Oil Industry

12 Signs That The Economy Is Really Starting To Bleed Oil Patch Jobs

January 20, 2015January 20, 2015 by Michael

The gravy train is over for oil workers. All over North America, people that felt very secure about their jobs just a few weeks ago are now getting pink slips. There are even some people that I know personally that this has happened to. The economy is really starting to bleed oil patch jobs, and as long as the price of oil stays down at this level the job losses are going to continue. But this is what happens when a “boom” turns into a “bust”. Since 2003, drilling and extraction jobs in the United States have doubled. And these jobs typically pay very well. It is not uncommon for oil patch workers to make well over $100,000 a year, and these are precisely the types of jobs that we cannot afford to be losing. The middle class is struggling mightily as it is. And just like we witnessed in 2008, oil industry layoffs usually come before a downturn in employment for the overall economy. So if you think that it is tough to find a good job in America right now, you definitely will not like what comes next.

At one time, I encouraged those that were desperate for employment to check out states like North Dakota and Texas that were experiencing an oil boom. Unfortunately, the tremendous expansion that we witnessed is now reversing…

In states like North Dakota, Oklahoma and Texas, which have reaped the benefits of a domestic oil boom, the retrenchment is beginning.

“Drilling budgets are being slashed across the board,” said Ron Ness, president of the North Dakota Petroleum Council, which represents more than 500 companies working in the state’s Bakken oil patch.

Smaller budgets and less extraction activity means less jobs.

Often, the loss of a job in this industry can come without any warning whatsoever. Just check out the following example from a recent Bloomberg article…

The first thing oilfield geophysicist Emmanuel Osakwe noticed when he arrived back at work before 8 a.m. last month after a short vacation was all the darkened offices.

By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel.

These jobs are not easy to replace. If oil industry veterans go down to the local Wal-Mart to get jobs, they will end up making only a very small fraction of what they once did. Every one of these jobs that gets lost is really going to hurt.

And at this point, the job losses in the oil industry are threatening to become an avalanche. The following are 12 signs that the economy is really starting to bleed oil patch jobs…

#1 It is being projected that the U.S. oil rig count will decline by 15 percent in the first quarter of 2015 alone. And when there are less rigs operating, less workers are needed so people get fired.

#2 Last week, 55 more oil rigs shut down. That was the largest single week decline in the United States in 24 years.

#3 Oilfield services provider Baker Hughes has announced that it plans to lay off 7,000 workers.

#4 Schlumberger, a big player in the energy industry, has announced plans to get rid of 9,000 workers.

#5 Suncor Energy is eliminating 1,000 workers from their oil projects up in Canada.

#6 Halliburton’s energy industry operations have slowed down dramatically, so they gave pink slips to 1,000 workers last month.

#7 Diamondback Energy just slashed their capital expenditure budget 40 percent to just $450 million.

#8 Elevation Resources plans to cut their capital expenditure budget from $227 million to $100 million.

#9 Concho Resources says that it plans to reduce the number of rigs that it is operating from 35 to 25.

#10 Tullow Oil has reduced their exploration budget from approximately a billion dollars to about 200 million dollars.

#11 Henry Resources President Danny Campbell has announced that his company is reducing activity “by up to 40 percent“.

#12 The Federal Reserve Bank of Dallas is projecting that 140,000 jobs related to the energy industry will be lost in the state of Texas alone during 2015.

And of course it isn’t just workers that are going to suffer.

Some states are extremely dependent on oil revenues. Just take the state of Alaska for instance. According to one recent news report, 90 percent of the budget of Alaska comes from oil revenue…

But oil is also a revenue source in more than two dozen states, especially for about a third of them. In Alaska, where up to 90 percent of the budget is funded by oil, new Gov. Bill Walker has ordered agency heads to start identifying spending cuts.

Sadly, it looks like oil is not going to rebound any time soon.

