Submitted by testosteronepit on 06/20/2012 19:29 -0400
Wolf Richter www.testosteronepit.com
The fiasco that is playing out in the natural gas industry doesn’t happen often in a free market, and when it does happen, it’s usually short—and brutal for all involved: namely, prices that are way below production costs. In most industries, hedging strategies might get market participants through the period, while unhedged production, a money-losing activity, gets slashed. If it lasts long enough, it causes a shakeout where less efficient or poorly capitalized producers, and their investors, get wiped out. It’s all part of the capitalist system that weeds out weaker elements through occasional sweeps of creative destruction.
As shortages crop up on the horizon, prices return to sustainable levels, and occasionally spike to once again unsustainable levels. For the survivors, or for lucky new entrants, the next step in the cycle has begun.
Alas, thanks to the Fed’s zero-interest-rate policy and the trillions it has handed over to its cronies since late 2008, the sweeps of creative destruction have broken down. Instead, boundless sums of money have been searching for a place to go, and they’re chasing yield when there is none, and so they’re taking risks, any kind of risks, in their vain battle to come out ahead. The result is a stunning misallocation of capital to the tune of tens of billions of dollars to an economic activity—drilling for dry natural gas—that has been highly unprofitable for years. It’s where money has gone to die. What’s left is debt, and wells that will never produce enough to make their investors whole. For that whole debacle, read.... Capital Destruction in Natural Gas.
But the money has dried up. And drilling for natural gas is collapsing. Last week, there were only 562 rigs drilling for dry natural gas—the lowest number since September 1999. A dizzying downward trajectory: