Energy Margin Calls- Chesapeake CEO Forced To Sell All His Stock

As people following our energy situation are aware, many if not most energy stocks are down 60-70% or more from their summer highs. In a bizarre but not completely surprising announcement after the close (we knew someone was liquidating), Chesapeake, (the US largest natural gas producer) CEO Aubrey McClendon has been involuntarily liquidated out of his rougly 30,000,000 remaining shares of CHK in the past 3 days due to margin calls. CHK, which in July was over $70 per share, hit as low as $11.99 today, and then had a 38% rally to close at $16.52 on 5 times normal volume. We don't typically comment on individual stocks or price movements on TOD but this and related NG stock developments could have a significant impact on the industry's future - CHK and XTO in addition to being top 2 gas producers also operate over 12% of our nat gas rigs. In addition to McClendons margin call, Chesapeake also announced further reductions in capex budgets going forward which means lower natural gas production, and thus higher prices, ceteris paribus. To make things more complicated, the majority of complicated financial hedges undertaken by CHK, are at Morgan Stanley, which fell to single digits today. This is all very good news for natural gas prices but bad news for both Aubrey McClendon and the North American energy situation.

Mr. McClendon, who has been recently highlighted in national TV commercials about expanding future of natural gas usage as recently as July held 33,500,000 shares which at one point traded over $70 per share.

"I am very disappointed to have been required to sell substantially all of my shares of Chesapeake. These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis. In no way do these sales reflect my view of the company’s financial position or my view of Chesapeake’s future performance potential. I have been the company’s largest individual shareholder for the past three years and frequently purchased additional shares of stock on margin as an expression of my complete confidence in the value of the company’s strategy and assets. My confidence in Chesapeake remains undiminished, and I look forward to rebuilding my ownership position in the company in the months and years ahead.”

This news was on top of an announcement to substantially reduce 2009 and 2010 capital expenditures (drilling).

Many (all?)natural gas companies stocks have been in freefall this week, though in hindsight that was perhaps fast money front running the rumour of margin calls on McClendon. But concerns about CHK were real, as pointed out in this Bloomberg story

Investors are concerned that Chesapeake and other U.S. oil and gas producers have hedging contracts with financial firms and other counterparties that won't be able to pay for their output at the agreed-upon prices because of the global credit crisis, said Robert Goodof, who helps manage $25 billion at Loomis Sayles & Co. in Boston.

Chesapeake also has so-called knockout swap contracts on more than one-third of its 2009 production, and those deals don't obligate the buyers to take gas when prices drop to $6.28 per thousand cubic feet of the heating and power-plant fuel, according to analyst Joseph Allman of JPMorgan Chase & Co. in New York. U.S. gas futures dropped to $6.65 today and have plunged 50 percent since the end of June.

According to Allman, Morgan Stanley is Chesapeake's biggest counterparty. Morgan Stanley shares fell 39 percent, dropping for a fifth straight day, after Moody's Investors Service said it may cut the investment bank's credit rating.

Allman said that if gas falls to $6 per thousand cubic feet, Chesapeake would have to sell $3.5 billion of assets.

``In our view, getting through 2009 is tough, but Chesapeake has a lot of non-producing assets it could sell and discretionary spending it could cut,'' Allman said.

Investors were ostensibly concerned about a natural gas train wreck if Morgan Stanley were to go under, that would cause Chesapeake to follow. I just can't imagine that happening. The government might let Chuck E Cheese go under, but not our largest natural gas producer and rig operator. I was thinking during the day that the financial types that were shorting Chesapeake and other nat gas companies into the ground (and buying Credit Default Swaps just like they did with Lehman and AIG) would pat themselves on the back for making good coin, then go home to find no heat, plastic bottles or diapers. Yet another juxtaposition of money and energy...But it becoming more clear that hedge fund margin liquidations are contributing to the equity sell-off. The margin clerks typically are instructed to start liquidating positions at 3pm if the account hasn't come up with margin - all week the volume in the days final hour dwarfed the trading earlier in the day. This has been a vicious cycle as banks are reducing leverage and increasing margin requirements for clients - more selloff equals more margin calls equals more selloff. Personally, I think its worse 'this time' because of the number and size of hedge funds, which became more popular after outperforming the bear market of 2000-2003. But I think we've seen 'peak hedge fund'.

Finally, as discussed 2 weeks ago after the first cap-ex cut by Chesapeake, the marginal cost of natural gas is over $8 per MCF, and the average cost being close to $6 in North America. Natural gas is on average getting more expensive to procure. Now that capital is less available, we are going to see more and more production cuts. We need to analyze what it really means - 5% drop? 15% drop? Aubrey McClendon has been seen on TV advocating the Pickens Plan to use natural gas as a vehicle fuel. I wonder if recent events will change the landscape of our natural gas industry and this plan. At prices during mid-day today, I was wondering if ExxonMobils $40 billion in cash (less $10 billion in debt they could just assume) might be put to work. The landscape has seemingly changed daily. I think even people who have never had an ecology class or never heard of theoildrum understand, or at least have an inkling, that natural gas and oil are more precious than dollar bills. Is it too early for nationalization of the energy industry?

Here are some previous TOD posts discussing the natural gas situation in North America, and although we have 'more' gas recently, it comes at higher costs:

An Update on the Energy Return on Canadian Natural Gas
At $100 Oil, What Can the Scientist Say to the Investor?
Ten Fundamental Truths about Net Energy
The North American Red Queen - Our Natural Gas Treadmill
A Net Energy Parable - Why is EROI Important?
Natural Gas and Complacency

Please add any comments or links below.

(EDIT: It seems that the contagion spread to CHKs financial twin, XTO, where it was just announced that their Chairman has been selling stock:

XTO Energy Inc. (NYSE: XTO - News) announced today that during the past week Chairman and CEO Bob R. Simpson sold 2.8 million shares of XTO common stock. This sale satisfied all considerations for debt, personal interests and family liquidity. As a Company founder, Mr. Simpson continues to own 6.8 million shares of XTO and has options to purchase an additional 4.0 million shares.

Of equal concern is that CHK operates 130 rigs, and XTO 70, which is fully 1/8 of rigs drilling for natural gas. (1600)

Having worked for a decade on Wall St, I know the answer to that, and the mechanisms underlying this behaviour are why I see our current situation as unsustainable, even if we were to find more gas and oil. The dopamine feedback loop for more, culturally defined, is nearly unstoppable.

Chesapeake also has so-called knockout swap contracts on more than one-third of its 2009 production, and those deals don't obligate the buyers to take gas when prices drop to $6.28 per thousand cubic feet

I am a little puzzled about the "knockout clause." Are the parties on the other side of the hedge totally off the hook if prices fall below $6.28 or do their losses stop at $6.28?

As Rockman has said, someone is (probably) going to make a ton of money buying these natural gas companies at their lows.

A knockout option is like an option on an option. IF a certain price is reached in the market THEN the investor/hedger owns an option at a predetermined price. It allows the hedger/investor to articulate a very specific scenario that is more than just directional (up or down). I don't know the specifics in this situation.

Isn't this version of Casino Capitalism how we got into this mess?
Superstition based economic systems (you know, the one's who ignore the Second Law),
are for idiots, or greedy sociopaths.

it may prove to be a knockout in another way.

So you're back to counterparty risk.

These trades have only been matched up by definition.

"In 1963 Mandelbrot published research into the distribution of cotton prices based on a very long time series which found that, contrary to the general assumption that these price movements were normally distributed, they instead followed a pareto-levy distribution. While on the surface these two distributions don’t appear to be terribly different, (many small movements, and a few large ones), the implications are significantly different, most notably the pareto-levy distribution has an infinite variance.

This implies that rather than extreme market moves being so unlikely that they make little contribution to the overall evolution, they instead come to have a very significant contribution. In a normally distributed market, crashes and booms are vanishingly rare, in a pareto-levy one crashes occur and are a significant component of the final outcome.

It has taken years for this to be taken seriously, and in the mean time financial theory has gone on using the assumption of normally distributed returns to derive such results as the Black-Scholes option pricing equation, ultimately winning an Nobel Prize in Economics for the discoverers Scholes and Merton (Black having already died), not to mention Modern Portfolio theory (also winning Nobels). That modern finance ignored Mandelbrot’s discovery and went onto honor those working under assumptions shown to be false has clearly annoyed Mandelbrot immensely and as mentioned previously he spends much of the book telling us of his prior discoveries and how he was ignored."

From Sep 26, 2006

I've thought alot about nationalization for two years. In my conversation with the Obama energy team, I concluded that although they were a tad idealistic about the ease of problem solving, and, were also not cold to the idea of extra taxation on energy producers--they were, admirably, well educated in energy policy history and energy policy mistakes, from our past. And did not want to repeat them.

