Some see falling prices as the equivalent of a tax cut that will spur the western world out of its economic torpor. Others worry it is an ominous harbinger of deflation.
Out on the American frontier, the plunging price of crude oil may mean the end of the kind of luxury that for more than 100 years has sporadically visited an area famous for one of the world’s largest-ever land grabs and forced extinction.
The Bakken Club closed its doors over the New Year’s break, evicted after a spat with a controversial landlord in Williston, North Dakota, home to the most expensive real estate market in the U.S., with average apartment rents some 60% above New York City.
The Bakken Club, which described its menu as “Tuscan” while specializing in 14-ounce pancetta hamburgers, was a startup whose members were required to spend at least $750 a month on food and drinks – a lot by G-7 standards but less than a day’s pay for a skilled laborer in the Dakotas today, where hydraulic fracturing of the so-called Bakken shale is a massive affair.
Indeed, some see the Saudi refusal to cut oil production as a direct response to the fracking rage in North America, a bid to drive fuel prices so low that unconventional drilling methods are no longer economical.
We’ll come back to that, but first it’s worth noting that the high plains are the historic home of some of the most extreme human stories, mostly lost or snobbishly ignored at the individual level yet critical to the creation of the United States of America as it is today – warts and all.
Back in 1880, folks in the area were eating oysters. We know that from the recently-uncovered original autobiography of Laura Ingalls Wilder, author of Little House on the Prairie, source of a wildly popular television series that turned a chaotic story into a one-way gloss on manifest destiny.
It turns out Ms. Ingalls’nation-building epic was spun mostly by her daughter, Rose, who was born in De Smet, South Dakota shortly after her grandfather took a job there with the railway, one of a string of peripatetic jobs held by the patriarch of the “Prairie” dynasty. For the record, Rose was a clever but poor girl who made a fortune in her 20s selling real estate in what is now known as Silicon Valley and went on to a literary career that led her along with Ayn Rand and Friedrich Hayek to be deemed one of the intellectual north stars of the libertarian movement.
In short, mess with a Dakotan at your own peril. On the other hand, it’s hard to stay up there.
The Bakken fracking boom has led to massive creation of highly-paid jobs – one of this reporter’s childhood friends is driving a truck up there, having lost his insurance sales job in the wake of Obamacare. He tells of 100-hour weeks, caffeine and more, and the inevitability of lethal explosions in the former homeland of the Sioux tribe and their acclaimed Mandan civilization.
So, will all the roughnecks and the slick fracking financiers now follow the Bakken Club’s fate into history’s oblivion, just as Laura Ingalls left the area and the Sioux were infamously forced off the land?
North Dakota officials reckon crude oil prices have to fall to $42 per barrel before local production becomes uneconomic.That means there’s still a 20% cushion even after the 50% fall of 2014.
But nobody really knows. After all, industrial companies often have to operate at a loss during cyclical downturns as the alternative of turning off their capital stock would impose far greater losses. That’s a serious concern for American fracking, which is dominated by small companies who have issued gobs of corporate debt. It is not news for those paying attention that small companies have formidable cash flow hurdles they must meet to avoid being taken over or going bankrupt.
Oil gurus have noted that big players, like Exxon or Saudi Arabia itself, have deeper pockets and indeed wells, allowing them to watch as smaller rivals perish and they then pick up the pieces just as prices rise again. That could be. But a lot of oil-producing nations are politically rather leveraged – think of Russia, Iraq, Venezuela and countries that rely on oil revenue to buy social peace. And a lot of fracking outfits are small and perhaps more flexible than people know, given lighter capex requirements and shorter drilling lifespans.
In short, the stakes are high and visibility is severely impaired by the opacity of hedges, futures, debt levels and more. That leads to immaculate rhetoric such as that used by the Bakken Club itself when it explained its eviction and closure as temporary and due to a squabble with the landlord rather than an unviable business model.
Noting that the Dakota territory is a place of boom and busts adds little insight, given the locals were eating oysters shortly after arrival, funded by crème exports of all things. At the same time, one can’t rely on presumed resilience, given that Laura Ingalls had a rough life –her family moved 10 times in her first 12 years and she then began to serve as a maid for other families – that only true-blue American rhetorical hucksterism turned into a tale of a pilgrim’s progress.
A cryptic prediction: It was the U.S. government, not the Sioux, Osage and other tribes, was the biggest problem for Laura Ingalls’ father and his effort to start his own farm. The fate of fracking probably doesn’t lie in decisions taken by faraway lands but whether it can make the U.S. the world’s swing oil producer, a move that would steal a march from OPEC but require Washington to pursue a clear-minded energy strategy rather than just drill, baby, drill.
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