ‘experts and ‘analysts’ out there claiming that economies will experience a stimulus from the low prices, something I’ve already talked about over the past few days in The Price Of Oil Exposes The True State Of The Economy and OPEC Presents: QE4 and Deflation. And I’ve also already said that I don’t think that is true, and I don’t see this ending well.

Oh, this meme is getting so tiring - the boogie man of deflation .... and it gets better read on (hint: financial investments are heavily dependent and positively correlated with the price of crude and so crude price must not be allowed to fall below a certain level, supply and demand be damned)

The epicentre of irrational behaviour across global markets has moved to the fossil fuel complex of oil, gas and coal. This is where investors have been throwing the most good money after bad. [..] oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building.

What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?

Who's money is it? Who's responsibility is it? Uh, investors, don't you mean speculators

“Under a global climate deal consistent with a two degrees centigrade world, we estimate that the fossil fuel industry would stand to lose $28 trillion of gross revenues over the next two decades , compared with business as usual,” said Mr Lewis. The oil industry alone would face stranded assets of $19 trillion, concentrated on deepwater fields, tar sands and shale.

Those numbers alone, combined with the knowledge that prices are off close to 40% by now, should be enough to give anyone the jitters, about the oil industry, and therefore about the global economy. Any industry that’s so deeply in debt cannot afford a 40% dip in revenue, not even for a short while. Dominoes must start tumbling in short order.

Oh, it's the debt, huh? We should be afraid of falling oril prices high so companies don't go out of business and can service their debt ... hey, man, ever read a book on capitalism and how to run a business; ever heard of hedging for example

Plummeting oil prices not only mirror the state of the – real – economy, they will also drag the state of that economy down further. Much further. If only for no other reason than that today’s oil industry swims in debt, not reserves. Investment policies, both within the industry and on the outside where people buy oil company stocks and – junk – bonds, have been based on lies, false presumptions, hubris and oil prices over $100.

The oil industry is no longer what it once was, it’s not even a normal industry anymore. Oil companies sell assets and borrow heavily, then buy back their own stock and pay out big dividends. What kind of business model is that? Well, not the kind that can survive a 40% cut in revenue for long. The industry’s debt levels were, in Ambrose’s words, at a ‘danger level’ when oil was still at $110.

Good point if true, and Good riddance to that business model.

And how will this be a boon to the economy even if, as Ambrose puts it, the ”oil drop lasts”? Do you have any idea how much your pension fund is invested in oil? Your money market fund? Your government? I would almost say you don’t want to know.

Uh, so everyone should pay higher energy prices so we can keep the pension industry solvent. What's next, Government price fixing oil at a higher price than "market" ? These folks are lunatics.

[don]

Re: Automatic Earth: Cheep, Cheep

Financialization....the conversion of lead into gold, a debt into an asset

by Charles Hugh-Smith of OfTwoMinds,

All the analysts chortling over the "equivalent of a tax break" for consumers are about to be buried by an avalanche of defaults and crushing losses as the chickens of financializing oil come home to roost.

The pundits crowing about the stimulus effect of lower oil prices on consumers are missing the real story, which is the financialization of oil. Financialization is another word that is often bandied about without the benefit of a definition.

Here is my definition:

Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.

That is a mouthful, so let's break it into bite-sized chunks.

Home mortgages are a good example of how financialization increases financial profits by jacking up risk and distributing it to suckers who don't recognize the potential for collapse and staggering losses.

In the good old days, home mortgages were safe and dull: banks and savings and loans issued the mortgages and kept the loans on their books, earning a stable return for the 30 years of the mortgage's term.

Then the financialization machine appeared on the horizon and revolutionized the home mortgage business to increase profits. The first step was to generate entire new families of mortgages with higher profit margins than conventional mortgages. These included no-down payment mortgages (liar loans), no-interest-for-the-first-few-years mortgages, adjustable-rate mortgages, home equity lines of credit, and so on.

This broadening of options and risks greatly expanded the pool of people who qualified for a mortgage. In the old days, only those with sterling credit qualified for a home mortgage. In the financialized realm, almost anyone with a pulse could qualify for one exotic mortgage or another.