China, the biggest user of oil in the world, just reported that economic growth expanded at the slowest pace in 24 years. And concerns about oversupply drove the price of U.S. crude down another couple of dollars on Monday…

Oil declined about 5 percent on Tuesday after the International Monetary Fund cut its 2015 global economic forecast on lower fuel demand and key producer Iran hinted prices could drop to $25 a barrel without supportive OPEC action.

U.S. crude, also known as West Texas Intermediate or WTI, settled 4.7 percent lower at $46.39 a barrel, near its intraday bottom of $46.23.

There is only one other time in history when we have seen an oil price crash of this magnitude.

That was in 2008, just before the greatest financial crisis since the Great Depression.

Many believe that we are now on the verge of the next great financial crisis.

I hope that you are getting ready.

Plummeting Oil Prices Could Destroy The Banks That Are Holding Trillions In Commodity Derivatives

December 3, 2014December 3, 2014 by Michael

Could rapidly falling oil prices trigger a nightmare scenario for the commodity derivatives market? The big Wall Street banks did not expect plunging home prices to cause a mortgage-backed securities implosion back in 2008, and their models did not anticipate a decline in the price of oil by more than 40 dollars in less than six months this time either. If the price of oil stays at this level or goes down even more, someone out there is going to have to absorb some absolutely massive losses. In some cases, the losses will be absorbed by oil producers, but many of the big players in the industry have already locked in high prices for their oil next year through derivatives contracts. The companies enter into these derivatives contracts for a couple of reasons. Number one, many lenders do not want to give them any money unless they can show that they have locked in a price for their oil that is higher than the cost of production. Secondly, derivatives contracts protect the profits of oil producers from dramatic swings in the marketplace. These dramatic swings rarely happen, but when they do they can be absolutely crippling. So the oil companies that have locked in high prices for their oil in 2015 and 2016 are feeling pretty good right about now. But who is on the other end of those contracts? In many cases, it is the big Wall Street banks, and if the price of oil does not rebound substantially they could be facing absolutely colossal losses.

It has been estimated that the six largest “too big to fail” banks control $3.9 trillion in commodity derivatives contracts. And a very large chunk of that amount is made up of oil derivatives.

By the middle of next year, we could be facing a situation where many of these oil producers have locked in a price of 90 or 100 dollars a barrel on their oil but the price has fallen to about 50 dollars a barrel.

In such a case, the losses for those on the wrong end of the derivatives contracts would be astronomical.

At this point, some of the biggest players in the shale oil industry have already locked in high prices for most of their oil for the coming year. The following is an excerpt from a recent article by Ambrose Evans-Pritchard…

US producers have locked in higher prices through derivatives contracts. Noble Energy and Devon Energy have both hedged over three-quarters of their output for 2015.

Pioneer Natural Resources said it has options through 2016 covering two- thirds of its likely production.

So they are protected to a very large degree. It is those that are on the losing end of those contracts that are going to get burned.

Of course not all shale oil producers protected themselves. Those that didn’t are in danger of going under.

For example, Continental Resources cashed out approximately 4 billion dollars in hedges about a month ago in a gamble that oil prices would go back up. Instead, they just kept falling, so now this company is likely headed for some rough financial times…

Continental Resources (CLR.N), the pioneering U.S. driller that bet big on North Dakota’s Bakken shale patch when its rivals were looking abroad, is once again flying in the face of convention: cashing out some $4 billion worth of hedges in a huge gamble that oil prices will rebound.

Late on Tuesday, the company run by Harold Hamm, the Oklahoma wildcatter who once sued OPEC, said it had opted to take profits on more than 31 million barrels worth of U.S. and Brent crude oil hedges for 2015 and 2016, plus as much as 8 million barrels’ worth of outstanding positions over the rest of 2014, netting a $433 million extra profit for the fourth quarter. Based on its third quarter production of about 128,000 barrels per day (bpd) of crude, its hedges for next year would have covered nearly two-thirds of its oil production.