Rather than nationalization, I could see a time when Washington lends money to NG producers to goose production, and uses the occassion to get producers to boost hiring. In return, the government could offer a ladder of buy prices for the extra production of NG, or some structure thereof. I imagine a world where NG prices have fallen below the incremental unit cost--and yet--because the wider macro environment makes NG prices too "high" still, for people, the government comes in and subsidizes the difference.

Grim stuff.


In other words, 'nationalization-lite'?


Yes. A rose by any other name would not smell as sweet. But, nationalization by other names might smell sweeter.

I had a flashback today to a secondary school lecture, by a brilliant teacher, in which he explained how agricultural economics defied typical economic theory, and how the boom-bust cycle in food production presented unique problems to society. And how society had come over the years to realize that you simply had to dampen the cycle in agriculture, to make sure both the farmer and the society survived. It was a very simple lesson. But as I watched the energy equities crumble further, my memories were stirred.


PS: XTO press release tonight on CEO's sales:

It's no accident that you've linked ag with energy.

And ID'd that ag "defies" TEC.

Ag HAS to defy TEC because it is the transfer mechanism
of the eco to the economy. All wealth is automatically leveraged
away from agriculture. EX- Why have the term "Nonfarm payroll employment".

Note that Zero economists talk about ever "paying back" the "equity"
taken(borrowed) from Mother Earth.

Just as talk of "subsidizing" energy production to create more energy
defies the 2nd Law of Thermodynamics.

In extremis, WWII, food import blockade etc., following dismal depression in 1930s and low Ag production providing less than 30% of UK food as calories, UK had to invent all sorts of regulatory mechanisms to increase and smooth farm production. Marketing Boards for example for produce (e.g. eggs, milk, potatoes). These survived until need to join EU followed by Thatcher / Reagan globalization when agricultural production problems were deemed to have been solved.

And how society had come over the years to realize that you simply had to dampen the cycle in agriculture, to make sure both the farmer and the society survived.

I don't understand how extra taxes on energy producers is going to encourage production. Seems it would have the opposite effect. The only benefit I can think of off the top of my head, is that the uninformed public gets to see some blood from those evil energy producers ... and then walk home from the show.

Gosh, maybe "Washington" will be as successful with with NG market over site and meddling as it was with Frannie & Fredie! We all know what a good job "Washington" did there. We all know that Washington is just filled with congressmen and bureaucrats that are just natural gas financial and marketing wizards! You just know "Washington" would run things better, don't you?

One thing that has struck me in the past about natural gas producers is how small any of them are relative to the total. Chesapeake's 2007 annual report shows that it produced 655 billion cubic feet of natural gas last year. Total US consumption was 23,052 billion cubic feet. US produced marketed production was 20,151 billion cubic feet. Using whatever base you like, it seems like Chesapeake is at most 3% of total US production/consumption.

At this size, do you expect that the federal government is going to worry about taking care of them? I can see a Morgan Stanley, or and Exxon Mobil, or a Citibank. Isn't there a chance they will just slip under the Federal Government radar, as one more over-leveraged company, whose president bought too much stock on margin?

See my edit above - XTO Chairman sold over $100,000,000 of stock this week too. Together those 2 companies were responsible for the majority of production growth in past couple years - as you've written about, mostly financed with borrowing than from internal cash flow. XTO is just behind Chesapeake with 1.8 bcf per day. So now your up to almost 6% of US production. How many others are out there?
And almost as important, CHK operates 130 rigs, and XTO 70 out of about 1600 drilling for nat gas.

There are about 40 public co that represent 66% of operated production.
The top 5(as of JUN/08) are:
CHK 2.167Bcf/da
BP 2.140
COP 2.132
DVN 1.939
APC 1.869

Their prod of 10.247Bcf/da is 18.6% of US daily prod of 55.2B.

Nate said: "I was thinking during the day that the financial types that were shorting Chesapeake and other nat gas companies into the ground (and buying Credit Default Swaps just like they did with Lehman and AIG) would pat themselves on the back for making good coin, then go home to find no heat, plastic bottles or diapers. Yet another juxtaposition of money and energy..."

But...the so-called money is not even real:

This could be a symptom of what I'd call the looming 'affordability window' for a transition to lower carbon. One analysis could be in terms of capital availability and another in terms of physical feedback loops ie to create lower carbon energy you have to invest a percentage of current carbon energy.

The problem is that if governments take over they could get the technology choices wrong. Since politicians tend to be lawyers and ex-military types rather than engineers they are prone to spending any spare cash on wars and bailouts rather than cleantech. On natural gas specifically I think the time is ripe for some policy directives ie what are the preferred uses, depletion protocols and strategic minimum stocks taking into account changes in reserves.

Yup and Yup.
The price window may last for a time with oil, but it is about over for NG. This news will bring us to permanent double digit levels for NA gas, and probably in next few months.


Could you please explain you comments further...Thanks

The price window may last for a time with oil, but it is about over for NG. This news will bring us to permanent double digit levels for NA gas, and probably in next few months.

Chesapeake is the largest nat gas driller in US by a longshot and is going to fall pretty dramatically. The current new wells drilled deplete at about 50-60% in first year - the market was expecting Haynesville and Marcellus to make up for currently depleting wells but financial crisis is going to slow expansion or stop it cold. Commodity analysts now have an excuse to get bullish due to lower natural gas production expectations. A huge psychological change in my opinion. And the market is near record short positions.


Do you know when they have to cover their shorts?

The US nat gas market could be well supplied till after the heating season (end of March) as the storage situation presently is good.


Thanks for the prompt response....I guess the great unknown as well will be the winter weather....I see that the forecasts for the Northeast will be quite cold....probably the same for the Midwest...

First snow in Boise Idaho is the earliest on record! From the Idaho Statesman published Saturday 10/10:

"This is the earliest measurable snowfall in Boise since record-keeping began in 1898, according to the National Weather Service. At 10 p.m., the Weather Service said 1.7 inches of snow had fallen. The previous earliest recorded snowfall was Oct. 12, 1969, when a little more than an inch fell."

Who says global warming is a bad thing?



The diagram above shows the development in US nat gas consumption and the energy price ratio between nat gas and crude oil.

Post winter 2006 the energy price ratio has been in decline and nat gas consumption growing due to growing supplies and relatively cheaper energy from nat gas. The relative stable energy price ratio suggests that oil prices have pulled nat gas prices in both directions. What I believe we are witnessing in the US presently is some substitution taking place from oil to nat gas due to price.

I am (and have been for some time) in the deflationary camp when it comes to oil prices (similarities to the 80’s etc.), suggesting further decline in oil prices and thus nat gas prices.

Question is; will lower economical activity also affect nat gas consumption and thus continue to exert a downward pressure on nat gas prices?

Could this be reinforced by retreating oil prices?

When will supply/demand equilibrium be reached, followed by demand driven price increase and a possible decoupling between oil and nat gas prices?

I expect to see more of this with oil and gas companies in the near future (the Russian majors are already asking for governmental help).

I expect demand (oil and nat gas) to fall faster than supplies (and the liquidity problems will just see to it that the gap does not become too big) in the near future.

This cements Peak Oil.

Thanks Rune
I agree that nat gas is about as low as it will get. But looking at your chart, is there some prima facie reason that the historical relationship between NG and crude has to stay the same? Perhaps the switching ability has lessened or there are more substitutes for gas than oil? IOW, some reason other than 'its historically cheap'?

Hello Nate,

I do not believe there is any historical reason that the energy price ratio will remain the same, even if it has been quite stable through the last couple of years. It is all a question of supply, demand and availability of substitutions.

Presently I guess that coal is looking expensive relative to nat gas, thus encouraging more nat gas usage for electricity production. I also, just by browsing the numbers from EIA, am of the opinion that some nat gas could even be used to substitute for propane.

If oil prices continues to decline (which I believe they will, even if OPEC will try to establish a floor) which partly will be due to the global credit contraction and slowed down economies I expect that nat gas prices in the US also will continue to decline (no, I will not say anything about a floor) until demand again overtakes supplies.

In Europe where the nat gas market is tightening and even though many nat gas supplies contracts are indexed towards heating oil (or other oil related fuel), nat gas in the liberalized markets, like in the UK, will continue to increase.

Presently UK (day ahead) prices are around 55 p/therm which is around US$ 9,35/MScf.


Let me add that if nat gas supplies starts to run tight and thus exerting an upward pressure on prices I would expect that some fuel switching would take place as the energy price ratio approaches and/or surpasses 1,0.

What could happen is that nat gas prices grows while oil prices declines and at some point fuel switching took place, thus relieving demand for some nat gas.


Another consideration in the price will sometime be the value of the sometime all this printing of money that Paulson is doing will definitely impact the value of the dollar...thereby possibly increasing the price of oil....the days of printing more dollars may end sooner than later.


I agree that the exchange rate for US dollar is also one of the variables in this equation.

Under equal circumstances a weaker dollar would generate an upward pressure on US nat gas prices.

