Tuesday, March 27, 2018


As the sell-off in the broader stock markets intensifies, it will be bad news for the world’s largest oil companies.  Why?  Because cracks are already beginning to appear in the biggest and most profitable global oil companies.  While rising costs and higher debt levels have been plaguing the U.S. shale oil industry, these negative factors are now impacting the major oil companies as well.
When the oil price fell below $100 in 2014, it spelled doom for the U.S. and global oil industry.  As oil prices continued to decline, energy companies were forced to increase their debt and reduce their capital expenditures (CAPEX).  Cutting CAPEX spending while adding debt aren’t a good recipe for positive financial earning in the future.
According to several energy analysts, they believe 2018 will be a turnaround year for the major oil companies.  Unfortunately, the fate of the price of petroleum and the oil companies are tied to the broader markets.  When the markets rise, it’s good for the oil price and energy companies, and when the markets fall, then the opposite is true.  However, the next major market selloff will likely cause irreversible damage to the global oil industry.
Investors need to realize that the global oil industry required $120+ oil in 2013 to replace reserves and bring on more oil production.  When that price level was not obtained that year, oil companies began to cut CAPEX spending even before the price fell below $100 a barrel in 2014.  Today, with the price of oil trading at $64, it is approximately half of what the global oil industry requires to fund new production growth.
So, there lies the rub.  Even though oil companies are more profitable currently, it was achieved by destroying future production.  As we can see in the chart below, CAPEX spending in eight of the largest global oil companies fell 56% from $245 billion in 2013 to $109 billion in 2017:
Yes, it’s true that a lower oil price forces oil companies to cut CAPEX spending to remain profitable, but it will also negatively impact their earnings in the future.  While all the major oil companies cut their CAPEX spending significantly over the past four years, Brazil’s Petrobras and ConocoPhillips both reduced it the most by 70%.
Now, to offset the falling oil price, many of the oil companies resorted to adding more debt to pay shareholder dividends or to fund CAPEX spending (or both).  For example, Shell’s long-term debt increased from $36 billion in 2013 to $74 billion in 2017 while ExxonMobil, one of the most profitable major oil companies in the world, saw its debt increase significantly from $7 billion to $24 billion during the same period:
These eight major oil companies have increased their debt right at the very time the stock markets are beginning rolling over.  As I have mentioned, when the stock market suffers a big correction-crash, so will the oil price.  A falling oil price will force oil companies to cut their CAPEX spending, once again, to provide positive cash flow for their shareholders.  Furthermore, rising debt levels and interest rates have severely cut into these energy companies’ profits.
In 2013, these eight oil companies paid $5.7 billion to service the interest on their debt.  However, that nearly tripled to $15.4 billion in 2017.  Thus, $10 billion in profits were vaporized just so these major oil companies could service their debt.  We must remember, during major market corrections, ASSET VALUES DECLINE, while DEBTS & LIABILITIES stay the same.  Which means, a much lower oil price will make it increasingly difficult for these oil majors to remain profitable as a large portion of their profits is now being used to pay their interest expense:
These three charts represent the CRACKS that are now beginning to appear in world’s largest oil companies.  Even though the oil majors have been somewhat immune to much of the negative issues plaguing the U.S. shale energy industry, it seems like the disease is finally spreading to them.  It’s just a matter of time before the Falling EROI – Energy Returned On Investment and Thermodynamics starts bankrupting oil companies that have been around for more than half of a century.
While this may seem like I am overly pessimistic, the data and the facts speak for themselves.
Lastly, the public has no clue just how critical the oil supply is to our Just-In-Time-Inventory-Economy.  Even though the housing market is still booming, what would our Suburban Economy look like with 50+% less of petroleum liquid fuels??  Please don’t belch out that Electric Cars (EV’s) are the answer… they are not.  Also, the current electric battery technology used to power a semi-tractor trailer would only have enough energy to also transport a fraction (2,000 lbs) of the freight compared to a typical diesel engine (48,000-50,000 lbs).
Unfortunately, technology has not solved our problems…. it has just created even bigger ones.  When you understand this simple principle, then it’s easy to see how the world unfolds in the future.