Oops.

When things are nice and stable, the derivatives marketplace works quite well most of the time.

But when there is a “black swan event” such as a dramatic swing in the price of oil, it can create really big winners and really big losers.

And no matter how complicated these derivatives become, and no matter how many times you transfer risk, you can never make these bets truly safe. The following is from a recent article by Charles Hugh Smith…

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 recent years, Wall Street has been transformed into the largest casino in the history of the world.

Most of the time the big banks are very careful to make sure that they come out on top, but this time their house of cards may come toppling down on top of them.

If you think that this is good news, you should keep in mind that if they collapse it virtually guarantees a full-blown economic meltdown. The following is an extended excerpt from one of my previous articles…

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For those looking forward to the day when these mammoth banks will collapse, you need to keep in mind that when they do go down the entire system is going to utterly fall apart.

At this point our economic system is so completely dependent on these banks that there is no way that it can function without them.

It is like a patient with an extremely advanced case of cancer.

Doctors can try to kill the cancer, but it is almost inevitable that the patient will die in the process.

The same thing could be said about our relationship with the “too big to fail” banks. If they fail, so do the rest of us.

We were told that something would be done about the “too big to fail” problem after the last crisis, but it never happened.

In fact, as I have written about previously, the “too big to fail” banks have collectively gotten 37 percent larger since the last recession.

At this point, the five largest banks in the country account for 42 percent of all loans in the United States, and the six largest banks control 67 percent of all banking assets.

If those banks were to disappear tomorrow, we would not have much of an economy left.

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Our entire economy is based on the flow of credit. And all of that debt comes from the banks. That is why it has been so dangerous for us to become so deeply dependent on them. Without their loans, the entire country could soon resemble White Flint Mall near Washington D.C….

It was once a hubbub of activity, where shoppers would snap up seasonal steals and teens would hang out to ‘look cool’.

But now White Flint Mall in Bethesda, Maryland – which opened its doors in March 1977 – looks like a modern-day mausoleum with just two tenants remaining.

Photographs taken inside the 874,000-square-foot complex show spotless faux marble floors, empty escalators and stationary elevators.

Only a couple of cars can be seen in the parking lot, where well-tended shrubbery appears to be the only thing alive.

I keep on saying it, and I will keep on saying it until it happens. We are heading for a derivatives crisis unlike anything that we have ever seen. It is going to make the financial meltdown of 2008 look like a walk in the park.

Our politicians promised that they would do something about the “too big to fail” banks and the out of control gambling on Wall Street, but they didn’t.

Now a day of reckoning is rapidly approaching, and it is going to horrify the entire planet.

The Middle Class In Canada Is Now Doing Better Than The Middle Class In America

April 22, 2014April 22, 2014 by Michael

For most of Canada’s existence, it has been regarded as the weak neighbor to the north by most Americans. Well, that has changed dramatically over the past decade or so. Back in the year 2000, middle class Canadians were earning much less than middle class Americans, but since then there has been a dramatic shift. At this point, middle class Canadians are actually earning more than middle class Americans are. The Canadian economy has been booming thanks to a rapidly growing oil industry, and meanwhile the U.S. middle class has been steadily shrinking. If current trends continue, a whole bunch of other countries are going to start passing us too. The era of the “great U.S. middle class” is rapidly coming to a bitter end.

In recent years, I have been up to Canada frequently, and I am always amazed at how much nicer things are up there. The stores and streets are cleaner, the people are more polite and it seems like almost everyone that wants to work has a job.

But despite knowing all this, I was still surprised when the New York Times reported this week that middle class incomes in Canada have now surpassed middle class incomes in the United States…

After-tax middle-class incomes in Canada — substantially behind in 2000 — now appear to be higher than in the United States. The poor in much of Europe earn more than poor Americans.