The interest rate, risk and profit margins were all much higher for the originators. What's not to like? Well, the risk of default is a problem. Defaults trigger losses.

Financialization's solution: package the risk in safe-looking securities and offload the risk onto suckers and marks. Securitizing mortgages enabled loan originators to skim the origination fees and profits up front and then offload the risk of default and loss onto buyers of the mortgage securities.

Securitization was tailor-made for hiding risk deep inside apparently low-risk pools of mortgages and rigging the tranches to maximize profits for the packagers at the expense of the unwary buyers, who bought high-risk securities under the false premise that they were "safe home mortgages."

The con worked because home mortgages were traditionally safe. Financialization did several things to the home mortgage market:

1. Collateralized previous low-risk assets into high-risk, high-profit financial instruments

2. Commoditized this expansion of debt and leverage by securitizing the exotic mortgages

3. Built an inverted pyramid of leveraged speculative debt on the low-risk home mortgage

4. Used the Federal Reserve's vast expansion of liquidity and credit to originate trillions of dollars in new debt and leveraged financial instruments.

Consider a house purchased with a liar-loan, no-down payment mortgage. Since the buyer didn't even put any cash down or verify stable income, there is literally no collateral at all to back up the mortgage. The slightest decline in the value of the home will immediately generate a loss of capital.

Now pile on derivatives, CDOs, etc. on the inverted pyramid of risk piled on the non-existent collateral, and you have the perfect recipe for financial collapse.

Like home mortgages, oil has been viewed as a "safe" asset. The financialization of the oil sector has followed a slightly different script but the results are the same:

A weak foundation of collateral is supporting a mountain of leveraged, high-risk debt and derivatives. Oil in the ground has been treated as collateral for trillions of dollars in junk bonds, loans and derivatives of all this new debt.

The 35% decline in the price of oil has reduced the underlying collateral supporting all this debt by 35%. Loans that were deemed low-risk when oil was $100/barrel are no longer low-risk with oil below $70/barrel (dead-cat bounces notwithstanding).

Financialization is always based on the presumption that risk can be cancelled out by hedging bets made with counterparties. This sounds appealing, but as I have noted many times, risk cannot be disappeared, it can only be masked or transferred to others.

Relying on counterparties to pay out cannot make risk vanish; it only masks the risk of default by transferring the risk to counterparties, who then transfer it to still other counterparties, and so on.

This illusory vanishing act hasn't made risk disappear: rather, it has set up a line of dominoes waiting for one domino to topple. This one domino will proceed to take down the entire line of financial dominoes.

The 35% drop in the price of oil is the first domino. All the supposedly safe, low-risk loans and bets placed on oil, made with the supreme confidence that oil would continue to trade in a band around $100/barrel, are now revealed as high-risk.

In the heyday of mortgage financialization, exotic mortgages were tranched into securities that were designed to fail, to the benefit of the originators, not the buyers.These financial instruments were sold with the implicit understanding that they were only low-risk if the housing bubble continued to expand.

Once home prices fell and the collateral was impaired, it only made financial sense for borrowers to default and counterparties to refuse to pay until their bets were made whole by another counterparty.

The failure of one counterparty will topple the entire line of counterparty dominoes. The first domino in the oil sector has fallen, and the long line of financialized dominoes is starting to topple. Everyone who bought a supposedly low-risk bond, loan or derivative based on oil in the ground is about to discover the low risk was illusory. All those who hedged the risk with a counterparty bet are about to discover that a counterparty failure ten dominoes down the line has destroyed their hedge, and the loss is theirs to absorb.

All the analysts chortling over the "equivalent of a tax break" for consumers are about to be buried by an avalanche of defaults and crushing losses as the chickens of financializing oil come home to roost.

[don]

Re: Automatic Earth: Cheep, Cheep

yes, undoubtedly the price of oil has a million moving parts. Has it ever been so precariously financed . . . .


by Charles Hugh-Smith

It is these unforeseeable and uncontrollable consequences that are poised to wreak havoc on the global financial system.

Here's the thing about risk: it bursts out of whatever is deemed "safe." It wasn't accidental that the Global Financial Meltdown originated in home mortgages; it was the perceived safety of the mortgage market that attracted all the speculative debt and leverage.

