Shale gas won’t save us

First, a little practical advice. You want to buy the car you want at the price you want? Don’t go into a dealership.

We met a man here in Aiken who owns major car dealerships all over the country. He explained:

“This is how it works. The dealer doesn’t really make much by selling cars. He makes it on the add-ons. The customer comes in. He knows what he wants. But he leaves with much more. The salesman shows him the upgrades. The shiny wheels, the on-board entertainment, four-wheel drive, service contract, and so forth. You want to save money? Just figure out what you really want, and get a couple of dealers to bid on it. Don’t go into the dealership.”

There. That will save you some money, dear reader.

Now back to the financial markets: Dow up 49 on Friday, gold off $10, Mt Gox blew up like Krakatoa, and Janet Yellen maintained that it was the weather holding back the US economy, nothing more. But it ain’t necessarily so.

Officially, GDP increased 1.9% last year. Unofficially, the figures are fudged so much that you have to call the dentist after looking at them. We could be in recession for all anyone knows. Fewer people are working than at any time since the ‘70s, when women began entering the workforce in large numbers. And sales for S&P 500 companies rose only 1.8%. So much of the S&P’s sales growth comes from foreign sales, it is doubtful if US sales alone kept up with population growth.

What’s wrong?

Bill Bonner on markets, economics & the madness of crowds

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When the 21st century began, just 13 years ago, the US accounted for 25% of total world output. Now, the figure has been cut down sharply – at 17% of world GDP. Within ten years, it is likely that the US will be neither number one nor number two. Instead, it will have to settle for the bronze medal – in the number three position behind the EU and China.

Why? Some of it is natural, regression to the mean; but some of it comes from the staggering policy mistakes. US officials seem to think:

1) That you can borrow your way out of a debt problem;

2) That you can keep interest rates artificially low without doing damage to the real economy;

3) That you can waste the nation’s precious output on zombie activities – including wars, inefficient tax systems, giveaways, bailouts, and healthcare programmes that no one can understand.

We mentioned one example of economic distortion caused by ultra-low rates – robots. At zero interest rates, a business can borrow money and replace an employee with a robot. Labour costs go down. Profits go up. Debt goes up too, but who cares about that?

Another example: at super-low interest rates energy producers can drill in marginal areas for marginal output of oil and gas. As long as the capital costs are held in check by super-low rates, almost any return on investment looks good. And then, the press reports a new ‘energy revolution’ in America that is supposed to give the empire a second wind.

Trouble is, it ain’t necessarily so. Here’s Bloomberg:

The path toward US energy independence, made possible by a boom in shale oil, will be much harder than it seems.

Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back.

Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency.

Iraq could do the same with 60.

Drillers are pushing to maintain the pace of the unprecedented 39 percent gain in US oil production since the end of 2011. Yet achieving U.S. energy self-sufficiency depends on easy credit and oil prices high enough to cover well costs.

Even with crude above $100 a barrel, shale producers are spending money faster than they make it.

Second wind for the Empire? Recovery in America? Maybe not.

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