Here in North America there is only a very small, but ongoing, ability to switch from propane to natgas. Propane (delivered by truck) has been substantially more expensive than piped natural gas for at least a decade. So few if any would start using propane if natgas was available. However as the population grows the pipes keep getting extended, so there are always a few businesses and homes that can convert whenever the capital expenditure seems more economical than the ongoing higher bills.

5% of US NG is still shut in 1 month after Ike. I am not sure how much of the 2827 MM cu ft/day (as of today)will be recovered.
193 MMM cu ft lost for the last 30 days.

What is the current depletion rate for all current production? I am willing to bet that we shall be in storage draw mode by next summers peak AC season. By then depletion will exceed new production.

But what do I know?

Hello dipchip,

Looking at the most recent EIA data, these tells that domestic marketable nat gas production was slightly above domestic consumption in July (2008) 0,4 Bcf/d of a total marketable production of 57,6 Bcf/d.

Net imports mainly used for storage injection.

What you point out (and assuming consumption stays very much the same) is a possibility.

Could the choice be accepting more heat (less ac) in the summer just to stay warm during the winter? ;-)

Well that would be possible in a more homogenous climate country, however the cold guys don’t use much AC and the AC guys don’t use much heat.

Invite the AC guys to stay with the cold guys during peak AC season, and....vise versa. ;-)

Thanks for posting this. I need all the informed opinions I can get at this very interesting and distressing time. As little as I know about oil, I know even less about economics, and since we are in the "YOYO"(you're on you're own) phase, I have to make decisions on the best available information, which (of course!) is freely available here.

Aubrey McClendon has been seen on TV advocating the Pickens Plan to use natural gas as a vehicle fuel. I wonder if recent events will change the landscape of our natural gas industry and this plan.

The price of natural gas goes up and oil goes down, relieving the pressure to use natgas for vehicle fuel.  On the other hand, the price advantage of wind over natgas increases.

Looks like going long wind is still a good move, at least until all natgas baseload is shut down.

It's becoming obvious to me that the gov't needs to immediately outright nationalize or at least take command of all major banks and perhaps the key energy companies -- just to ensure that complete and massively lethal freezeup doesn't occur. Credit and energy has to be made to available to the necessary industries just to keep the basics flowing.

Having done that, having bought a little time, there needs to be a rapid program of developing means where basics can be provided, food, cots in armories at the bare minimum, heat, etc. so that mass suffering can be avoided, all around the country. Immediately. Everyone needs to be assured that the basics of life will be there, that there is a net under them -- that survival is not at stake. This and only this can prevent utter mayhem and chaos.

Then begins the serious work of a longer term restructuring so that we can survive comfortably on a radically reduced resource budget.

For a few paltry billions in aid we could have some members of the Cuban gov't come here and show us how to make do with much less, and how to deal with emergencies like this. They stink at supplying iPods and microwaves, but they're very skilful in getting everybody through something like this.

I'm serious about all of the above at the same time that I know it won't happen. Total freezeup, disaster and anarchy will be risked in order to preserve TPTB. And all in the name of restoring 'normalcy', which is gone, never to come back, and resuming growth, which is far less likely than my becoming young again and growing hair.

We need to go into reverse, rapidly in some key areas, but in an organized and inclusive way. Otherwise we're toast.

Even a few days ago it would have seemed mad to write something like this. Maybe not so much now.

Oh yeah, have the government step further in, I mean they have done such a good job so far. I know, I can eat cake right?

Don in Maine

The private sector has totally screwed up, so you are blaming the government for trying to clean the mess?

It was the private sector in bed with the gov that resulted in this mess.

Does the word lobbyist ring a bell?
How about 'brought out'?
How about scumsucking dickwad arseholes?

As bad as it might be the only way is to let it all fall apart and start over with men of... 'gasp,ouch,hey'...INTEGRITY.

And just how might this come about? It won't..we are screwed and its far far too late. No one is being born who knows truth or ever discovers it.

Just like Monica said " Lewinsky: I was brought up with lies all the time... that's how you got along... I have lied my entire life..."


Ok, so government and the private sector are both screwups.

"As bad as it might be the only way is to let it all fall apart and start over with men of... 'gasp,ouch,hey'...INTEGRITY."

That's just wishful thinking. a) we don't have a choice of letting it fall apart
b) if it does fall apart, certain people will step in to fill the power vacuum, and they won't be people with integrity.

You have a democaracy, why don't you quit moaning about others and get involved in running YOUR country? Frankly, the hand wringing is pretty pathetic.

There are many reasons but try just this one.

The problem with letting politicians run the economy, or think they do, is that politicians don't make economic decisions: they make political decisions that have economic consequences.

It's intriguing to watch the canibalistic hedge funds and their allies starting to devour their own. The destruction of CHK is following the same template as the destruction of hundreds of smaller companies. It would be very smart for every company remaining on every US stock exchange to de-list and move to exchanges that police short selling and have rigorous enforcement of naked short-selling and other market manipulation plays as it's very clear Bush's SEC won't do a damned thing. If it were up to me, I would sieze the assets of every hedge fund operating in the US exchanges and invade places like the Cayman Islands where they stash their loot in offshore tax havens. I believe I was correct to call them Financial Terrorists on Yahoo Finance's NFI board 4 years ago as they set about trying to destroy NFI.

One may not like Big Oil, but they are certainly a big part of national security. If the oil industry was a nationalist organization with shares trading on an exchange, such attacks would be considered an act of war. But Bush, Cheney and Paulson do absolutely nothing.

It's difficult to explain to people why natgas shouldn't be used for baseload generation. I'd put it like this; there are other ways of generating baseload but very few things with the versatility of;

Haber chemistry for fertiliser
CNG diesel substitute
onsite combined heat and power
quickstart load balancing of wind and solar

Therefore every country should conserve its natural gas resources by prohibiting gas baseload. Apart from Pickens the captains of industry don't get it.

One development that CSIRO is working on is direct injection coal energy(DICE), using finely ground coal in place of diesel. Efficiencies are reported to be 54%, power plants can be 10-100MW range and like NG very fast start up if coolant is kept at 85C. Was used in US for locomotives replacing diesel.
Would agree with you that NG should not be used for base-load unless coal is being phased out.

O.K., let me talk now.

About a half year or so ago right here on TOD, I wrote several posts asking people to please be careful, that there was a real danger of very fast price drops in oil and other commodities (note: not a guarantee of price decline which I was accused of saying by multiple TOD’ers in rhetorical blasts, but a real danger of major fast price decline . Needless to say, my view was not well received.

Then, I pointed out that speculation was indeed a factor in the fast run up in energy and commodity prices, as did several other folks on TOD and in the business press. Anyone who pointed out the major role that hedge funds and speculators were playing in the almost completely erratic and almost insane jumps in commodities prices were dismissed as “peak oil deniers” and accused of “hunting for scapegoats”.

My how the worm has turned as now it is TOD’s own respected contributor Nate Hagens who writes, “Yet another juxtaposition of money and energy...But it becoming more clear that hedge fund margin liquidations are contributing to the equity sell-off. The margin clerks typically are instructed to start liquidating positions at 3pm if the account hasn't come up with margin - all week the volume in the days final hour dwarfed the trading earlier in the day. This has been a vicious cycle as banks are reducing leverage and increasing margin requirements for clients - more selloff equals more margin calls equals more selloff. Personally, I think its worse 'this time' because of the number and size of hedge funds…”

Now we have allowed the financial game players/vultures/sharpies/”capitalists”, call them what you will create a novel situation for the natural gas industry, that is, heads you lose, tails you lose. If the price of nat gas is too high, it destroys/paralyzes the economy, but if the natural gas price is too low, it destroys/paralyzes the nat gas industry, which of course has the same effect on the economy soon enough. Does this make sense, that NO price for natural gas is acceptable?

This leaves my most often stated point to restate one more time…Price and “peak” whatever (oil, gas, etc, etc,) are NOT related. From TOD to Clusterf*ck Nation, many have been the intellectual convolutions and contortions used to try to connect the worlds recent financial meltdown to peak “something”.

Now we are seeing what we long suspected: Peak may be here today, it may have gotten here yesterday, or it may occur anytime between now and thirty years from now, and one day is as good as another, there is no way to know when, but “peak” oil is not demonstrable as the cause of the current financial meltdown…good old fashioned corruption, excess and mismanagement are. This is a typical case of a bubble gone bad. Unfortunately, this bubble was bigger and longer lasting than most, so the financial pain will be deeper and longer lasting than average.

