Gilligan's Island Economics 101 for the U.S. Shale Oil Industry (Hint: Debt is *Not* a Long Term Solution)

Hey, U.S. Shale Oil producers, how's that Hamster Wheel of Debt working out for you?

Still spending more money than you earn?

Running faster and faster to service increasing debt levels?

Shale Oil production up but still can't seem to turn a profit because of servicing debt?

Just sit right back and you'll hear a tale ...

Gilligan's Island theme song | YouTube

Here is an excellent article that I highly recommend anyone involved in business to read.

Seriously, take the time to put on your thinking cap, take a cue from The Professor, and come to grips with a few basic fundamentals of Economics, in plain English, using Gilligan's Island as the simplified classroom.

I would be exceedingly happy if someone could gently nudge Harold Hamm to read this article:

Economics on Gilligan's Island

"... Given the three factors that create prosperity – labor, capital, and productivity – we discuss how the three elements of economic growth can be employed on Gilligan’s Island and the benefits and drawbacks of each. We greatly simplify this analysis by assuming that the only product the castaways produce are coconuts. Further, the coconuts can be sold to Robinson Crusoe Island (RC Island), and as a result the castaways on Gilligan’s Island can buy whatever goods they desire. ...

Summary

The concepts presented here are grossly simplified, but they apply to our modern, multifaceted economy every bit as much as they do to Gilligan’s Island. As a nation, we can keeping gaming GDP growth with largely unproductive debt or we can save and invest more. It is easier to borrow and spend, but it offers only a short-term means of raising consumption. It is not a permanent, long-term solution. Saving and investing comes with a temporary, short-term cost but the long -term benefits more than outweigh that sacrifice. ..."

 

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This is actually quite good, Tom. Well done, mate!

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Thanks Mike : )

Unfortunately I am probably preaching to the choir.  The business leaders that may find this useful may be unlikely to actually read the article.

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@Tom Kirkman, you clearly haven't heard of MMT :) which states that debt is irrelevant as long as countries can borrow in currency they can issue. Oil patch is just a tiny tip of ~$250T iceberg...

 

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7 minutes ago, DanilKa said:

@Tom Kirkman, you clearly haven't heard of MMT :) which states that debt is irrelevant as long as countries can borrow in currency they can issue. Oil patch is just a tiny tip of ~$250T iceberg...

 

Just ... NO.        EN  OH          NO.

 

MMT is a recipe for economic disaster, in my opinion.  Did you even read the article Economics on Gilligan's Island ? ! ?

Venezuela is a prime example of why MMT cannot possibly work in the real world.  Zimbabwe is another example.  Excerpt from the article you linked, I definitely disagree with MMT premises:

===============================

What exactly is MMT?

Modern Monetary Theory is a macroeconomic theory that contends that a country that operates with a sovereign currency has a degree of freedom in their fiscal and monetary policy which means government spending is never revenue constrained, but rather only limited by inflation.

20190130-stephquote.png

This is my layman’s version after reading and listening to everything I could on the subject, but I think I got the gist of it.

MMT’ers believe that government’s red ink is someone else’s black ink. Sure, the government owes dollars, but they have a monopoly of creating those dollars, and not only that, the creation of more and more dollars is essential to the functioning of the economy.

Here are the policy implications of accepting MMT:

  • governments cannot go bankrupt as long as it doesn’t borrow in another currency
  • it can issue more dollars through a simple keystroke in the ledger (much like the Fed did in the Great Financial Crisis)
  • it can always make all payments
  • the government can always afford to buy anything for sale
  • the government can always afford to get people jobs and pay wages
  • government only faces two different kinds of limitations; political restraint and full employment (which causes inflation)

The government can keep spending until they begin to crowd out the private sector and compete for resources.

And in fact, Stephanie Kelton argues it is immoral to not utilize this power to fix problems in our society. ...

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(edited)

Some companies faired well even with the drop in the 4th quarter nosedive.  I believe some companies, not all, but some are using common sense and discipline.

 

https://www.rigzone.com/news/wire/oil_supermajors_smash_analyst_estimates-05-feb-2019-158084-article/?utm_source=AMS_US_ENG&utm_medium=PD_SM_FB&utm_campaigns=FANS&utm_campaign=ENGAGED

Edited by cbrasher1
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2 hours ago, Tom Kirkman said:

MMT is a recipe for economic disaster, in my opinion.  Did you even read the article Economics on Gilligan's Island ? ! ?

