by Drew McManigle
This morning, the spot price for West Texas Intermediate Crude is $42.58.
However, the real story now isn’t prices; it’s the pending nuclear winter resulting from the precipitous drop in those prices and the effect on the overall economy. As I’ve been saying all along, you have to go “Back to the Future” (the 80’s) to understand the ramifications of all this. To understand why the experts were wrong, see my earlier article: Why the Experts are Wrong about the Oil Industry.
According to data from the FDIC, between 1980 & 1994, a total of 1,617 commercial and savings banks failed who held $206 billion in assets at those failed institutions. At the time, bank oversight issues certainly existed, but the precipitous decline in energy prices was a factor for many of those failures. And, those “assets” consisted of energy production loans, energy service company equipment loans, small business loans, real estate loans, home mortgages, boat loans, etc. that all went belly-up as a result of the collapse of energy prices.
Aside from living through that period and recognizing that past really is prologue, let’s keep it simple and see how banks “assets” in troubled times are derived:
“I’m Bubba. I’m a Geologist with advanced degrees from Texas A&M University. I’m experienced and I’ve been working for a major energy production company on shale and offshore projects for the last 10 years. I’m very good at what I do and I make around $150k a year with bonus. I independently invest in O&G projects on the side and, I even do a little consulting, if a conflict doesn’t exist. My wife is a nurse and I have 2 kids in private school. And, I’m a member in good standing at The Petroleum Club. I own a nice big house with a mortgage; I have a loan on a fancy bass boat and, on the modest lake house, where I keep it. I have two car loans and a reasonable amount of credit card debt. I have about 2 month’s cash-on-hand at my current burn rate.
I was just fired and no one needs geologists anymore…”
All this calls to mind Charlton Heston’s ending to his opening monologue from the movie “Armageddon, “… It happened once…it will happen again.”