And things are particularly dire for those in the U.S. on the low end of the scale…

The struggles of the poor in the United States are even starker than those of the middle class. A family at the 20th percentile of the income distribution in this country makes significantly less money than a similar family in Canada, Sweden, Norway, Finland or the Netherlands. Thirty-five years ago, the reverse was true.

Even while our politicians and the media continue to proclaim that everything is “just fine”, the U.S. middle class continues to slide toward oblivion.

The biggest reason for this is the lack of middle class jobs. Millions of good jobs have been shipped overseas, and millions of other good jobs have been replaced by technology.

The value of our labor is declining with each passing day, and this has forced millions upon millions of very qualified Americans to take whatever they can get. As NBC News recently noted, this is a big reason why the temp industry has been booming…

For Americans who can’t find jobs, the booming demand for temp workers has been a path out of unemployment, but now many fear it’s a dead-end route.

With full-time work hard to find, these workers have built temping into a de facto career, minus vacation, sick days or insurance. The assignments might be temporary — a few months here, a year there — but labor economists warn that companies’ growing hunger for a workforce they can switch on and off could do permanent damage to these workers’ career trajectories and retirement plans.

“It seems to be the new norm in the working world,” said Kelly Sibla, 54. The computer systems engineer has been looking for a full-time job for four years now, but the Amherst, Ohio, resident said she has to take whatever she can find.

It has been estimated that one out of every ten jobs is now filled by a temp agency. I have worked for temp agencies myself in the past. Big companies like the idea of having “disposable workers”, and this is a trend that is likely to only grow in the years ahead.

But temp jobs and part-time jobs don’t pay as well as normal jobs. And those kinds of jobs generally cannot support middle class families.

At this point, nine out of the top ten occupations in the United States pay an average wage of less than $35,000 a year.

That is absolutely stunning.

These days most families are barely scraping by, and they don’t have much extra money to go shopping with.

This is a big reason for the “retail apocalypse” that we are now witnessing. This week we learned that retail stores in the United States are closing at the fastest pace that we have seen since the collapse of Lehman Brothers. But you won’t hear much about that on the mainstream news.

You can find lots of “space available” signs and empty buildings in formerly middle class neighborhoods all over the country. For example, one of my readers recently shot the following YouTube video in Scottsdale, Arizona. As you can see, empty commercial buildings are all over the place…

As the middle class shrinks, more families are being forced to take in family members that can’t find decent work. I have written previously about the huge rise in the number of young adults that are moving back in with their parents. But this is not just happening to young people. As the Los Angeles Times recently detailed, the number of Americans 50 and older that are moving in with their parents has absolutely soared in recent years…

For seven years through 2012, the number of Californians aged 50 to 64 who live in their parents’ homes swelled 67.6% to about 194,000, according to the UCLA Center for Health Policy Research and the Insight Center for Community Economic Development.

The jump is almost exclusively the result of financial hardship caused by the recession rather than for other reasons, such as the need to care for aging parents, said Steven P. Wallace, a UCLA professor of public health who crunched the data.

“The numbers are pretty amazing,” Wallace said. “It’s an age group that you normally think of as pretty financially stable. They’re mid-career. They may be thinking ahead toward retirement. They’ve got a nest egg going. And then all of a sudden you see this huge push back into their parents’ homes.”

The U.S. economy is slowly but steadily falling apart, and more people fall out of the middle class every single day.

A recent Gallup survey found that 14 percent of all Americans would experience “significant financial hardship” within one week of a job loss.

An additional 29 percent of all Americans would experience “significant financial hardship” within one month of a job loss.

That means that 43 percent of the entire country is living right on the edge.

It is no wonder why only about 30 percent of all Americans believe that we are moving in the right direction as a nation.

Most people know deep down that something is seriously wrong. But most people can’t explain exactly what that is or how to fix it.

Meanwhile, the politicians and the media keep telling us that if we just keep doing the same old things that everything will work out okay somehow. The blind are leading the blind, and we are rapidly marching toward disaster.