Monday, February 16, 2015

The Pain to Social Security if Shale Busts

The USG is pretty happy with itself over the oil weapon. "Har-har, we can stick it to the Russians like in the '80s. Unlike them, we're invincible." Did anyone wordcloud President Obama's State of the Union? I swear "one country" was said a dozen times. Like asking someone what the status of your relationship is, if you have to say it, things are tenuous and shaky. One thing, maybe the only thing, that holds the nation together is Social Security. A very important side effect of bursting the shale bubble to get the Russians is what effect does this have on Social Security. The US could be in for a bumpy ride a lot quicker than the mandarins think.

Now every year there is a scare piece written about Social Security (SS). This year's best one even mentioned the evergreen nature of these types of pieces. One of my favorite financial writers, Brice Krasting, pays attention to SS numbers, and he did not like what he saw in mid-2014. While the first link is worried about the funding and cites how if certain numbers are hit, payments automatically drop 20% for all (SSDI), Krasting is worried about conflicting numbers. The CBO says the permanent tax fix is now a full 4% (awful) and SS Trust Funds deplete in 2030, while SS numbers are 2.8% for the tax fix and a run out of 2033. Keep these numbers in mind because no permanent and immediate tax increase is coming as it would suck money out of the rickety economy and the Trust Fund depletion date is now 2030, which is the moment all SS benefits drop simultaneously by law due to Trust Fund depletion. The scary part is what follows.

These estimates were from posts in 2014. This is pre-shale rig count collapse. All rigs employ men. All rigs contract with suppliers, transportation crews, machinists, etc. to work the rig. Those firms have vendors that supply them with equipment and services. An example you may have never considered is simple fire and safety consulting. Those guys train and can be contracted to fight fires on the rigs if need be, for a high price as it is dangerous. Mud logging is not a sex act but a recording of oil drilling data. It is a super safe job, it pays well and it employs men without college degrees. Shanking the oil price hurts marginal production, which hurts American shale production. This will hurt our employment numbers and the quality of employment in the American, Frankenstein economy. This will make SS numbers look much worse.


A lot of people have seen the above chart about how Texas is the reason for job growth in America since 2009. That is oil, and then the knock on effect of oil infusing the local economies. If you gave the chart a third line with North Dakota and made the US chart, US-ND/TX, it would look even worse and that is all oil. Zero Hedge has fun noticing how all other job growth is waiters, bartenders and hotel workers. Those are not high wage earners and they also have variable earnings that are not perfect payers into the SS system. Oil jobs pay well, and the SS taxes collected on those jobs, fill the coffers well. With many oil industry jobs reaching that 100K level, these men (and few women) are topping out SS tax payments into the system. You cut these jobs, and you have cut huge payers into the system when no other industry is hiring.

You think health care is going to fill the gap? Sorry, but many large health care systems have shed jobs and others have cut people back to under 30 hours per week to escape Obamacare. Three LPNs at 29 hours is like two at full 40 hours but no benefits! Large systems like Aultman Health spent the 2010 to present years spending money on capital equipment that they could then lay off employees, shedding payroll. They also have been buying clinics, laying off redundant staff while keeping critical skilled employees. This is happening all over America. Sorry to burst your bubble, but banking, education and government are all tapped, too. I work with a wide variety of sectors of our economy, and when I ask who is hiring, it is no one except the oil industry. There is no replacement for those great paying oil jobs.

A dip in the jobs numbers from a shale bust will accelerate the problems in SS. This is a major problem, because when the SSDI benefit cut date happens, the elite will have 8.8 million people angry. If the elite borrow from SS retirement funds to patch the disability program, then the 2030 number gets pulled closer. That is before revisions to the 2030 happen with the drop in shale jobs. Pull the 2030 number into the 2020s, and it becomes a decade out. No need to provide a link, but Boomers have not saved for retirement. If people who paid in for forty years don't get their payment, and it is all they have, "one country" isn't going to be enough to keep them peaceful. This is all before I even touch government expenditures on national debt interest if interest rates normalize in any little bit. The Happening could move up a bit closer. Dear USG, I hope trying to hurt Putin enough to secure prized possessions Ukraine and Syria is worth destroying the shale oil sector and whatever knock on effects it may have. Maybe we'll make it to the 250th America the Beautiful celebrations.


3teh said...

Makes me think of an an amusing bit from the technothriller book "Twilight's last gleaming":

"Before he was gone, though,
McGaffney got a good look at the shirt. The art on the front was a cartoonish beach scene, with the Ronald Reagan heeled over on its sandbar in the middle distance; in the foreground sat what looked like a big muscular American eagle, but the head had come off. The “eagle” was a heavily padded muscle suit, and from out of the neck hole rose the neck and head of a scrawny, frightened-looking turkey."