Many folks will suffer because once more they were suckered into believing that “this time it’s different”. We heard that mantra during the “new paradigm” of the 1980’s when it was assumed that recessions were a thing of the past. We heard it again with “the death of history” when it was postulated that the age of international conflict was past, just before the new age of terrorist war and a resurgent and militant Russia. We heard it in the “virtual reality” of Silicon Valley just before the collapse of the “tech bubble”. We heard it in the commodities price run up when we were told by those in the catastrophist camp that we would never see oil below $100 per barrel again. And now we are being told by some that there will be no recovery, it’s the end of “fiat money” and world markets and luxury purchasing and travel and whatever we have known as we fall steadily backwards into a new medieval age. The deadliest phrase in investing, “THIS TIME, this time, it’s different.” Yes, surely human motivations for luxury, wealth, status, sex, security, advance and a varied and interesting life experience have suddenly disappeared! Yeah, right. I wouldn’t bet my money on it.

What we are now seeing is finally the “capitulation” that always must occur in these periods. Almost everybody MUST believe that there will be no recovery before the recovery can begin. This has always been the pattern. I had said that on several occasions that I was astounded by the NYSE (New York Stock Exchange) and its ability to resist all bad news. Despite rumors of “peak” and the “mortgage crisis” and national and world debt crisis, Wall Street had refused to budge, and hung at near historic highs. That was 6 months ago. I had said that until Wall Street “capitulated” the recovery period could not even begin. Well, we can safely say that Wall Street has capitulated (although it may still have some way to go to get to bottom, and it could take a long time), finally NOW things are following the normal pattern.

So, what next? We are already seeing it. We will maintain continuity of social order and structure and government through debt. Why not? I always love to try to figure out the logic of those who are hysterical about debt, but at the same time wail that “fiat money” isn’t real wealth! If the “fiat money” isn’t real, then how real can the debt be? Money is just numbers, say the fiat money complainers. Well, so is debt! No, no, the government can use force to collect debt. Right and the government can use force to create debt and make people honor it.

Some say that money is a substitute for energy, or commodities or labor. No it’s not. Money is a proxy for force. If you want to know who the real “government” in any nation is, it is always defined by the same 2 characteristics: The government is the group in the culture that can (a) legally use violence and (b) legally print currency. These are the two fundamental monopolies that governments have held from Ancient Babylon to Gee Dub. So the print of money goes up, the debt goes up, and for awhile inflation goes up until the system finds equilibrium. It has happened time and time again in regions and nations all over the world. Look back to the recent past, the collapse of the Soviet Union, the currency crisis in Latin America, the Asian bond crisis, the multiple collapses of the Italian governments and repeated economic crisis. We can argue all day about what causes great cultures to decline and collapse, but we will be hard put to find evidence that economic issues alone have ever collapsed a real culture.

But hey, don’t listen to me. You didn’t the last 4 or 5 times I was right. :-) :-) :-)

Roger Conner Jr

I was out last night in London and substantially nothing had changed since the week before so I have to agree with you, its just abnother cycle and not 'The End', well, not in Putney anyway. :o)

When the shopping malls are just filled with stuff people actually need, when the shops selling 'make-your-own-teddy-bear' kits have all packed up and gone, when a loaf of bread costs the equivalent of a days wage, then we might be getting close...


Roger, your posts on TOD have always been a voice of reason. While there are some posters who post in great frequency and volume, yours are worth seeking and reading in full.

Thank you.

Edit: major typo

You have been saying this for a long time Roger and you have been right. It is so obvious, and it is a feeling of Deja vu for me - after 2000 and 2002. They threw out the bay with the bathwater then and some of us did quite well out of that collapse.

This is a really strange site

(1) The consensus of the prolific posters here is that (a) GW is real and dangerous and (b) we must move away from fossil fuels to renewables

(2) OMG FF are going up in price - the government should subsidize drilling for NG

(Me: there will be no move to renewables unless FF go up in price RELATIVE to the rest of the economy)

A bunch of freaks? or just stupid? or crooked?

I'm not an insider here and I have no idea of whom it was that doubted you or anything, so take my comment as a guy sitting on the sidelines.

You're right that this crisis is mainly rooted on old-fashioned greed and mismanagement and that it IS going to affect the energy business and that concentrating on the purely geological/technological aspect of the business (and price) was probably a mistake a lot of people here at TOD made. Also, you're right that there will be still stimulus for power, wealth, security, etc and I liked you remembering the foundations of any government (monopoly of force and currency). Having said that, don't you think you're ignoring the constraints that Peak Oil, AGW and general resource depletion will have on the economic side? Sort of doing the reverse of what you accused people here of doing? Because I have serious problem seeing continual economic activity on the pattern of the last century and half or so moving forward. I mean, will there be a "bottom" and them a new bull market? A bull market based on what? How can we keep growing after that? I think that the people who focused more on the economic side of this "doomer" movement, like the folks at The Automatic Earth, are on the spotlight now because, frankly, their area of focus is much more pressing today, mainly because it happens way faster than depletion of resources, but I believe we should keep the long view of resource depletion and "end of growth" in our field of vision as well and not treat this like some review of the Great Depression, expecting "recovery" in a decade or so.

"You're right that this crisis is mainly rooted on old-fashioned greed and.."

Saying greed is the main cause is like saying gravity causes airplane crashes. You really haven't said anything enlightening or useful. When the economy is prosperous and everybody is happy as a hog in the trough I do believe greed is there; it is perhaps the only constant element.

The 'Limits to Growth' stuff is still just a theory.
If we have plentiful, fairly cheap energy then what we actually have is a liquid fuels crisis, rather than a full-blown limits to growth scenario.
If you can chuck energy at the problem, then lower grade ores are perfectly feasible to exploit.
So if two technologies work out, the more effective burn of nuclear fuels, and cheaper solar power, then tackling the technical issues seems perfectly feasible - we already have a very fair idea of how to do both.
There is an excellent EROI from either.

In my view what is confusing the issue is the conflation of the very poor economic choices the West, and in particular the Anglo-Saxon economies have made, and the constraints this is likely to impose for the future such as investing in infrastructure with the world situation.

In the East, most of the economic factors are opposite to that in the West, such as a very high savings rate and massive potential for investment in renewables and nuclear energy as production is shifted from the present model of production for the Western consumer.

None of this should be taken as indicating that Eastern economies will not take a very heavy hit from the near collapse of the West, or that adjustment will be easy, but for me at any rate it is presently difficult to see why some considerations of a limits to growth nature are going to bring the rise of the east to a full stop.

At another level, there are severe difficulties with water and ecology, but to acknowledge that there are problems is a long way from confirming that it is inevitable that it is game over.
Having a lot of savings helps a lot in adjusting your economy.

We may indeed all be doomed, but the point is far from proven as yet.

Gosh, where to start. You hit the lottery so now you're qualified to pontificate on all manner of subjects. Your comment is rife with cant, verisimilitudes and outright inaccuracies, and I certainly don't have the time or energy to point out and debunk them all, so let's zoom in on this one:

We can argue all day about what causes great cultures to decline and collapse, but we will be hard put to find evidence that economic issues alone have ever collapsed a real culture.

Do you classify the Roman Empire a "real" culture?

In my opinion, the key internal element in Rome's success or failure was the economic well-being of its taxpayers. This was because the empire relied for its security on a professional army, which in turn relied on adequate funding.

Bryan Ward-Perkins, The Fall of Rome and the End of Civilization

How about the Spanish Empire?

Epitaph on an Empire

The Castile bequeathed by Phillip IV to his four-year-old son was a nation awaiting a saviour... Its currency was chaotic, its industry in ruins, its population demoralized and diminished. Burgos and Seville, formerly the twin motors of the Castilian economy, had both fallen on evil times; the population of Burgos, which had been about 13,000 in the 1590s, was down to a mere 3,000 by 1646, and Seville lost 60,000 inhabitants--half its population--in the terrible plague of 1649. While the rival city of Cadiz gradually arrogated to itself the position in the American trade previously enjoyed by Seville, the trade itself was now largely controlled by foreign merchants, who had secured numerous concessions from the Spanish Crown. Castile was dying, both economically and politically: and as the hopeful foreign mourners gathered at the death-bed, their agents rifled the house.

J.H. Elliot, Imperial Spain: 1469-1716

And Ward-Perkins gives some insights about people like yourself, and what your ignorance of economic history might be predicated upon:

My conception of Roman civilization, and its demise, is a very material one, which in itself probably renders it unfashionable. The capacity to mass produce high-quality goods and spread comfort makes the Roman world rather too similar to our own society, with its rampant and rapacious materialism. Instead of studying the complex economic systems that sustained another sophisticated world, and their eventual demise, we seem to prefer to read about things that are wholly different from our own experience, like the ascetic saints of the late and post-Roman worlds, who are very fashionable in late-antique studies. In their lifetimes, the attraction of these saints was their rejection of the material values of their own societies, and our world, which is yet more materialistic and 'corrupt', seems to find them equally compelling... This is a much more beguiling vision of the past than mine, with its distribution of maps of peasant settlements, and its discussion of good- and bad-quality pottery.

