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Guess What Happened The Last Time The Price Of Oil Crashed Like This?…

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Michael Snyder is the publisher of , The American Dream Blog and The Truth

There has only been one other time in history when the price of oil has crashed by more than 40 dollars in less than 6 months.  The last time this happened was during the second half of 2008, and the beginning of that oil price crash preceded the great financial collapse that happened later that year by several months.  Well, now it is happening again, but this time the stakes are even higher.  When the price of oil falls dramatically, that is a sign that economic activity is slowing down.  It can also have a tremendously destabilizing affect on financial markets.  As you will read about below, energy companies now account for approximately 20 percent of the junk bond market.  And a junk bond implosion is usually a signal that a major stock market crash is on the way.  So if you are looking for a “canary in the coal mine”, keep your eye on the performance of energy junk bonds.  If they begin to collapse, that is a sign that all hell is about to break loose on Wall Street.

It would be difficult to overstate the importance of the shale oil boom to the U.S. economy.  Thanks to this boom, the United States has become the largest oil producer on the entire planet.

Yes, the U.S. now actually produces more oil than either Saudi Arabia or Russia.  This “revolution” has resulted in the creation of  millions of jobs since the last recession, and it has been one of the key factors that has kept the percentage of Americans that are employed fairly stable.

Unfortunately, the shale oil boom is coming to an abrupt end.  As a recent Vox article discussed, OPEC has essentially declared a price war on U.S. shale oil producers…

For all intents and purposes, OPEC is now engaged in a “price war” with the United States. What that means is that it’s very cheap to pump oil out of places like Saudi Arabia and Kuwait. But it’s more expensive to extract oil from shale formations in places like Texas and North Dakota. So as the price of oil keeps falling, some US producers may become unprofitable and go out of business. The result? Oil prices will stabilize and OPEC maintains its market share.

If the price of oil stays at this level or continues falling, we will see a significant number of U.S. shale oil companies go out of business and large numbers of jobs will be lost.  The Saudis know how to play hardball, and they are absolutely ruthless.  In fact, we have seen this kind of scenario happen before

Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, told Reuters that Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the US shale oil sector.” Even legendary oil man T. Boone Pickens believes Saudi Arabia is in a stand-off with US drillers and frackers to “see how the shale boys are going to stand up to a cheaper price.” This has happened once before. By the mid-1980’s, as oil output from Alaska’s North Slope and the North Sea came on line (combined production of around 5-6 million barrels a day), OPEC set off a price war to compete for market share. As a result, the price of oil sank from around $40 to just under $10 a barrel by 1986.

But the energy sector has been one of the only bright spots for the U.S. economy in recent years.  If this sector starts collapsing, it is going to have a dramatic negative impact on our economic outlook.  For example, just consider the following numbers from a recent Business Insider article

Specifically, if prices get too low, then energy companies won’t be able to cover the cost of production in the US. This spending by energy companies, also known as capital expenditures, is responsible for a lot of jobs.

“The Energy sector accounts for roughly one-third of S&P 500 capex and nearly 25% of combined capex and R&D spending,” Goldman Sachs’ Amanda Sneider writes.

Even more troubling is what this could mean for the financial markets.

As I mentioned above, energy companies now account for close to 20 percent of the entire junk bond market.  As those companies start to fail and those bonds start to go bad, that is going to hit our major banks really hard

Everyone could suffer if the collapse triggers a wave of defaults through the high-yield debt market, and in turn, hits stocks. The first to fall: the banks that were last hit by the housing crisis.

Why could that happen?

Well, energy companies make up anywhere from 15 to 20 percent of all U.S. junk debt, according to various sources.

It would be hard to overstate the seriousness of what the markets could potentially be facing.

One analyst summed it up to CNBC this way

This is the one thing I’ve seen over and over again,” said Larry McDonald, head of U.S strategy at Newedge USA’s macro group. “When high yield underperforms equity, a major credit event occurs. It’s the canary in the coal mine.

The last time junk bonds collapsed, a major stock market crash followed fairly rapidly.

And those that were hardest hit were the big Wall Street banks

During the last high-yield collapse, which centered around debt tied to the housing sector, Citigroup lost 63 percent of its value in the following 60 days, Kensho shows. Bank of America was cut in half.

I understand that some of this information is too technical for a lot of people, but the bottom line is this…

Watch junk bonds.  When they start crashing it is a sign that a major stock market collapse is right at the door.

At this point, even the mainstream media is warning about this.  Just consider the following excerpt from a recent CNN article

That swing away from junk bonds often happens shortly before stock market downturns.

“High yield does provide useful sell signals to equity investors,” Barclays analysts concluded in a recent report.

Barclays combed through the past dozen years of data. The warning signal they found is a 30% or greater increase in the spread between Treasuries and junk bonds before a dip.

If you have been waiting for the next major financial collapse, what you have just read in this article indicates that it is now closer than it has ever been.