It's even more appropriate since the situation that USG gets itself into deep you know over is about oil..

Anonymous said...

let's not forget that ZIRP means that even those with savings cannot live off the interest relatively risk free. There really is no option for cash that doesn't carry the risk of a 30% drop in principal in a correction.

i hate to sound like a boob here, but isn't there at least a chance the saudi production is driven by the saudis wanting to hurt russia and the US, and the US isn't really objecting strenuously? or a chance that it is just a natural outcome of increased production?

Son of Brock Landers said...

Anon, look at my post from yesterday. Yes, the Saudis are working with the USG to hurt Russia.

Mark Minter said...

These fracking wells have a high depletion rate. There are depletion rates of 35% per year on a fracked well. So you can expect wells drilled today to be well under way in their depletion curve 18 months after production starts.

I frankly find it ridiculous to think that a few years ago that Obama had a clue that their would be this level of production and their was some strategic idea of using the "oil weapon".

There was a technical advance that occurred fairly recently. This a huge contributor to the oil produced. Instead of one pump used to frack the ground they would pull up 10 pumps and deploy them to create a much more effective frack to allow more oil from the lattice to be recovered, and that it produced more oil faster.

One the key realities of this boom is that it is a product of (a) the quality and ingenuity of the oil industry and the nature of the men from middle America to make it happen. These guys are tough MFs who have innate mechanical ability, the intelligence to learn specialized skills quickly, and the where with all to see opportunity and figure out ways to best capitalize on it. The spillover into the economies of the regions where drilling is occurring is enormous. At each step, each input requirement, each output that must be dealt with from waste water, to chemicals, to even how to house and feed the army that has converged on these areas, novel solutions based on need have been realized, created, and optimized.

(b) It is entirely the product of the infrastructure of the United States. Every lease is somewhere close to a road capable of hauling the necessary stuff to drill. There are usually motels and temporary lodging nearby. There are cell signals for communications, satellite, heck, probably even LTE access available to many drilling sites. There are convenience stores and gas stations, local mechanics, truck stops, FedEx, heck you name it.

Now, the nature of this bad boy boom is that, OK, it has reached an apex and it settling back down. But given that small project nature of it, given the skills required that are effectively "a stored effect". and at some point, some price is reached where it is again economical to begin to kick it back in to gear.

Expect a see-saw effect. I had some real back 10 years ago that said that once the inflation price of oil crossed the $25 dollar a barrel price level, then we were effectively in recession. All through the 90s, the inflation adjusted price was somewhere around the $20 price level.

All products have some energy component in them. Take Milk for example. Inevitably there is transportation cost involved in shipping feed and in collecting and transporting the raw milk to diaries, then in transporting it to the store. It is said that each ton of coal mined costs one gallon of diesel fuel to dig it up and transport it. So inevitably when the price of fuel is lower then it causes the prices of other things to be lower or rise less quickly. So other aspects of the economy see improvements. Just having more discretionary income at the consumer level due to less money spent on gas, an inelastic cost to most people, will provide improvement in other areas.

So the oil industry is 180 degrees out of sync with the rest of the economy. But all bets are off about what the near and mid term future holds for energy. If the Saudis had swing production that they hold in check in order to drive up the world price, then the production and exploration capabilities of US will no longer allow that ability. So you could expect a more sensible oil price in the near to mid term which will have an effect of improving the whole US economy.

And if there is a Shale Bust then it won't last long. The depletion rates of existing production of tight oil will quickly deplete available supply within a couple of years, probably sooner, and the price will rise and them boys will get back after it and "get 'er done".

Atavisionary said...

Retirement benefits to a large extent can be considered a gender issue. There is something between 2-3 women over 80 for every one man over 80. Obamacare and SS are both essentially transfers of wealth from working age men, who pay much more into them than they take out, and women, especially old women, who pull out much more than they put in. This is both because of how little women pay in because they don't work all that much as a group and because they live so much longer. When you say boomers haven't saved for retirement, to a large extent what that says is that women don't save for retirement. Men don't really need as much money if they are going to be dead anyway.

Dave said...

So much of our government's legitimacy is invested in Social Security that benefits will never be cut regardless of what the rules say. The Federal Reserve will always "loan" more money to keep the system solvent.

The end times begin when the world's exporters stop accepting dollars as payment and bring all their saved dollars back here to buy whatever they can. If you know when *that's* going to happen, short the dollar the day before and become stupendously wealthy.