A move away from economic history is not exclusive to Late Antiquity. Nowadays it is very difficult to persuade the average history student that it is worth spending even a few days researching an economic-history topic. In Oxford at least, the word 'economy' in its title is the kiss of death to an undergraduate history course... In the 1960s, economic history was highly fashionable, because it played an integral part in Marxist interpretations of the past. When the attraction of Marxist theory declined (with the concomitant rise of neo-liberalism)...most historians, and the reading public, seem to have withdrawn from economic history altogether, rather than seek out different ways of studying it and of understanding its importance.

Reply to DownSouth’s fascinating reply:

DownSouth, I may be wasting my time here, I don’t know if you will come back and check for replies or not, but I felt compelled to respond to your very interesting post, not to debunk, but to play through some thinking on an endlessly fascinating subject, that being the nature of the rise and fall of great cultures.

First, you are obviously a student and or fan of history. That is rare enough these days to allow for my enjoying hearing from you. Even when students or fans of history differ, they must enjoy examining one another’s ideas, since the group of humans alive who care anything about history is declining very fast in the world.

Your first line, “You hit the lottery so now you're qualified to pontificate on all manner of subjects.” I must in all candor admit that over the longer haul I have been wrong as often or more so than I have been right. I think that’s true of most humans if they are honest in looking at their own record. However, I “pontificate” as a matter of my nature, and being right or wrong probably wouldn’t stop me.

Now, to the sentence of mine that you differed with: “We can argue all day about what causes great cultures to decline and collapse, but we will be hard put to find evidence that economic issues alone have ever collapsed a real culture.”

Note there are some qualifiers in the sentence, as even as I wrote in a stream of conscious fashion, I did craft that sentence with some caution and care.

The two qualifiers of importance to our discussion are “economic issues alone” and “real cultures”.

The reason for the first qualifier should be obvious. Usually it can be demonstrated that when a culture declines and then collapses, there will come a point that the economy will fail. But was the collapse of the culture caused by the collapse of the economy, or was the collapse of the economy caused by the collapse of the culture?
This may sound like an egghead argument, but the United States now faces exactly this conundrum. Allow me to ask the question this way in relation to our energy situation: Suppose that we absolutely knew of realistic technology that could end America’s dependence on oil and natural gas, absolutely “solve” the energy crisis and the carbon release crisis without major damage to our culture and it’s citizens. Do we still have the culture to be able to implement such a program? Do we have the educated people? Do we have the ability to create and use advanced financial systems to fund such a program (at what cost, 100 billion dollars, a trillion dollars, two trillion, four trillion, ten trillion (which is about the amount of debt we have accrued as a nation since Ronald Reagan? And the most important question: Do we still have the WILL and the desire to save our nation and our culture?

Let us turn to your discussion of Imperial Rome for a minute, and your fascinating quote from Bryan Ward-Perkins:

“Instead of studying the complex economic systems that sustained another sophisticated world, and their eventual demise, we seem to prefer to read about things that are wholly different from our own experience, like the ascetic saints of the late and post-Roman worlds, who are very fashionable in late-antique studies. In their lifetimes, the attraction of these saints was their rejection of the material values of their own societies, and our world, which is yet more materialistic and 'corrupt', seems to find them equally compelling... This is a much more beguiling vision of the past than mine, with its distribution of maps of peasant settlements, and its discussion of good- and bad-quality pottery.”

It is interesting that Ward-Perkins would mention the “ascetic saints” and very instructive. Here we have the best minds that the Roman Empire could produce, educated in the Hellenistic worldview, trained to be the type of men who would be the backbone of a continuing Imperial Rome. These men were obviously the thinkers, the philosophers, prime examples of the literate class of Rome. They were writers and speakers, communicators, who were able to sway opinions and lead men to a higher cause and a greater goal.
Let us name some of them, and I will use Wikipedia as a quick reference so others may track the discussion without heavy reading:

St. Paul, trained as a Roman tax collector.

The greatest catch for the Christians in the ancient world is arguably Saint Augustine, a man trained in the Neo-Platonism and other Hellenistic ideas:

St. Ambrose, trained in Rome in literature, law and rhetoric:

St Jerome, the “doctor” of church literature and language:

The lesser saints such as St. Cyprian, who received a classical pagan education, and
even the bright and wealthy Roman women of the age abandoned the Hellenistic worldview:

And the aristocratic and well connected Paula, as Roman as they come before her conversion:

I will stop off at these examples in making my case that the greatest crisis Rome faced was NOT a financial crisis, not a military crisis, but a crisis of will. How many other thousands of intellectuals of the Roman Hellenistic belief system abandoned Rome when the Empire needed their talent, their leadership skills, their ability to sway other intellectuals of the Empire? Rome’s intellectual class simply lost interest in seeing Rome continue as an empire and lost faith in the Hellenistic world view. The death of the Hellenistic worldview, culture and lifestyle came soon afterward.

Wikipedia says that “German professor Alexander Demandt published a collection of 210 theories on why Rome fell, and a number of new theories have emerged since then.

Your quote of Ward-Perkins indicates his bias and his own belief that his views are much in the minority: “My conception of Roman civilization, and its demise, is a very material one, which in itself probably renders it unfashionable”.

I think this same bias exists in the United States today. There is a fascination with the material aspect (oil, gas, money, physical resources, houses, cars, boats, planes, clothes, “physical fitness”, jewelry, etc. Alvin Toffler in the 1980’s referred to it as a worldwide phenomenon he called “materialismo!”, the new found fascination with the material world and material wealth even in deeply spiritual and "ascetic" cultures such as Hindu and Buddhist cultures.

It would be expected that the latter day historical philosophers would attribute everything to a material cause and not to a spiritual or intellectual crisis, a crisis of that WILL TO SURVIVE that must exist for any culture to continue.

It is to be noted that fewer Americans then ever seem to care who their overlords are. They could be Chinese, Indian, Saudi, as long as I get to keep my car and house, and live pretty nice. The elements of destiny, liberty, cultural pride and purpose, will be easily sold for a continued comfortable lifestyle, as long as I can get out of paying an extra quarter for a kilowatt hour of electricity, or an extra few pennies per mile in travel cost. So it was with the Romans, until they had sold away their future, and a newer more purpose driven spiritual regime of existence took over. The regime that promised MEANING won out over the regime that promised STUFF, as one major intellectual of Rome after another abandoned the Hellenistic ship for the new Christian world view (Medievalism).

Let us turn now to your example of Imperial Spain: You quote J.H. Elliot, Imperial Spain: 1469-1716:
“The Castile bequeathed by Phillip IV to his four-year-old son was a nation awaiting a saviour... Its currency was chaotic, its industry in ruins, its population demoralized and diminished. Burgos and Seville, formerly the twin motors of the Castilian economy, had both fallen on evil times; the population of Burgos, which had been about 13,000 in the 1590s, was down to a mere 3,000 by 1646, and Seville lost 60,000 inhabitants--half its population--in the terrible plague of 1649. While the rival city of Cadiz gradually arrogated to itself the position in the American trade previously enjoyed by Seville, the trade itself was now largely controlled by foreign merchants, who had secured numerous concessions from the Spanish Crown. Castile was dying, both economically and politically: and as the hopeful foreign mourners gathered at the death-bed, their agents rifled the house.”

In one way, you can say that Imperial Spain was bankrupt at the time of its decline and thus “economics” finished off the Spanish Empire, but of course you would have to ignore such a multitude of wars (some needed perhaps but many very questionable military adventures), poor management of colonies, and a fascination with enforcing the counter reformation out of all proportion to the threat that the Protestants posed to Spain (to this day Spain is 90% Catholic) that cost Spain fortune after fortune, and bankruptcy after bankruptcy. If economic issues alone would have ended Spain, which one of its multiple bankruptcies finally killed the empire?

“Imperial Spain” suffered from the problem that it tried to graft on too many cultural systems that did not fit. Spanish-Catholic-Hispanic culture is indeed a cohesive cultural system to this day. But who identifies southern Italy as “Hispanic”? Who identifies the Dutch as “Hispanic”? Who identifies the Netherlands as culturally “Hispanic”?

This again is a caution to the United States. We are very multi cultural, but we have been great at not trying to “enforce” our “cultural” systems (with the exception of our economic model, private property capitalism) on our citizens to such a degree that it would create expensive and painful conflict *with some local exceptions].

Unlike Imperial Spain, you can be Protestant, Catholic, Jewish, Hindu, Buddhist or Islam in the United States. One of the great gifts of our system is it’s ability to “co-opt” culture…we will buy and sell black jazz, Catholic Rosary beads, Hindu or Buddhist icons and prayer wheels, we don’t care. Spain bled itself to death trying to prove a point: God is Spanish. In one way, the Romans suffered from too little will, and the Imperial Spanish suffered from too much expensive and misdirected will. It still remains to be proven that “economic collapse” destroyed either Empire. It is easy to point to the shambles that was Imperial Spain at the end of its golden age and claim that it was caused by an economic collapse, but then the same writer points to plagues that depopulated the nation (also an issue in Imperial Rome by the way), on top of multiple needless wars and religious conflicts.