The authorities (those few who weren't bribed to look the other way) were caught off-guard by this explosion of risk in a presumably "safe" market, but this was entirely predictable: this is the nature of systemic risk.

Since 2009, central state/bank authorities have backstopped the private banking sector and the sovereign debt market with everything they've got. The Federal Reserve alone threw something on the order of $23 trillion in guarantees, loans and backstops at the private banking sector, and the other central banks have thrown trillions of yuan, yen and euros to shore up the banking sector and sovereign debt.

They did this because they identified the banking sector and sovereign debt as the sources of systemic risk. Now that they've effectively shored up these two risk-laden sectors with the full weight of the central state and bank, they presume the systemic risk has been eradicated.

They could not be more wrong. As I often note, risk cannot be disappeared, it can only be masked or transferred. The systemic risk will not manifest in the heavily protected banking sector or the sovereign debt market--risk will break out of sectors that are considered 'safe"--like oil.

Yesterday, I described how The Financialization of Oil has followed much the same path as the financialization of home mortgages in the 2000s: a "safe" sector has been piled high with highly profitable and highly risky debt and leverage.

Once the narrow base of collateral shrinks (as it has in oil), the inverted pyramid of debt and leverage collapses, distributing losses that then trigger defaults as the dominoes fall.

What are the risks that result from the drop in oil prices? We can identify four right off the top:

1. Financial market turmoil. Right now, the extent of the losses created by oil's sharp decline have yet to become visible. Everyone holding the losses is scrambling to hide them and sell positions to limit the losses. The full consequences of losses and defaults will only become public in the weeks and months ahead.

Those who think the losses are confined to the oil patch and lenders are mistaken. How many hedge funds and pension/mutual funds own oil stocks or oil-related bonds, loans and instruments?

2. Currency market turmoil. Venezuela is the leading candidate for currency collapse resulting from the drop in oil prices. Russia's currency (ruble) is already in a free-fall, and though some may blame Western sanctions, the real driver is the collapse in oil revenues.

3. Geopolitical conflicts. History suggests that declining oil revenues tend to spark geopolitical conflicts as those losing revenue seek scapegoats in other oil exporters who refuse to cut production to support higher prices.

There are a host of other reasons for geopolitical conflicts to arise out of oil's price decline. Stronger rivals may seek to exploit the weakened state of oil-exporting competitors. Oil exporters might seek to trim supply by disrupting rivals' production via fomenting domestic unrest. The temptation to invade and conquer rises in parallel with desperation.

4. The unknown unknowns and the rising odds of miscalculation. As I noted in The Oil-Drenched Black Swan, Part 1, the The Smith Uncertainty Principle expresses the multiple ways risk can manifest:

"Every sustained action has more than one consequence. Some consequences will appear positive for a time before revealing their destructive nature. Some will be foreseeable, some will not. Some will be controllable, some will not. Those that are unforeseen and uncontrollable will trigger waves of other unforeseen and uncontrollable consequences."

The highlighted passage echoes the impact of Black Swans and Donald Rumsfeld's famous encapsulation of the risks implicit in the unknown:

"Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones."

Psychoanalytic philosopher Slavoj Žižek noted that there is a fourth category, the unknown known: what we know that we intentionally refuse to acknowledge that we know.

I think this is an ontological (intrinsic) source of risk: we know our activities and choices are piling up risk, but we refuse to acknowledge this because we do not want to deal with the consequences of all that risk accumulating.

This is the root of Chuck Prince's famous line about dancing (i.e. pursuing reckless financial speculations) as long as the music is playing ("As long as the music is playing, you've got to get up and dance."): everyone engaged in speculation knows the risks are piling up, but to avoid having to exit the game, they deny knowledge of the risks that are visibly piling up.

Then when the house of cards predictably collapses, they can plead ignorance.

The Power of Black Swans lie in the unanticipated consequences of the unknown unknowns. Some of the consequences of lower oil prices are known, but some are unknown. It is these unforeseeable and uncontrollable consequences that are poised to wreak havoc on the global financial system.