I've read it. Here is another analogy for you:

"Once upon a time on a Monkey Island, a man announced to the villagers that he would buy monkeys for $10.
The villagers seeing there were many monkeys around, went out to the forest and started catching them.
The man bought thousands at $10, but, as the supply started to diminish, the villagers stopped their efforts. The man further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.
Soon the supply diminished even further and people started going back to their farms. The offer rate increased to $25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now act as buyer, on his behalf.
In the absence of the man, the assistant told the villagers, “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when he returns from the city, you can sell them back to him for $50.”
The villagers squeezed together their savings and bought all the monkeys.
Then they never saw the man or his assistant again, only monkeys everywhere! Welcome to WALL STREET."

(In Australia, ~60% of economy depends on real estate (in US it is 60-70% Consumption) and there are plenty of people with several monkeys investment properties and Chinese buyers seem to stop coming... )

Reason US Shale happened in a first place is giant capital missallocation caused by ~Zero Interest Rate Policy (ZIRP) which deprived savers from steady bank/bonds interest revenue stream and forced them into risky assets such as bonds of shale operators (making borrowing cheap for them). And land speculation frenzy/flipping assets, of course.

That's why we have corrections/bear markets/recessions and judging by size of monetary extravaganza, next one will be of a biblical proportions. Gosh, I so hope I'm wrong...

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1 hour ago, DanilKa said:

(In Australia, ~60% of economy depends on real estate (in US it is 60-70% Consumption) and there are plenty of people with several monkeys investment properties and Chinese buyers seem to stop coming... )

Reason US Shale happened in a first place is giant capital missallocation caused by ~Zero Interest Rate Policy (ZIRP) which deprived savers from steady bank/bonds interest revenue stream and forced them into risky assets such as bonds of shale operators (making borrowing cheap for them). And land speculation frenzy/flipping assets, of course.

That's why we have corrections/bear markets/recessions and judging by size of monetary extravaganza, next one will be of a biblical proportions. Gosh, I so hope I'm wrong...

 

Great response, DanilKa.

MMT is still a horrible idea, though.  Debt run rampant, with no apparent intention to actually pay back the debt - just print more money....

Zimbabwe printed so much money that it became basically worthless.  Venezuela heading that way also.

These bits from the MMT article you linked to above scare me the most; gives new meaning to the concepts of "too big to fail" and "big government".

Here are the policy implications of accepting MMT:

  • governments cannot go bankrupt as long as it doesn’t borrow in another currency
  • it can issue more dollars through a simple keystroke in the ledger (much like the Fed did in the Great Financial Crisis)
  • it can always make all payments

 

859098d27f3b2aaf11d228764564affbd43779cece3a24c793d86bdc0521fa07.thumb.jpg.8326b4502d4bd68da5c059ac47c9ae2a.jpg

 

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14 minutes ago, DanilKa said:

Reason US Shale happened in a first place is giant capital missallocation caused by ~Zero Interest Rate Policy (ZIRP) which deprived savers from steady bank/bonds interest revenue stream and forced them into risky assets such as bonds of shale operators (making borrowing cheap for them). And land speculation frenzy/flipping assets, of course.

And this bit here ^ is the reason I just awarded you an "Enhanced Intelligence" medal.

Not sure if any forum member can award this medal or if only moderators can award this medal, but you got one now.

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7 hours ago, Tom Kirkman said:

The concepts presented here are grossly simplified, but they apply to our modern, multifaceted economy every bit as much as they do to Gilligan’s Island. As a nation, we can keeping gaming GDP growth with largely unproductive debt or we can save and invest more. It is easier to borrow and spend, but it offers only a short-term means of raising consumption. It is not a permanent, long-term solution. Saving and investing comes with a temporary, short-term cost but the long -term benefits more than outweigh that sacrifice. ..."

fantastic argument as to why a society should invest in education and other social-liberal programmes that benefit societies longterm. Great one Tom. 

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7 hours ago, Tom Kirkman said:

 

Great response, DanilKa.

MMT is still a horrible idea, though.  Debt run rampant, with no apparent intention to actually pay back the debt - just print more money....

Zimbabwe printed so much money that it became basically worthless.  Venezuela heading that way also.

These bits from the MMT article you linked to above scare me the most; gives new meaning to the concepts of "too big to fail" and "big government".