TSE said...

This is some really boring technical reading - not recommended.

And too hard for those were indoctrinated by RUSD - but the day IS coming when even those poorly educated people will understand....


And ya know what will get ya - the scourges of old which you never heard about!

The first epidemic of a waterborne disease probably was caused by an infected caveman relieving himself in waters upstream of his neighbors.

Perhaps the entire clan was decimated, or maybe the panicky survivors packed up their gourds and fled from the “evil spirits” inhabiting their camp to some other place.

As long as people lived in small groups, isolated from each other, such incidents were sporadic. But as civilization progressed, people began clustering into cities. They shared communal water, handled unwashed food, stepped in excrement from casual discharge or spread as manure, used urine for dyes, bleaches, and even as an antiseptic.

As cities became crowded, they also became the nesting places of waterborne, insect borne, and skin -to-skin infectious diseases that spurted out unchecked and seemingly at will. Typhus was most common, reported Thomas Sydenham, England’s first great physician, who lived in the 17th century and studied early history. Next came typhoid and relapsing fever, plague and other pestilential fever, smallpox and dysentery’s-the latter a generic class of disease that includes what’s known as dysentery, as well as cholera.

The ancients had no inkling as to the true cause of their misery. People believed divine retribution caused plagues and epidemics, or else bad air, or conjunction of the planets and stars, any and all of these things.

Ignorance Ain’t Bliss! How else to explain healthy people suddenly falling dead within hours and soldiers struck down with no signs of wounds? What else would cause such excruciating deaths, accompanied by delirium or hallucination, the body wracked by yellow or green or black vomit or excreta; or covered with obscene black boils, terrible red rushes or ghastly blue pallor? Why else would such sickness remain for months, then leave suddenly and not reappear till years later? Or perhaps it was replaced by a plague more deadly.


TSE said...

Vaccines get all the glory, but most plumbers will tell you that it was water infrastructure – sewage systems and clean water – that eradicated disease, and they’re right.
Disease Before Plumbing

After the fall of the Roman Empire, Europeans despised all things Roman, including bathing. There was a widespread belief that getting wet caused illness. This contempt and fear of bathing persisted through the Dark Ages.

Some Europeans defied local customs by bathing, but this was usually done over great protest. When Queen Elizabeth bathed, her servants panicked, fearing she would become ill and die.

This resistance to bathing was brought across the Atlantic to America, influencing habits all the way into the 1800s. In 1835, Philadelphia almost passed an ordinance forbidding wintertime bathing. Ten years later, Boston did outlaw bathing, except by medical directive. (Though this law was not widely enforced, it does illustrate the American resistance to bathing as late as the mid 1800s.)
How Plumbing Eradicated Disease

Before plumbing was widely used, indoor facilities consisted of a washstand and a washbowl, a pitcher, and a chamber pot or commode. Human waste was thrown into the street or anywhere convenient.

This total lack of sanitation in urban areas filled with rats and other vermin provided the perfect environment to spread disease. The Black Plague alone killed 75 million – 200 million people – including 1/3 of Europe’s population. Though this disease is not entirely eradicated, human infection has become a rare occurrence. The last plague epidemic in America was in the early 1900’s.

Polio and Plumbing

Polio thrives in fecal matter and is easily transmitted through human waste. Plumbing and water sanitation in India is way behind the rest of the industrialized world. In areas where sanitation and hygiene are good, polio is rare. In areas where sanitation and hygiene are poor, the disease can spread rapidly.

Immunization efforts have received a lot of publicity and have garnered most of the credit for India being declared “polio free” by the World Health Organization. As recently as 2009, India reported 762 cases of polio, and at that time, these numbers made India the polio capital of the world. In 2014, there are currently no “official” documented cases of polio, but without proper sanitation there is no way this can last.