Figure 1: classic doomsday scenario as fuel prices begin to decline below what drillers require to bring new fuels to the marketplace. Fuel shortages do not drive prices higher; instead, capital depletion is reflected by the parallel decline of purchasing power. Customers are unable to gain credit while banking/finance systems break down. (Chart by TFC Charts, click on for big.)

Every part of the world is experiencing distress as modernity requires cheap fuel and other resources to squander. Since 2000, waste- for- pleasure confronts resources increasingly priced in line with their value; resources that are becoming too costly to waste. Sadly, we humans never figured out alternative uses for our capital, the time to find such uses has run out.

Failure (Financial Times):

Sumitomo’s US shale oil foray turns sour

Ben McLannahan

Sumitomo Corp of Japan has drawn a line under its disastrous two-year foray into shale oil in the US, with writedowns connected to the project almost completely erasing its full-year earnings.

On Monday, Sumitomo, the fourth biggest of Japan’s trading companies by market capitalization, said that an impairment loss of Y170bn ($1.6bn) on a “tight oil” project in west Texas would form the bulk of Y240bn of charges for the fiscal year to March 2015.

… on Monday, Sumitomo said it had decided to sell roughly three-quarters of its acreage, triggering the loss on the assets and the agreement to fund their development. “It is difficult to extract the oil and gas efficiently,” the company said, adding that it could not “expect as much production to recover the investment”.

Other Japanese trading companies have taken big writedowns as shale bets have soured. Itochu Corp, the third largest trader by market capitalization, has written down about four-fifths of the Y78bn it paid in 2011 for a 25 per cent stake in family-owned Samson Investment of the US.

More Failure, Tim Morgan (Telegraph UK):

Shale has been hyped (“Saudi America”) and investors have poured hundreds of billions of dollars into the shale sector. If you invest this much, you get a lot of wells, even though shale wells cost about twice as much as ordinary ones.

If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US.

The key word here, though, is “initial”. The big snag with shale wells is that output falls away very quickly indeed after production begins. Compared with “normal” oil and gas wells, where output typically decreases by 7pc-10pc annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60pc or more in the first 12 months of operations alone.

Faced with such rates of decline, the only way to keep production rates up (and to keep investors on side) is to drill yet more wells. This puts operators on a “drilling treadmill” (running with the Red Queen), which should worry local residents just as much as investors. Net cash flow from US shale has been negative year after year, and some of the industry’s biggest names have already walked away.

The seemingly inevitable outcome for the US shale industry is that, once investors wise up, and once the drilling sweet spots have been used, production will slump, probably peaking in 2017-18 and falling precipitously after that. The US is already littered with wells that have been abandoned, often without the site being cleaned up.

2017-18 is optimistic. Drilling is undermined by an overall shortage of credit; oil prices are declining b/c oil customers around the world are bankrupt. Declining wages and the inability to ‘earn’ by wasting petroleum means customers cannot borrow, they are insolvent.

Loans are made to firms, instead; they are larger, they can offer up their leases as collateral. The result is that customers are starved for funds. Credit turns out to be another non-renewable resource; drillers compete against their own customers — and their lenders as well — to gain access to loans.