Over the coming weeks, keep your eye on the price of oil, keep your eye on the junk bond market and keep your eye on the big banks.

Trouble is brewing, and nobody is quite sure exactly what comes next.

The post Guess What Happened The Last Time The Price Of Oil Crashed Like This?… appeared first on The Economic Collapse.

Read More: The Economic Collapse Blog
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    Total 37 comments
    • 2GodBtheGlory

      Good article. It is nice to read something of substance on this site for a change.

      • Z-Boy

        If you say so, I personally feel that this article should be titled “The Way Reptilians Do Business”.

        • CrowPie

          Now, z-boy, it IS the way Reptilians do business!
          But, the way they do business and the current situation was ‘accurately described’!

          Notice, not ONE WORD about the ramifications to the aquifer fed fresh water supply of the U.S.
          Just, PUMP, PUMP, PUMP, at ANY cost, EVEN YOUR FRESH WATER SUPPLY IN VAST areas of base grain growing regions!
          NOT just fresh water, but food, YOUR HOARDING, white-skinned Caucasian judeo-christo-WAR MONGERING leaders have put in future jeopardy, for a “Quarterly Profit” today for ONE Lousy industry!!!

          That IS a Reptilian, controlling the conversation! They are very good at it!
          But, z-boy, for once I gotta agree with a “god freak” when it wrote “Good article. It is nice to read something of substance on this site for a change”.

      • Bonzo

        It was Ronald Reagan who made an agreement about LOW oil price with the OPEC. The result was that Soviet Union went bankrupt in 1986. It is the same thing THEY trying on now. Replay.

        ? Russia+OPEC that will run the United States and the West bankrupt, or is it US+OPEC trying to kill Russia? Will petrodollars eventually collapse?

        This is a dangerous game:

        Third World War is no impossibility.

        • Gil Carlson

          Just released: “The Reagan Briefing on Roswell” Now they can no longer deny the truth of Roswell! This amazing Transcript of classified tape recording made at Camp David, Maryland during a presidential briefing regarding the subject of UFOs and ALIEN VISITATION of EARTH!

      • Sean

        From the start of 2007 through the end of 2012, total U.S. private sector employment increased by more than one million jobs, about 1%.

        Over the same period, “the oil and natural gas industry” increased by more than “162,000 jobs” a 40% increase.

        The Labor Department’s Bureau of Labor Statistics (BLS) accounts for oil and natural gas industry employment in three categories: drilling, extraction, and support.


        The injecting of vast quantities of water, sand and “undisclosed chemicals” deep into the ground at high pressure to crack open little pockets of oil and natural gas trapped in shale rock formations.


        The injecting of vast quantities of water, sand and “undisclosed chemicals” deep into the ground.


        The injecting of vast quantities of “undisclosed chemicals” deep into the ground..Ahh, thats it!

        • Anonymous

          Problem is you completely missed the part about contaminating our water aquifers????

    • Boxed in Freight

      You must have lost your mind.

      The USA is over producing oil. This is a glut situation.

      Stop fear mongering.

      In 2008 the USA was over dependent on foreign oil.

      That is not what is happening now.

      The USA is producing over 9 million barrels of oil per day, that is slated to be 11 million barrels per day very shortly. What are the refiners going to do with the extra oil?

    • Pink Slime

      This is the result of BUST-BOOM cycle.

      Prices stay low economy BOOMS, prices get too high people cut back economy reverses and BUST cycle occurs!

      No science to it. Just that nobody knows when it goes BUST!!! Sort of like blowing a balloon up. No one knows when it goes POP! But everybody sure knows what happens after.

      • Banderman

        Really, this is what you believe? You have my sympathy. Boom-Bust cycles existed ‘back in the day’; today, everything $$$ is controlled, corrupt, and manipulated.

        • Pink Slime

          Thanks for validating the well-known theory. I too have cut back when prices get too high and I contribute to the BUST cycle.

          BOOM/BUST cycles are always manipulated, corrupted, controlled. That is so obvious it even need not be mentioned and I didn’t.

      • Alan

        No science to it.
        But everybody sure knows what happens after.

        Clearly science then :neutral: :roll:

    • James Smith

      Thanks for nothing…. federal agent pete santilli the back stabber?

    • Warren

      The marginal cost of production from a U.S. shale (“fracking”) operation is something a bit less than $80/bbl, on average. Saudi Arabia will force OPEC to control production to hit a price point at which the U.S. shale producers can’t get their marginal cost of production. As a result those producers will gradually drop off line. That’s where the price of oil will stabilize; right about $78/bbl. Bet on it.

      • Alan

        Problem,> most countries have access to enough shale for pumping out using their own facilities. :twisted:

        It not so much the shale its the cost to get at it, as any miner will tell yous. :lol:

    • Z-Boy

      From – “Monthly number of full-time employees in the United States from October 2013 to October 2014 (in millions, unadjusted) – 120.18 million. From the link “fairly stable jobs” (provided by the author which links to) – “1.7 million jobs already created and a total of 3.5 million projected by 2035″. So 1.7 million is a bit less than 1% of all U.S. full time employed people. Michael Snyder & T. Boone Pickens are of the same cloth i.e., low character, i.m.o. U.S. oil should be nationalized and should cost U.S. citizens only the price of refining it, maybe $0.50 a gallon. Muammar Gaddafi was providing gas to his people @ approx. $0.35 a a gallon which is probably one of the reasons for his being murdered. Maybe Lee Greenwood could write a song about how happy we all should be about $4.00+ gas and fracking.. It only makes sense that low gas prices would be a boon to the economy and create more jobs. From what I’ve read and believe, there is one find in Alaska that would provide enough oil to last 200 years at the present rate of consumption, who does this oil belong to(?) I say it belongs to We the People.

    • Z-Boy

      “The last time junk bonds collapsed, a major stock market crash followed fairly rapidly.

      And those that were hardest hit were the big Wall Street banks…” Boo hoo.

      • duffer

        …except congress just signed the new spending bill for the 1.1Trillion to keep the gov’t functioning with the caveat that wall street gets bailed out by the taxpayers *IF* the derivatives bets they are making go boom. so, it’s not boo hoo…it’s oh s$it!

    • Blue

      The price of crude oil is not the sole factor that causes economic collapse. It is true that the price of crude oil fell in 2008 but the economy was already in trouble a year prior. When people start experiencing financial difficulties, we all stop spending. We cut on expenses and unnecessary spending. We avoid travel, trips, we save on electricity, gasoline, food, etc… When people stop buying gasoline, demand goes down. Prices of oil based products fall.

    • MediaMike

      If it shuts down fracking, then it will save this continent. Ironically, petroleum for transportation, electrical generation, and heating purposes is obsolete. It only supports corporations who, on the whole, damage the planet. Water can be used to source hydrogen (don’t give me that inefficiency BS, it is being done at 1000% efficiency and up) for all of those purposes, and the byproduct is water.

      Let’s put all those oil people out of jobs, and train them to manage water.

    • medtes

      Be very careful when you hurt a lion and you don’t achieve him…

    • WALTNZ

      I literally am looking forward to it all crashing down ….hahahah

      • Jungle Bro

        Jungle Bro.

        Right,let it crash. :cool:

    • vaalix

      Oil is dropping as a political chess move by the west who control saudi/opec, and it is to hurt russia economically. The 08 crash was due to a certain firm unloading all its mortgage backed derivatives for pennies on the dollar..

    • Geotracker

      I was going to buy ERF cause I just sold a house and don’t know where to put the money

    • LennyX

      Let it crash, I don’t care because my suv takes 44 gallons a pop and gets 12 miles to the watered down gallon anyway.

      Screw the saudi opecker production and lets just use what we have coming out a the wells in America and stop trading it over seas.

    • yes2truth

      The US and UK economies are totally dependent upon the Petro-Dollar. How this oil price crash affects the Petro-Dollar will have a direct financial effect upon the US and the UK. Turbulent times are ahead for sure.

    • Danel Riqar

      If the US is now the biggest oil producer in the world, we could simply cut off the import of Saudi oil, or any oil for that matter. This would send them into the hurt zone immediately, and they’d be forced to play by OUR rules…. This is simply a no-brainer. It would require some distribution network changes, but I’m sure we’d be just fine. The domestic market is certain to be big enough to support domestic production.

    • MG


      1. Oil was artificially inflated by the US to pay back the Koch Brothers for rigging the elections in the GOP favor.
      2. Oil consumption no longer provides accurate data on growth, as consumer and business move to hybrid engines.
      3. Oil consumption is down, and the Koch brothers over stepping themselves by going to Opec and demanding they inflate oil back to the 100 a barrel limit.

      The Koch brothers along with all their limited liability friends will be having a going out of business sale.

      Oils is headed to where it was under clinton, 30 a barrel, which means the end of FOX news and their endless money flow.

    • Anonymous

      The “article” is based on a false premise. Yes, there was a oil price drop just prior to the 2008 crash but it wasn’t significant until the crash was in full swing. So while there was a oil price drop prior, that drop was less than it was in prior drops with no economic downturn. The crash made the oil price drop substantially because it stopped consumption.

      This “article” is more end of the world nonsense. Sure Russia is facing hard economic times but they brought that on themselves. When they invaded the Ukraine, Putin laughed at economic sanctions, now those sanctions are hitting home and the Ruble is becoming rubble. Russia needs oil to be $100+ per barrel to turn a profit so they’re losing $30 on every barrel they sell.

      As one real article said, Kerry visited the middle east oil producers and a week later they opened the oil flood gates pushing the per barrel price down $30, well below the Russian profit point. This is politics and nothing but.

    • neanderthal

      Im suprised you left the comments open
      so no I could care less what happened the last time
      It is the past
      I live in today
      tomorrow may never come
      what the fk is your point

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