Here are the policy implications of accepting MMT:

  • governments cannot go bankrupt as long as it doesn’t borrow in another currency
  • it can issue more dollars through a simple keystroke in the ledger (much like the Fed did in the Great Financial Crisis)
  • it can always make all payments

 

859098d27f3b2aaf11d228764564affbd43779cece3a24c793d86bdc0521fa07.thumb.jpg.8326b4502d4bd68da5c059ac47c9ae2a.jpg

 

As the $ZBW went into hyperinflation it was actually physically (fiscally) better to wipe your butt with the currency as it was worth less than a roll of toilet paper, not a good situation when your paid in bog roll.

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All this is very logical but is the leader of the free world applying logic.  

The state of the Union speech clearly indicate he is pleased with the massive increase in an un economic industry and he is presumably happy with the debt.  America used to prints dollars and Saudi delivered oil.  America converted the oil into high value goods that it sold around the world.  What wrong with that. 

Why start producing you own expensive oil at a loss.  What is wrong with importing oil.

The only logic is that you believe that you might not get the oil from Saudi or that the oil might not be sold to you in dollars.

 

 

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17 hours ago, cbrasher1 said:

Some companies faired well even with the drop in the 4th quarter nosedive.  I believe some companies, not all, but some are using common sense and discipline.

 

https://www.rigzone.com/news/wire/oil_supermajors_smash_analyst_estimates-05-feb-2019-158084-article/?utm_source=AMS_US_ENG&utm_medium=PD_SM_FB&utm_campaigns=FANS&utm_campaign=ENGAGED

Oil Majors seem to be doing it right, If I am wrong please set me straight. It seems that only the small operators have the big financial problems. 

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13 hours ago, Rasmus Jorgensen said:

fantastic argument as to why a society should invest in education and other social-liberal programmes that benefit societies longterm. Great one Tom. 

2

It seems that the main impact of our higher education system has been to teach people not to think but to follow socialist ideology. LGBT immorality, so called social justice, etc. 

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17 hours ago, Tom Kirkman said:

The government can keep spending until they begin to crowd out the private sector and compete for resources.

And in fact, Stephanie Kelton argues it is immoral to not utilize this power to fix problems in our society. ...

Here ya go, MMT insanity embodied by AOC:

 

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21 hours ago, Tom Kirkman said:

Hey, U.S. Shale Oil producers, how's that Hamster Wheel of Debt working out for you?

Still spending more money than you earn?

Running faster and faster to service increasing debt levels?

Shale Oil production up but still can't seem to turn a profit because of servicing debt?

Just sit right back and you'll hear a tale ...

Gilligan's Island theme song | YouTube

Here is an excellent article that I highly recommend anyone involved in business to read.

Seriously, take the time to put on your thinking cap, take a cue from The Professor, and come to grips with a few basic fundamentals of Economics, in plain English, using Gilligan's Island as the simplified classroom.

I would be exceedingly happy if someone could gently nudge Harold Hamm to read this article:

Economics on Gilligan's Island

"... Given the three factors that create prosperity – labor, capital, and productivity – we discuss how the three elements of economic growth can be employed on Gilligan’s Island and the benefits and drawbacks of each. We greatly simplify this analysis by assuming that the only product the castaways produce are coconuts. Further, the coconuts can be sold to Robinson Crusoe Island (RC Island), and as a result the castaways on Gilligan’s Island can buy whatever goods they desire. ...

Summary

The concepts presented here are grossly simplified, but they apply to our modern, multifaceted economy every bit as much as they do to Gilligan’s Island. As a nation, we can keeping gaming GDP growth with largely unproductive debt or we can save and invest more. It is easier to borrow and spend, but it offers only a short-term means of raising consumption. It is not a permanent, long-term solution. Saving and investing comes with a temporary, short-term cost but the long -term benefits more than outweigh that sacrifice. ..."

 

Tom, are the oil majors in the same shape as the smaller operators by exploiting the shale fields? They seem to be going all in with many billions of dollars. 

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18 minutes ago, Tom Kirkman said:

Here ya go, MMT insanity embodied by AOC:

 

If you are not familiar with the Cloward and Piven strategy for socialist control PLEASE read. This is also a strategy benefitting the super rich and globalists by giving them even more power and cheaper wages. 

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21 hours ago, Tom Kirkman said:

Hey, U.S. Shale Oil producers, how's that Hamster Wheel of Debt working out for you?

Still spending more money than you earn?

Running faster and faster to service increasing debt levels?

Shale Oil production up but still can't seem to turn a profit because of servicing debt?

Just sit right back and you'll hear a tale ...

Gilligan's Island theme song | YouTube

Here is an excellent article that I highly recommend anyone involved in business to read.

Seriously, take the time to put on your thinking cap, take a cue from The Professor, and come to grips with a few basic fundamentals of Economics, in plain English, using Gilligan's Island as the simplified classroom.