As I said at the beginning of this reply, you must note that I used the term “real culture”. As I indicated above, it is questionable whether Imperial Spain (as opposed to Hispanic culture) was a “real culture”. It was much more a congeries of multiple cultures. The Hispanic Catholic culture lives on to this day, and in fact is bigger in the new world that it ever was in the old. The Hellenistic culture of Imperial Rome was much more coherent that the congeries of Imperial Spain, much more a “real culture”, but is now efffectively dead.

Just as the Jews have managed to maintain a coherent culture though history by way of sheer WILL even when they controlled no land and had no nation, the Hellenistic world and the Imperial Spanish "culture" where unable to survive even though they controlled vast land and wealth. The definition of Cultural coherence is central if one believes (as I do) that cultural WILL is the real driving fuel, the real energy that drives the existence of culture. If a culture has the energy of will and coherence, it will find any physical energy it needs to survive. History has proven it so.

(Postscript: I hope the above discussion points to why I throw down the rhetorical challlenge to those who question the need for the modern culture to exist, and those who make the case that "peak oil" is in fact doing us a great favor by destroying the modern culture. I am referring here to what has been referred to as "deep greens", "anarcho-primitivists", and "neo-primitivist" worldviews:

These are the philosophies that do not see Peak Oil and the collapse of modern technical society as the problem, but see it as the solution. These are the people who do not argue that "peak oil" cannot be solved, but instead argue that peak oil SHOULD not be solved. Effectively, these are the people and groups who have abandoned the believe that anything like modern technical culture should be continued, and that a solution to peak oil and peak resources problems is to be avoided because a technical solution would allow the continuation of the modern technical world. In effect, these people are honest in their belief that what needs to be ended is the very WILL of the people in technical cultures to continue the technical culture. Many others have adapted much of the thinking of this death of cultural will without even knowing it. The philosophy that it is the WILL to continue modern technical culture is much, much more dangerous to modern technological culture than peak oil or peak anything else could ever be. Peak WILL is the enemy.

I am an avowed defender of the Modern technical age, not only for the "stuff" it provides (i.e., "materialismo") but for purely aesthetic reasons. I believe that the modern technological age has provided a world of beauty and experience that no culture to this date in history has provided. I love the spiritual aspect of "humans as the creator", "humans the designer" and humans as the developers of new physics and new devices. I think that as we leave the fossil fuel era behind, we can create design, architecture, technology and lifestyles that will so beautiful that our current imaginations cannot easily comprehend the sheer artistry of the post fossil fuel age. For me, technology is an aesthetic, yes even a spiritual quest. IF we have the will.

Thank you for a fascinating discussion.

Joseph Tainter wrote the book on Collapse. "Willpower" may help with dieting, but I am sure it is irrelevant to civilisation.

Wow! Did I ever misjudge you from your initial post. My opening sentence in my first response to you was originally a lot more acerbic and judgmental, and I went back and edited it, toning it down a little bit. I'm certainly glad I did, lest we descend into the Grobiana that characterized discussion and debate in the 16th through 18th centuries.

Your excellent discussion prompts more questions than critiques.

I am intrigued by your observations about "deep greens", "anarcho-primitivists", and "neo-primitivists." You state that these are "the philosophies that do not see Peak Oil and the collapse of modern technical society as the problem, but see it as the solution." I'm wondering if these groups evolved from the more radical elements of the multiculturalist movement that exerted such a huge influence on American culture during the 1970s, 80s and 90s. The reason I ask this is because there seems to be a similar iconoclasm and rejection of everything once considered sacred in America in both groups. Time art critic Robert Huges in Culture of Complaint talked of the frenzy of victimology that radical multiculturalism ignited in America. To be a victim one first must be a loser, and Robert Hughes commented that the desire to join the brotherhood of losers became so virulent in America that it eventually infected even white males: "Since our new-found sensitivity decrees that only the victim shall be the hero, the white American male starts bawling for victim status too."

Richard Bernstein in Dictatorhip of Virtue: Multiculturism and the Battle for America's Future also renders a devastating critique of an ideology that provides a "pretext for repudiating the values and behaviors that have traditionally led to success, such as objectivity and achievement":

The plain and inescapable fact is that the derived Western European culture of American life produced the highest degree of prosperity in the conditions of the greatest freedom ever known on planet Earth. The rich and the advantaged of our society will survive even if they are taught to believe something different. But to teach the poor and the disadvantaged that they can ignore the standards and modes of behavior that have always made for success in American life is more than mere silliness. It is a lie.

I am also intrigued by the question you posed:

But was the collapse of the culture caused by the collapse of the economy, or was the collapse of the economy caused by the collapse of the culture?

I have pondered this question endlessly, the nexus between a great society and a great cuture, and expecially its high arts. And history seems to offer only ambiguities:

During the two centuries, Spain not only pretended to European political hegemony; it also imposed--this was not pretension, but a reality--cultural fashions throughout Europe. This went from the manner of dress to the manner of war, and back to the formalities of court etiquette, diplomatic style, and conduct in polite society, which, according to Oswald Spengler, "gave [European life] a stamp that lasted till the Congress of Vienna and in essential points till beyond Bismark." From Charles V to Phillip IV, adds the author of The Decline of the West, Europe lived "the Spanish century in religion, intellect, art, politics, and manners." Again, this was not the first or the last time that a vast empire, overextended, unaware of its many flaws, went surely toward its doom but actually created out of the corruption of its deterioration the ferment necessary to achieve the heights of creativity.

In spite of intolerance, corruption, incompetence, and commitment beyond its abilities, the Spanish monarchy of the seventeenth century coexisted with the greatest flourishing of culture that Spain would ever know, el siglo de oro, the Age of Gold, the gretest century of Spanish literature and painting--the age of the painters El Greco, Velazquez, Zurbaran, and Jurillo, of the dramatists Lope de Vega and Calderon de la Barca, of the poets Quevedo and Gongora, and of the novelist Cervantes.

Carlos Fuentes, The Buried Mirror


The most powerful men knew artistic genius when they saw it, and their unstinting support of it, despite their deplorable private lives and abuse of authority, is unparalleled...

In an ideal world, genius should not require the largess of wicked pontiffs, venal cardinals, and wanton contessas. But these men of genius did not live in such a world, and neither has anyone else. In art the end has to justify the means, because artists, like beggars, have no choice. Other ages have provided different sources of support, though with dubious results. Five centuries after Michelangelo, Raphael, Botticelli, and Titian, nothing matching their masterpieces can be found in contemporary galleries. No pandering to popular tastelessness, adolescent fads, or philistine taboos guided the brushes and chisels of the men who found immortality in the Renaissance. Political statements did not concern them. Instead they devoted their lives to artistic statements, leaving time to judge their wisdom.

William Manchester, A World Lit Only by Fire


In 1937 Hitler decreed a considerable arts budget to finance the cultural mission of the National Socialists. Never before in Germany had such large financial aid been given to the arts...

On the whole, in all these works the style and iconography were the same. There was little development during the next few years, except for the introduction of war paintings, which took an increasingly important place. There were some who hoped that the approaching war would release new artistic energies. In the event, the paintings of the tanks and battle scenes which resulted brought a new realism to the art scene, but most of the paintings were just as undemanding and boring as the previous genre paintings. With a few exceptions mediocrity ruled, right to the end.

Peter Adam, Art of the Third Reich

P.S.--And in regards to your last paragraph, I couldn't agree more.

The greatest artistic achievements in the West are now being made where technology meets creative genius. And that is not in some artist's studio in New York, London, Paris or Berlin, but in Hollywood.

I don't know what they call it--special effects?, animation?--but the images are absolutely stunning. They're indescribable. The impact almost leaves one speechless. To me it's the greatest flowering of creative genius seen in Western civ since the Reniassance.

It's ironic, too, that this stuff created for the hoi polloi--low art, popular art--leaves the stuff created for the beautiful people in the dust.

A proposal for a solar tower system
A concentrating solar mirror
Plug hybrid prototype
Maglev train
Proposed “lobe” and “district plan of a car free city
Model of vertical axis wind turbine
Design for vertical axis offshore wind rotor
Design for solar city in Linz Austria

I have been a bit disappointed in our artists. At the birth of the industrial revolution, artists such as the expressionists and the "futurist" Italian artists attempted to capture the changing world of the industrial landscape through art. The hardest thing for people is to envision the future and our place in it. I think art could be a great tool in showing people how a post fossil fuel world could look, and in capturing the new spirit of the age.

As far as the issue of "victimology", I do think that this is partly due to bigger and faster systems, which causes people to feel powerless. This is part of why some bitterly resent the modern age and desire to return to what seemed a simpler time. the modern age goes faster and faster and trying to get on the "learning curve" as to how to understand things seems almost impossible. I think that much of this can be dealt with by much more humane ways of dealing with people on the part of institutions. The recent financial collapse is a great example, wherein it seems that no mattter how hard you try to learn, the financial community will pull a new rabbit out of the hat, and destroy your efforts, and even your wealth.

The other term I hate is "The Powers That Be". At some point we have to stop worrying about them and build on our own if we have to. Blaming everything on "The Powers That Be" strikes me as sounding pathetic, "victimology" that transcends race, gender etc., and allows everyone to claim a sort of group victim status. I have used the term myself, but I am going to make a willfull effort to swear it off!


Sadly, I don't have the time to thoroughly go trough that post and reply to some of the things being said here (which are very interesting), but just wanted to point out something. The arguments you propose seem closely linked with Hegel's philosophy of history. This "will" you speak of is very much like Hegel's spirit of the cultures.

You said you're interested in History, but your post leaves me with the impression that you didn't study it in a professional manner, am I right? Coming from a History academic background, I must say that the sort of arguments you came up with are considered thoroughly disqualified by professional historian these days. Not in the sense that they are "bad" or "misleading", they were very important on their day, but further research and theorization have made them quite obsolete.

This kind of view it's still extremely popular, along with simplified "materialist" explanations, because of a few factors. One, is that they are easier to comprehend to the average educated reader, so they are published in a more mainstream press than contemporary professional works. Second, both of those system come from the same place, which is, teleological philosophy applied to History. You must remember Hegel's most famous disciple was Karl Marx. They are mirror images of each other. One says that the movements are history are caused by the "Spirit" and "Will", the other says it is caused by "material conditions". Both agree that History has a path it must follow and that "something" causes it.

This is also very popular, because most people WANT history to have a meaning, so, again, it comes down to more "press" about this sort of interpretation. You'll find it in almost all publications that you can acquire at a regular bookstore for the mainstream public, although sometimes the ultimate source of the interpretation will not be found (for example, it is rare to see works on the "materialist" side of spectrum quote Karl Marx, because, well, he's Karl Marx, it usually goes to some archeology, economists, etc).

Oh, btw, on the topic of why certain "cultures" fall, the current viewpoint is that they do for a variety of reasons, each does it in different fashion (there's no overall "system" to collapse) and in different time scales. Some don't really collapse, but manage a orderly withdraw into a smaller scale. Both material and cultural factors are important and can't be extricated one from the other. They are one and the same, in a lot of ways. Also, don't discount the "unknows" and "chance". Aztec civilization was not in any danger of "collapsing" until the Conquistadores arrived, which is akin to Aliens landing on Washington and blowing up the White House, if you think about it.

Lastly, the whole thing about Rome, that's one of those issues that never gets solved because there are a lot of conflicting opinion even to this day. It's not my field of expertise, but I think contemporary historical research goes more in the direction of attributing it to political/economical factors than to "cultural" or "lack of willpower" factors. I don't remember anyone saying that it was caused by resource depletion too, btw, unless you count slave labor like a resource.

If I remember my "Ancient History" courses correctly, the most agreed upon vision today on the collapse is that Rome created a system that accumulated wealth at the few large landowners who could use slave labor and take advantage of gains of scale to successfully compete and then drive out of the market the small landowners. These people formed the political elite. This created a political problem in the sense that the system was dependent on a ever growing supply of land and slaves (which eventually couldn't be procured), it caused a drastic shrinkage of the small-holder peasant which formed the backbone of the armed forces, which in turn prompted a adoption of professional soldiers, which itself caused an increased violent political scene. This violent political system, prone to crisis, also had to deal with a growing number of poor and unemployed people, many of them flocking to cities (and Rome in particular), which caused even more stress to the political system, along with the slaves themselves. Geopolitical factors must not be discounted (the emergence of the Parthian Empire and the Huns).

Rome, in the end, failed to provide a political system viable to contain those stresses and that prompted it's fall. One of the symptoms was the widespread adoption of eastern religions in the Empire, mostly ascetics and/or deeply mystical, like the Cult of Isis and later Christianity. Oh, btw, modern historians also date the beginning of fall of the system with the death of Octavian, the first Emperor. The Empire itself was a construct that tried (unsuccessfully) to contain the stresses that had plagued the Republic and that it never really worked well, except under a few very talented (and ruthless) emperors.

I'm not saying this is what I think, just what I remember as being the most-agreed-upon view. I personally think that Rome suffered from over-specialization as well. "Lack of Will" doesn't seem to be a factor, in my view, not until the very end, perhaps.


Yours is an interesting reply and cuts very much to the chase!

To handle first things first, I am not a historian. To my "professional" education in history you say, "your post leaves me with the impression that you didn't study it in a professional manner, am I right?"

I would say that is relatively correct. I did benefit from two years of undergraduate humanities honors classes at the state college level, and was blessed in being taught by a doctorate level historian and an English Literature professor, two men I considered the brightest historical thinkers I know.

My primary intellectual mentor, beside these two men, would be the historical philosopher Pitirim A. Sorokin, the Russian exile historical philosopher and founder of the Department of Sociology at Harvard University
and Alvin Toffler, more a sociologist/futurist than a historian, but a historical thinker who puts forth an invoved big picture theory of history and wealth production. There are many other influences, but Sorokin and Toffler are the two who gave me the "roots" from which the rest of my thinking about history has grown.

Now to the chase! It is fascinating that you mention Hegel, and here we are getting to the heart of what I call for lack of a better question "the purpose of history" or the purpose of culture.

Hegel with his German idealism and "spirit" (somewhat like what I call "will" is a takeoff of Neo-Platonism. It is in a certain way teleological (as you call it, the idea that history has a purpose, or as Toffler says, even if history has no meaning or purpose, humans and human cultures will create one for themselves).

Sorikin's ideas are described this way: "This artful blending of Eastern and Western philosophy fused the truths found in the trinity of human existence; i.e., truths of the mind, the senses, and the spirit. Integralism would free us from the pitfalls of one dimensional thought and instrumental knowledge.

Sorokin's view is rather mystical sounding (as is Plato and Hegel often times)

Toffler narrows the scope a bit to worldly power and says it this way in "Powershift" in describing the nature of worldly power: There are only three types of worldly power at the heart of all culture and in fact for any individual: Violence (the brute power of the animal), wealth (control of material wealth or physical things that people or cultures want or Sorikin's truth of the senses) the mind (Sorokin's truth of the mind) and knowledge (which is not only mental but spiritual in the aesthetic aspect, that is "what is beauty and right? What do you want your culture to be, what do you want it to be become, and how do you fit into this "right" and "beauty" as an individual human being(destiny.

A simpler way of viewing is that each culture and each individual has certain core assumptions or "belief" about the three realities that are manifested in the expression of the hand, the expression of the mind, and the expression of the spirit (desire for perfection and "destiny")

For cultures, each culture is born into a place and a time in history. Each culture must begin from what is known or believed about the world at the time of it's formation. Based on when and where a culture is in time and space, and the limits of that time and place, it will use the tools and knowledge available to create it's "perfectable" existance, i.e., it will create a core set of cultural assumptions.

If the culture plays through all it's cultural possibilities successfully, it will rise to it's highest possible state given the limits of it's birthing assumptions (it's "golden age"). Then, it will begin to wither and die. Why? Because the culture has essentially played out it's possibilities, it has exhausted it's options IF it is limited by it's birthing assumptions. The best minds in the culture will begin to search for a way forward. After a certain amount of time, the best minds and the most vibrant people and groups in the culture will begin to look outside the birthing assumptions of the culture, look to graft in alien ideas and elements to bring vitality back to the culture. This can work, but often enough the new alien elements do not fit, and the culture begins to break into smaller elements, or breaks down in internal conflict. This is what many here refer to as "relocalization" which pretty much ends the unity and more importantly the "will" (my word) or the "spirit" (Hegel's word)of the culture.

The above idea sets the terms of the debate concerning whether the "Western" modern technologica system is at it's end.

We can say that any culture attempts to find ways to master time and space. Architecture and art is one way (the Pyramids of the Egyptians and it's association with immortality, literature and poetry is another (the Greek myth of the Homeric hero, the Jewish "covenent" and old testament chronicle of their suffering), the Mayan fascination with time, the Ancient Chinese fascination with eternal "balance", the Hindu fascination with endless cycles of rebirth), each culture creates it's own core methods to deal with time and space, to deal with the physical limitations of existance.

The "modern' West has centered itself around science and technology, the detailed study of the physical world in an effort to master the elements of it and create devices that will master space and time and the physical limitations. This has of course created an age of competitiveness, an age of acquisition, an age of "practical" learning. Our technology leads our philosophy and religious/moral ideas. Our technology is not made to fit our morality, but the other way around, our morality is shaped by our technology. It was Bacon wasn't it who said "what is most useful in fact is what is most right in principle."

