THE SHALE OIL PONZI SCHEME EXPLAINED: How Lousy Shale Economics Will Pull Down The U.S. Economy

Few Americans realize that the U.S. economy is being propped up by the Shale Oil Industry.  However, the shale oil industry is nothing more than a Ponzi Scheme, so when it collapses, it will take down the U.S. economy with it.  Unfortunately, the reason few Americans understand how lousy the economics are in producing shale oil and gas is due to the misinformation and propaganda being put out by the industry and energy analysts.

I am quite surprised how bank analysts and brokerage firms can continue to fund the shale oil and gas or advise clients to purchase stock when the industry is behaving just like the Bernie Madoff Ponzi Scheme.  The only big difference is that the U.S. Shale Industry is a Ponzi at least four times greater than Madoff’s $65 billion fiasco.

I decided to discuss in detail why the U.S. Shale Oil Industry was a Ponzi Scheme in my newest video.  I provide some interesting charts that explain how the huge decline rates and massive debt are going to bring down the industry, much quicker than the market realizes.

In the video, I show just how quickly two of the largest U.S. shale oil fields decline.  The chart below was developed by Enno Peters at the ShaleProfile.com websiteThe Permian, the largest shale basin in the United States, decline rate was a stunning 60% in just two years.  Thus, the companies producing oil in the Permian are forced to spend boatloads of Captial Expenditures (CAPEX) to grow or just maintain production:

Furthermore, I explain how many of these shale oil companies are using debt to fund operations.  However, lousy shale economics are not allowing these companies to pay back debt, so they must borrow new debt to pay back existing debt.  This is the very definition of a Ponzi Scheme.  The table below shows how EOG has structured its debt to be repaid over two decades:

Unfortunately, for the majority of investors holding EOG debt, they will not receive the return of their funds.  When the stock market suffers the next major leg lower, probably in the fall, it will pull down the oil price.  As the oil price drops back to $40 and on its way to $30, it will destroy the already weakened U.S. Shale Oil Industry, thus dragging down the economy along with it.

All Ponzi schemes collapse.  Just like the collapsing stock market destroyed the Bernie Madoff Ponzi Scheme, the falling oil price, lousy shale economics, and the massive decline rates will also kill the U.S. Ponzi Scheme.

Lastly, when the U.S. economy and financial markets were collapsing in 2008, the domestic oil industry was still in relatively good shape.  Today, it’s quite the opposite.  The Federal Reserve’s massive monetary stimulus was able to provide the shale energy that helped pull the United States out of the recession, but this time around, there is no PLAN B.

Today, the entire market is full of massive bubbles and Ponzi Schemes.

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39 Comments on "THE SHALE OIL PONZI SCHEME EXPLAINED: How Lousy Shale Economics Will Pull Down The U.S. Economy"

  1. If shale oil producers are realizing $60 at the well head, producing 5 million barrels per day, gross sales are $110 billion per year in a $20 trillion economy. That’s ~0.5% of the economy.

    • Marmico, the rest is Facebook, McDonalds and the Fed. China’s energy production is down, way down. China’s debt is up, way up. So who you gonna call?

  2. 300 billions wipe out will be completely absorb in a few minutes by the Fed if required. They have greatly expanded their knowledge and skills since 2008.
    It is the same with the so cllaed chinese T bonds sales : it would have 0 impact so that they keep them as a relative bargaining position. should they sell it, their bluff would be called and the yuan would lose more credibility.

    • The Chinese wont have to sell treasuries, just let them mature and cash the proceeds in. The effect may be similar, though, since the Feds need to immediately issue more long term treasuries to pay off the Chinese at maturity of the old ones. That is a similar Ponzi as described in the presentation. Rob Peter to pay Paul.

      • Yes but at the maturity PBOC will end with us dollars. In some way they are using/exchanging/selling them (or durectly T bonds or bills) in order to buy lands, commodities namely in Africa, Asia or South America but they keep most of them as a threating weapon. However I guess that it fools only complete clowns like Bill Hotler…

  3. Perhaps current Middle East conflicts are orchestrated to force the oil price higher in a last ditch attempt to make profitable

  4. Yes Sean I agree and as well to get control over the remaining major oil and gas fields in the world which van be ultra cheap produced

  5. I suppose why these Ponzi schemes continue is NO CEO’S OR BANKERS EVER GO TO JAIL. Apparently the government doesn’t want to shake the boat as long as the economy seems to be stable, who cares about next week.

  6. Is it possible that some oil companies don’t produce as much because they are waiting for higher oil prices and thus is why we see less oil being produced?

    • If Oil Co are waiting – they are yet to invest into building production capacity and this years. Much faster (few month) in shale; but crap results – fast decline; marginal economics (case in point). Middle East may have some spare capacity but they were operating at its peak output when self-imposed restrictions.

  7. “Unfortunately, the reason few Americans understand how lousy the economics are in producing shale oil and gas is due to the misinformation and propaganda being put out by the industry and energy analysts.”

    The problem here is that the US doesn’t have a “normal economic system”. TPTB are utilizing controlled hyperinflation. What that means is that normal economics don’t apply. The US needs oil so they promote getting oil from an uneconomic method which is and will be supported by the constant printing of fiat USD. Just as the precious metals are suppressed by unlimited printing of USD so will the the shale oil industry be supported by unlimited printing of USD. The game ends when the USD is no longer the world reserve currency. Until then? Buy Cryptos and stack AG……

    • OutLookingIn | May 19, 2018 at 10:47 am |

      Few American’s understand.

      Only the under or uneducated along with the uninformed, believe the misinformation and propaganda as being the truth. During the past two generations, the elites have successfully torn out the idealistic, moral heart of education.
      Now there is a population composed mainly of Dolt’s, who spend their days willfully ignorant of anything of import, while they wile away their time playing with their electronic toys. Don’t look for it to get any better.

  8. Marmico,
    U.S. used approximately 7 billion barrels of petrol products in 2017. If the economy runs on energy, and it does, then each barrel is responsible for 2,850 dollars of GDP. If we see shale decline by 50 percent, then 2.5 trillion dollars of GDP will be lost per year. I think this is not insignificant. Would probably be higher as energy density is higher for liquids than natural gas.

  9. Could it be the EROEI for Conventional Oil was not terribly better than that of Shale Oil and Gas, all along?

    EROEI studies in the public domain have promoted ratios as extreme as 1:50 or even 1:150 – where 1 unit of energy invested claimed to be enough to produce a 50+ unit of final energy-returned, despite the assumption being a violation of the 2nd law of thermodynamics.

    They fail to identify where the initiating magical 1, in the 1:50+ ratio, has come from, in the first place?

    In the case of 1712 Britain, where all fossil fuels have started their cycle, this “1” has consumed arm and leg in energy. This far, it deforested most of Britain and has put generations and armies of horses, humans, hills of hand-picked coal and lubrication palm oil tropical supplies – into the mining process, just to build and mass-deploy first-generation steam engines.

    Then, from that point on, steam engines were installed at the mouth of the mine and the coal powered them was coming from that same pit, very poorly audited, if at all! The centuries-long backlog of energies has never been paid of since, as the more coal extracted, the more energy to build a bigger industrial base and ecosystem was needed, just to extract more coal and keeping the process going.

    Blueprints and ready-made machinery manufactured with that coal went then to Pennsylvania, and from Pennsylvania, new oil and coal-built machinery went to Venezuela, Iraq and Saudi, and the rest is history.

    It is this being the real energy-cost behind the unidentified 1 seen in the infamous EROEI ratio!

    Circulating EROEI ratios are severely partial, as assuming a balance of 1:100 means all what humans have expended of fossil fuels to extract half a trillion barrel of oil, since 1860, is 5 billion barrels-equivalent – a quantity the world currently produces in just 50 days! How this can be considered sound and real?!

    When one fills up a car with 100 litre of gasoline, for example, mainstream EROEI calculates only 1 or two litres were needed to make that quantity available at the fuel station.