I would be exceedingly happy if someone could gently nudge Harold Hamm to read this article:

Economics on Gilligan's Island

"... Given the three factors that create prosperity – labor, capital, and productivity – we discuss how the three elements of economic growth can be employed on Gilligan’s Island and the benefits and drawbacks of each. We greatly simplify this analysis by assuming that the only product the castaways produce are coconuts. Further, the coconuts can be sold to Robinson Crusoe Island (RC Island), and as a result the castaways on Gilligan’s Island can buy whatever goods they desire. ...

Summary

The concepts presented here are grossly simplified, but they apply to our modern, multifaceted economy every bit as much as they do to Gilligan’s Island. As a nation, we can keeping gaming GDP growth with largely unproductive debt or we can save and invest more. It is easier to borrow and spend, but it offers only a short-term means of raising consumption. It is not a permanent, long-term solution. Saving and investing comes with a temporary, short-term cost but the long -term benefits more than outweigh that sacrifice. ..."

 

"I would be exceedingly happy if someone could gently nudge Harold Hamm to read this article "

The last time we "nudged" Harold here in Oklahoma, was when we partially restored the GPT to 5% , up from 2%  .

He didn't seem tickled. 😊

harold-hamm-oklahoma-capitol.png

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15 hours ago, Tom Kirkman said:

And this bit here ^ is the reason I just awarded you an "Enhanced Intelligence" medal. 

Not sure if any forum member can award this medal or if only moderators can award this medal, but you got one now.

Prize goes to Art Berman who came to this conclusion long before I did.

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21 minutes ago, ronwagn said:

Tom, are the oil majors in the same shape as the smaller operators by exploiting the shale fields? They seem to be going all in with many billions of dollars

BHP is one of the majors and they exited US Shale business selling it for ~$10.8B. Their expenses estimated at $40-50B. BP is a buyer.

Dismal productivity and perverted incentive structure which rewards high IP is the challenge. Well needs to pay for itself in ~3 years to be economical because during this time its production will drop by 80-90% (~50% pa). Terminal (after rate drops to 50-60 bopd) decline rate flattens to 20-25%, as per @shaleprofile.

Few operators are making money but majority going deeper into debt. And all seemingly are lying about "breakeven cost" - overstating ultimate recovery and not including all expenses.

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37 minutes ago, ronwagn said:

Tom, are the oil majors in the same shape as the smaller operators by exploiting the shale fields? They seem to be going all in with many billions of dollars. 

I really don't understand the logic of oil majors shovelling heaps of money into a money-losing operation.

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14 hours ago, Rasmus Jorgensen said:

fantastic argument as to why a society should invest in education and other social-liberal programmes that benefit societies longterm. Great one Tom. 

just keep government out of it - they have magic Midas touch when everything turns to shit... Education and healthcare are good examples - it become crap quality and not affordable. Student debt exceeds $1.5T ($86B owned by people over 60)

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4 minutes ago, Tom Kirkman said:

I really don't understand the logic of oil majors shovelling heaps of money into a money-losing operation.

simple - FOMO and Reserve Replacement Ratio. They are not investing into exploration and shales are low geological risk and bunch of reserves could be booked. Just ask USGS.

(In Australian real estate market, FOMO is getting replaced by JOMO - Joy of missing out on buying overpriced property...)

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18 hours ago, Tom Kirkman said:

Here are the policy implications of accepting MMT:

  • governments cannot go bankrupt as long as it doesn’t borrow in another currency
  • it can issue more dollars through a simple keystroke in the ledger (much like the Fed did in the Great Financial Crisis)
  • it can always make all payments

 

The insane Modern Monetary Theory is part and parcel (an essential component of) AOC's Green New Deal.

 

Alexandria Ocasio-Cortez wants to pay for her Green New Deal by essentially printing more money

Essentially, Ocasio-Cortez is continuing to argue for Modern Monetary Theory — something she said "absolutely" needs to be "a larger part of our conversation" in a recent Business Insider interview. The theory says that because governments can literally print money, "they can spend as much as they like," Politico explains. "Inflation is the only obstacle" that should stop the presses, The Week details here. In short, it's a big, untested idea for a big, untested plan.

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On 2/7/2019 at 2:46 PM, Tom Kirkman said:

I really don't understand the logic of oil majors shovelling heaps of money into a money-losing operation.

The stockholders keep buying, same with Tesla's stockholders. Maybe we should ask their stockbrokers. 

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