Friday, February 5, 2016

Bankrupted By 0% Poverty Capital

Oil companies over-invested in excess capacity using 0% poverty capital, and now they're going bankrupt...shit happens.

It's called deflation aka. "poverty", something the dunces at the top haven't figured out yet. They think that deflation means lower prices at Best Buy. There's no free lunch:

Oil producers are locked in mutual assured bankruptcy. As it is in the poverty trap, when price goes down, quantity must go up. Producers are locked in a death spiral - the lower oil prices go, the more is produced. The marginal cost of producing an incremental barrel of oil for existing wells is the limit approaching zero...

Most of the costs associated with pumping oil are fixed costs or worse yet, sunk costs (in the past). So as long as the cost per barrel covers the variable costs, which are extremely low, they will continue pumping. Especially when they're behind on their "loans". They have a choice to go out of business slowly or immediately. 

Global output is rising, even as prices fall - as the poverty trap would predict, or cost accounting 101 for that matter:

There's a lot of "blame" to go around...but this article exhibits why fixed costs are EXACERBATING the problem. If there were no fixed costs, all "non-economic" oil production would shut down immediately, but unfortunately, shutting down doesn't eliminate the fixed costs. Even in bankruptcy protection, these companies would pump oil. 

"Morgan Stanley analysts project that Western Canadian crude volumes will rise at a compound annual rate of 4 percent through 2017. Increased production at recently completed facilities, and five major projects slated to be finished this year, will push total volume yet higher, they estimate. Canadian crude volume is expected to continue increasing through 2018 with the Fort Hills mine and Horizon expansion."