    Even if the 100 litres came breezing on the flying carpet from deep in the ground somewhere in the world right into your fuel tank, they would require more than 2 litres for the journey, at least to cover for leaks, evaporation and wastes, not to mention other procedures like extraction, transportation, machinery-making, refineries, control, distribution, sustaining humans involved – and the rest of the endless process!

    In fact, the real amount of fossil fuels consumed until the 100 litres put into your car must be more than 100 litres-equivalent – by physics.

    Knowing we have not extracted more than half a trillion barrel to-date, yet most of our crude reserves worldwide are now gone – is another proof that something doesn’t reconcile here: it must be earlier EROEI studies were unable to identify the magnitude of that magical 1, they put into their ratios-cliché, and where it came from?!

    When the real EROEI of conventional fossil fuels was 1 unit-invested to less than 1 unit-produced, all along, no wonder shale oil and gas operations are never profitable, as the stuff they produce is no more than a sub-product and a derivative of conventional fossil fuels supplies (similar to wind, solar, hydro and nuclear – which all are built and run with conventional fossil fuels and heavily financially subsidised).

    Being so partial, earlier ERORI ratios are now obsessively referred to by a barrage of recent articles seen today published online and aired by main networks hyping and grooming Karl Marx and Socialism over Capitalism.

    This sample article, among many others, is waging a new EROEI-assisted campaign that seems aiming for bringing the world under another rotational two-party, Capitalism then Communism-ruling Democratic system!

    The bottom line is that if humans don’t identify how much energy is required to build an energy-producing device of useful work, Economy being a one, the predicament of Energy on Earth will remain unresolved, no matter what economic-political system is pushed on us.

    • The bottom line is that EROI or negative externatlities are not taken into account into capitalism prism : it has never for the last 250 years and never will be.

      • RD – Right. Externatlities were not taken into Socialism’s prism, too!

        Forgetting about the energy put into extracting it for a minute, when a barrel of crude makes it to the refinery and comes back to the wellhead, there is no energy left in it to do any more useful work after that very energy-intensive long journey, yet alone lifting up another 100 barrels from deep in the underground and transporting them all the way to the refinery and end consumers!

        Earlier EROEI studies are flawed. They defy physics.

        From now on, whenever one sees the word ‘EROEI’ written or spoken, caution advised!

        • If by socialism you mean statism, that’s perfectly true.
          If by socialism you mean destruction of money AND state (ie exchange), so not necessarly.
          I disagree with SRS rocco on this issue, I see energy as a whole component but not as the core issue to the coming end of capitalism (this century or the next one). Capitalism like slavery and feudalism will die from its own and main contradiction.

          • From now on, you are spared from putting the effort in seeing “whole components“, “core issues” or worrying about “Capitalism“, but watching energy resources being smuggled un-audited on the world market – a neo status-quo Economics.

            The freshly released video below reports on Iraqi oil supplies being systematically smuggled to the black market through Iran, blessed by governmental bodies an all other parties involved!

            If a company manages to get some shale oil from the US mixing it with this gold-grade crude – Bingo! This is another money printer, even if the novel mix is sold for Bitcoins!

            What Socialism and Karl Marx are talked about in the media these days, for god sake?! Actually, tonnes of articles and comments about the guy are a waste of fossil fuels running servers and digital networks!

            (Sorry, non-English narrated, but you can use google for translation)
            https://www.youtube.com/watch?v=17MHgFTqRs0

          • RD,

            You stated this, “I disagree with SRS rocco on this issue, I see energy as a whole component but not as the core issue to the coming end of capitalism (this century or the next one). Capitalism like slavery and feudalism will die from its own and main contradiction.”

            If you believe that, then you are much more ignorant than I first imagined.

            steve

          • Indeed, I misspoke. I believe energy could provoke the fictious credit crisis which is the symptom of the deeper and intrisic crisis the west has faced since the end of the rebuild of europe and japan after the WWII.
            If I am not misunderstood, you think that energy is nearly an autonomous like exterior parameter which overlooks all the others. So basically, since capitlism took over the world after the end of the colonization, “everything” is based on liquid hydrocarbons. I am not sure but I believe you have written also on the fall of the roman empire because of energy issues and in searching more, you will find authors and researchers who could explain the end of the hunter gatherer or the fall of thr Qing dynasty for the same reasons.
            As we are facing the peak liquid oil to simplify even if you concede the new projects are possible beyond 120 USD which would reduce and/or postpone the senecca cliff/bell curve production. But you add that oil at 150 USD or 200 USD is “impossible” for consumers so that discount cash flow will have to take into account this new reality with stagnant future sales and that NPV will so go the ceiling.
            I note that it is possible the people involved with soil biology/chemistry could maybe conclude the same thing as for example worms and other microbiotic fauna has been reduced by 95% for the last 50/60 years in western europe or so which could provoke some food production decrease and if food production decrease, human population will decrease and so DCF will decrease and so the NPV, stocks price and so on.
            You may reply food is also energy… Of course but even dead corpses are energy !
            In some way, taking a partial view and taking one side/biew/aspect as the primary or explaining factor is like a neo-physiocrats approach to me.
            There are lots of potential reasons in order to provoke the huge fictious credit crisis such as the contradictions between german and american capitalists/oligarchies which could result into the break-up of the eurozone which could eclipse for a while or postpone in some way the liquid hydrocarbons issues we could face from 2023/2025. Obviously we should never understimate the wish of most of the owners of the society to try to maintain the status quo which is nowadays their apparent preference (cf. Italy, France or Spain).
            We could see that negative rate taboos exploded when necessity required (I know you cannot print oil like you can create electronic bits call USD).
            On the longer term, I agree with you that “something” will have “to change” from an energy point of view in the next decades if we contemplate a world in 2100 at the western standards. However, saying that by 2025, civilization will have disappeared and everything would have “exploded” JUST and ONLY because liquid oil production cannot increase beyond 90 millions/day and can even decrease progressively, appears to me as a static speculative case.

    • JT Roberts | May 20, 2018 at 9:17 am |

      Dude you need to stop stumping your book. You make no sense. Somehow you think the exploitation of low entropy fossil fuels has no effective work. And your proposing that you can concentrate high entropy energy more effectively. Well sorry to say your fifth law can’t violate the second law. Entropy is times arrow we are powerless to reverse it. All energy travels from low entropy to high entropy. Hence fossil fuels and the use of them is a natural order in the universe. And yes it will end and yes the first law will prevail which is a heat death to the industrial economy. But to say it never happened which is your 5th law premise sounds like too many wild mushrooms. What would be of more value is to ask how the low entropy originated in the first place? It shouldn’t be there. What else shouldn’t be there are ores. Try explaining how geologic life and biological life which are symbiotic on this planet came to be? And why only here do we find systems that can reverse entropy leaving surpluses to be exploited. And before anyone gets the overly simplistic idea that it just happened, or that biological life is the product of geological life you better try to answer the question of free oxygen in the atmosphere and the percentage of it.

      • JT – Your comment is classic: You are trying to make Fossil Fuels another case of Bob and Alice hanging around a massive black-hole and the experts are trying very hard explaining their fate – for the last 100 years!

        Read how your fridge works and you’ll find all questions you’ve raised here answered.

    • I it is nearly certain that you know nothing about what Karl marx wrote.
      Please just stay on your comfort zone with so called “cultural marxism” and statist BS.

      • Karl Marx has missed writing on when coal (the fuel known then) depletes, how much that will leave his Proletariat, digging mines, driving trucks and operate factories – idle and the majority of his thesis obsolete?

        In this, Karl Marx was no different from Adam Smith and Keynes (all were born after 1712, when the steam engine was already established the dynamo of the world and nobody knew the big secret – the engine was fueled by the same coal it dug – unaudited, all along)!

        The Classic Economics of the period 1700 – 2000 are now outdated and they need a major re-write.

        The exciting piece is that both Orwell and Huxley have not explained from where their big brother’s engine of deceit, terror and war will get its fuel from, post the age of abundant fossil fuels, either?!

        Many think the end of fossil fuels will be the end of Civilisation. Unlikely, though. Rather, it would be a new, very brave world, indeed!

        • No, classical “economics” will work until the end of capitalism as there are intrinsic laws which cannot be changed. What can be adapted or precised are for example all theories with price formation, offer demand equilibrium.

  10. To put it in perspective, that’s about 3 times the loss of GDP from the great recession. If we loose 70 percent of shale production, we are talking about great depression levels.

  11. If shale dopes just kept their production flat to start this year, they would be bathing in profits, could probably pay all all their debts in a year or 2, and buy all their stock back in a couple years more. Instead, they just keep blowing their brains out, now killing the differntial for their oil from the Permian and the infinite run on the treadmill continutes. Just the way things go when greed rules everyones decision making.

  12. When the Dow turns over and the shale oil industry goes with it will that mean the cost of oil and gas should go up?

  13. this shale oil in the east is getting nothing done with it yet, a us sen told my ppl in 2008 it holds a plastic that is stealth tec, now they are going to extract lithium from the old drying up wells cheaper than they can mine it

  14. there lithuim is in the easter oil fields. IT IS in the salt SEAM these oil wells in the east run in the same salt beds as the salt mines in CLEVeLAND OHIO as they go south the salt seams get as deep as 16,000ft to 19,000 in wv they end in nc, its the oil brine

  15. Great presentation Steve, thanks.

    The BIS had a oil presentation out too last week. Starting on page 16, it looks to me they are a little more optimistic about shale. However, they use some strange argumentation I think, but I’ m not an expert. Wat is your opinion about this.
    https://www.bis.org/publ/work725.htm

  16. Stocks futures are exploding higher with the complete Trump annihilation regarding trade war with China. Break out so confirmed and new all time highs with weeks.

    • Incredible rise in wages according to the richmont fed : the dedollarization clowns can wait another additional decade :

      https://www.zerohedge.com/news/2018-05-22/highest-wage-growth-21-years-richmond-fed

    • DisappearingCulture | May 22, 2018 at 2:52 pm |

      We can always count on you to be the short-term good news cheerleader, projecting one article or one day’s rise as a long-term trend. Let’s see stocks futures “exploding higher”…oops all the indices are down today. No cheer-leading for the crypto sector? No surprise, it’s down for the last 24 hours. Next time it’s up for 24 hours you will say Bitcoin is going to 100k by the end of the year.

  17. Goddamn you bubble inflating idiots. You never learn and inevitably you jerks will get a bailout courtesy of the taxpayer instead of being imprisoned for the con artists and thieves you are.

  18. silverfreaky | May 21, 2018 at 3:02 pm |

    Iran had declared that they want to change from oil dollar to the euro for gas/oil buisness.
    The answer from Pompeo came immediately:”they get the biggest repressions ever”.

    Masked under the smokescreen uran producing the USA cannot allow that.I think instead of printing dollars the USA should produce anything of value.They had everything for doeing so…

  19. An interesting perspective on Government and politics:
    If a government is a “democratic republic” it is so because the PEOPLE are the most precious resource and as such must be guarded and protected.
    BUT if a government is a “resource extraction” economy then that resource must be guarded and protected even at the expense of the populous. (Saudi Arabia, Congo, Venezuela, etc.)
    Therefore Despotic and Socialist government are not a cause but a symptom of the type of economy; because the RESOURCE of the economy MUST be protected.
    An abstract resource that may become extracted is the wealth of the populous before they have earned their wages, i.e. DEBT !
    If the “resource extracted” is DEBT then the VEHICLES of the “resource extraction” MUST be protected even at the expense of the “POPULOUS”!!!
    Then if the economy is the “resource extraction” model with the resource being “debt” then the vehicles of that extraction,i.e. Banks, financial institutions, stocks, bonds MUST be guarded and protected even at expense of the populous.
    If this is already evidenced then we are facing what kind of a government?

  20. I laugh when I see neoliberals of Milton Friedman’s style attacking social security for being a Ponzi scheme. The whole economy is a Ponzi scheme but they haven’t realized this !

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