Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

The Oil Apocalypse Is Upon Us

Recent headlines indicate that the Oil Apocalypse could be upon us. Oil prices are now so low they could drag down other segments of the economy with them.

The most frightening headline of all comes out of North Dakota, where at least one grade of crude oil is now so worthless that a producer will pay you to haul it away. Bloomberg Business reported that Flint Hills Resources LLC, part of the Koch brothers’ empire, is effectively paying $1.50 a barrel to have something called North Dakota Sour hauled away.

Just two years ago, in January 2014, North Dakota Sour was selling for $47.60 a barrel; last year in January 2015 it was trading for $13.50 a barrel, according to Bloomberg. North Dakota Sour is a high-sulfur grade of crude oil, which means it costs a lot to process. Bloomberg estimated the current price of North Dakota Sour at -50¢ a barrel.

That means the Koch brothers are losing money every day at Flint Hills Resources. Therefore it is safe to assume that company will soon have to shut down because not even billionaires like the Koch brothers can afford to pay people to haul oil they just pumped away.


Popular Kind of Oil Now Trading for Less Than $10 a Barrel

A popular grade of oil, Canadian Bitumen, which is made from Alberta’s tar sands, was trading at $8.35 a barrel during the week of January 11, Bloomberg reported. That’s frightening because as recently as two years ago Canadian Bitumen was fetching $80 a barrel in the world’s markets.

In contrast, normal crude oil was trading at less than $27 a barrel on January 20, 2016, USA Today reported. That drop caused the Dow Jones to plunge by 500 points.

American environmentalists might like this news because one of their favorite whipping boys, the Keystone XL pipeline, was designed to carry Canadian Bitumen from Alberta to Texas ports. That project might now be economically unfeasible because of these prices. Workers in Canada’s tar sands might not be that happy, because their jobs could soon disappear.

Prices for such varieties of crude have collapsed because of the vast amount of cheaper to refine low-sulfur crude being pumped in places like North Dakota. Not surprisingly, many oil producers are already feeling the heat and laying people off.

Texas oil exploration and production companies have eliminated 60,000 jobs, economist Karr Ingham told USA Today. What’s even more frightening is that Ingham expects the situation to get worse, leading to even more layoffs.

Why the Federal Reserve Is Worried

Even the Federal Reserve is worried about the price of oil. The Dallas Fed was so disturbed about a rumor that it was pressuring banks not to call in loans to energy companies in order to prevent bankruptcies. The Zero Hedge website reported that it tweeted a rebuttal on Martin Luther King Day Jr. (January 18, 2016), a federal holiday when banks are supposed to be closed.

The Fed became concerned because Zero Hedge writer Tyler Durden is making a good case that many U.S. banks are heavily exposed to energy industry loans. He noted that one lender, Regions Financial (NYSE: RF), reported that its rate of charge offs (unpaid loans) grew from $18 million to $78 million during the fourth quarter of 2015. What’s truly scary is that Durden claims the nearly fourfold increase in charge offs was due to one energy industry borrower.


The Apocalypse has already devastated Regions’ stock price. As recently as December 31, 2015, it was trading at $9.60 a share; by January 21, 2016, it had fallen to $7.98 a share.

To add to the fear, Durden also thinks that some banks could be underreporting loans to energy companies, a practice reminiscent of those that led to the 2007 subprime crisis. He did not specify which banks could be underreporting loans but pointed out that Wells Fargo (NYSE: WFC) has $17 billion in oil and gas loans on its books.

How the Oil Apocalypse Could Lead to a Financial Meltdown

The four biggest U.S. banks—Bank of America (NYSE: BAC), Citigroup Inc. (NYSE: C), JPMorgan Chase (NYSE: JPM) and Wells Fargo—have reportedly set $2.5 billion aside to cover losses from oil loans, Bloomberg reported. That does not seem like enough to cover a fraction of Wells Fargo’s losses if Mr. Durden is correct.

Lenders could be facing massive losses; according to Bloomberg, a company called Endeavour International Corp went into bankruptcy owing $1.63 billion, but its assets brought in just $9.65 million at auction. Another company, ERG Resources LLC, tried to sell its assets and found no potential buyers. ERG’s resources included Cat Canyon, an oil field in California that it could not sell at auction, so even oil fields are now worthless.

Something to point out here is that a bank does not have to have had made a single loan to an oil and gas company to be exposed to the oil danger. Any bank that wrote a large number of commercial or consumer loans to businesses and individuals in oil-dependent areas such as Oklahoma or North Dakota could be exposed. The same goes for banks that issued a lot of mortgages in such areas.

The frightening thing is that the Oil Apocalypse is only beginning; the losses so far are just the tip of the iceberg. Soon banks, real estate developers, retailers, trucking companies and many others will be devastated as cheap oil wreaks untold havoc throughout the economy.