Saturday, September 19, 2015

This cannot last


After a credit-fueled energy boom and a punishing downturn, U.S. shale drillers now spend the vast majority of their operating cash flow paying off the debt they took out to expand their drilling.

The U.S. Energy Information Administration says in the second quarter, 83 percent of domestic oil companies’ operating cash flow went to paying off debt balances as their cash piles shrink because of cheap crude.

That compares to 58 percent in the second quarter of 2014 and about 44 percent in early 2012. Over the last five years, oil companies have collected more than $250 billion in risky junk bonds to extract millions of barrels of crude from shale rock in Texas and North Dakota, eventually leading to a global oil glut that has cut the price of oil by more than half.

The whole shale boom was predicated on cheap credit enabled by a Federal Reserve that has kept interest rates at zero for too long. This has enabled more mal-investment that must now be liquidated. When oil prices go up to new highs in the future you can blame the Fed.

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