The search for absolute understanding of every element of the physical world is now the only way forward, because almost every nation in the world has adapted knowledge of physical reality as the method to compete with one another. No nation can pull out of the race because they know they will become subjects of the nations who concern to pursue knowledge and technology.

This is why so many elements of the "peak" debate are so central to the very core of Western philosophy, and the continuation of our culture. I am not talking about the narrow geological issue of peak, but about the assortment of philosophical ideas that come with it.

There is only one thing that can end the ongoing competition of culture vs. culture, and that is if "the physical limits" or our world put a stop to it. So, if a nation (take the U.S.) for example and it's people, especially it's intellectual class, feel that the options of the culture are played out, they can only hope that the physical limits of existance will put a stop to it. This is the only way to be able to leave the race without becoming enslaved by those who continue the knowledge chase. And the people who believe that the "physical limits" will put a stop to the madness (in this role, the "physical limits" act as something of a proxy for the religious idea of God, in that excesses will be punished and reigned in) as the old dreams of Speed, Distance, and Physical knowledge without limits that will explain the very meaning of time itself (the new giant super collider, faster, bigger, that will at last create mastery over the very elements of existance!) and finally space itself, worlds without end, faster and further "to go where no man has gone before". The old dream which was once seen as the perfection of history are now becoming hated...who needs to go faster, who needs to travel at all? Who needs to know the nature of every element, why are we spending money and time on this!

Now we are back to destiny, to Hegel's "spirit", to Sorokin's "truths found in the trinity of human existence; i.e., truths of the mind, the senses, and the spirit."

Sorokin himself expressed a sort of a "peak" and decline for the West, but not based on a lack of "energy". Instead, Sorokin envisioned an ethical collapse and a collapse of will:

"Sorokin has interpreted the contemporary Western civilisation as a sensate civilisation dedicated to technological progress and prophesied its fall into decadence and the emergence of a new ideational or idealistic era."

"The crisis of the West in most importantly an ethical crisis" said Albert Schweitzer, the great humanitarian and philosopher greatly admired by Sorokin. Why is our great Western science and knowledge unable to relieve the suffering of millions of people? And sad to say, that was not the way it was originally created, taht is not what it does well. Sorokin was dismissed as a bit of an oddball for creating a "Harvard Center for Creative Altruism" at Harvard University. In many ways, people such as Schweitzer and Sorokin can be seen as the intellectual vanguard who were already giving up on the core ideas of the "scientific West". They are in some ways joined now by what I can only call "catastrophist" thinkers (and I don't mean that as perjoritive, but only as the closest discription I can come up with) such as Tainter, and the "primitivist" thinkers such as Richard Heinberg (one of his most poetic and philosophical documents, and one that Sorokin and Schweitzer would understand can be found here:
These theories see the modern age, the West, as coming to an end. "Peak Oil" is seen as a tool in that end.

The argument thus becomes, "Has technology, the modern world, played out it's options? The important thing to remember is that this is an "aesthetic" argument. There is no proof as of yet that the "physical limits" have been reached. I could show my favorite charts showing how much sunlight falls upon the Earth every single day (the Earth's energy system is not a closed system), how much water is wasted that could be saved, how much metal could be recycled, and how much beautiful efficiency could be built into our systems of living and transportation, but you have seen them before. We may be at the "physical limits", but on the other hand, a valid case can be made that we are nowhre near them.

What we are discussing is actually a very simple question, despite my wordiness: What kind of culture do we WANT? A thousand possible scenarios lie before us. If we CHOOSE to attempt to go forward, we can. If we choose primitivism, other cultures will rise to take our place at the front of the new age, unless the "physical limits" stop us all, and the "God" of "physical limits" has decreed that we SHOULD and MUST go backward.

To use Hegels terminology, I don't think that our cultural "spirit" has decreed that at all. I am admittedly a "scientific/technical" idealist, one could even say "Romanticist". I believe that we are suffering not because our technology is so modern or so complex (Tainter) but because it is so primitive and so simple minded.

People are searching for meaning (whether meaning exists or not, it is human to search)

I sit holding in my hand the bookby Stephen Hawking, "A Briefer History of Time". This is called a "science book" but it is actually for all practical purposes a religious testament, a testament to the religion of science. It is full of parables, symbols, and discussions of infinity. It holds out redemption and salvation through science, the day that humans will master time and space and matter through our technological devices. Just as in the age of the cathedrals and the Pyramids, billions of dollars and millions have been spent on the structures that will "unify" and provide salvation to our culture, that will lead us beyond the physical, that will defeat time and distance (the giant supercollider at CERN is the latest biggest "cathedral" of science)

Millions of people bought Hawkings book, most of them completely unable to understand it. They were looking not for the "science" which is virtually incomprehensible, but for the "salvation". These are the people who still believe that modern science CAN work to the benefit of mankind, that our culture still has paths to be played out, and still want to see where our development, our culture to this point can lead us before they make the choice to give up on it.

Each day, we are all being asked to take sides: Support the continuation and development of the modern age, or abandon it, even fight it. Where is the real "SPIRIT" of our age, what do we WANT?

These are questions that philosophers of history have been dealing with, in one way or another, using one name or another, for centuries.


The conversion from paganism to Christianity was the reason given by many for Rome’s fall. And, if we take the materialistic outlook that Ward-Perkins does, it does seem eminently logical. Paganism, after all, was a religion that offered its reward (and its punishment) in this world and therefore celebrated materialism, sensuality, reason and intellect. Christianity, conversely, was a religion that offered its reward in another world. It abhored materialsm, sensuality, reason and intellect, preferring instead ascetism, self-flagellation and blind obedience to dogma:

The devout scorned reason, however. Saint Bernard of Clairvaux (1090-1153), the most influential Christian of his time, bore a deep distrust of the intellect and declared that the pursuit of knowledge, unless sanctified by a holy mission, was a pagan act and therefore vile.

Ironically, the masterwork of Christianity’s most powerful medieval philosopher was inspired by a false report. Alaric’s sack of Rome, it was said, had been the act of a barbaric pagan seeking vengence for his idols. (This was inaccurate, actually, Alaric and a majority of his Visigoths were Arian Christians.) Even so, the followers of Jesus were widely blamed for bringing about Rome’s fall; men charged that the ancient gods, offended by the empire’s formal adoption of the new faith, had withdrawn their protection from the Eternal City. One Catholic prelate, the bishop of Hippo—Aurelius Augustinius, later Saint Augustine—felt challenged. He devoted thirteen years to writing his response. De civitate Dei (The City of God), the first great work to shape and define the medieval mind. Augustine (354-430) began by declaring that Rome was being punished, not for her new faith, but for her old, continuing sins: lascivious acts by the populace and corruption among politicians. The pagan deities, he wrote, had lewdly urged Romans to yield to sexual passion—“the god Virgineus to loose the virgin’s girdle, Subigus to put her beneath a man’s loins, Prema to hold her down…Priapus upon whose huge and beastly member the new bride was commanded by religious order to stir and receive!”

Here Augustine, by his own account, spoke from personal experience. In his Confessions he had described how, before his conversion, he had devoted his youth to exploring the outer limits of carnal depravity. But he wrote, the original sin, and he now delcared that there was such a thing, had been committed by Adam when he yielded to Eve’s temptations. As children of Adam, he held, all mankind shared Adam’s guilt. Lust polluted every child in the very act of conception—sexual intercourse was a “mass of perdition [exitium].” However, although most people were therby damned in the womb, some could be saved by the blessed intervention of the Virgin Mary, who possessed that power because she had conceived Christ sinlessly: “Through a woman we were sent to destruction; through a woman salvation was restored to us.” He thus drew a sharp line. The chief distinction between the old faiths and the new were in the sexual arena. Pagans had accepted prostitution as a relief from monogamy. Worshipers of Jesus vehemently rejected it, demanding instead purity, chastity, and absolute fidelity in husbands and wives. Women found this ringing affirmation enormously appealing. Aurelius Augustinus—whose influence in Christianity would be greater than that of any man except the apostle Paul—was the first to teach medieval men that sex was evil, and that salvation was possible only through the intercession of the Madonna.

William Manchester, A World Let Only By Fire

It’s interesting to see how this medeival tradition plays out in modern-day politics. McCain and Palin have tailored their campaign to appeal to those steeped in this Christian narative—its anti-intellectualism, it’s blaming our current dilema on “lascivious acts by the populace and corruption among politicians” and the intercession of a Madonna (Palin) to save us.

But primitivism, as RC so astutely points out with his observations about the eco-fundamentalists, is not a phenomenon unique to the political right. It exists on both ends of our political spectrum. Could this commonality be because both left-wing and right-wing fundamentalisms are grounded in the same Christian cultural tradition?

And did Christian ascetism and anti-materialism, as embodied in the writings of St. Augustine, cause the downfall of Rome? Or were St. Augustine’s writings and Christian anti-materialism a reaction to, a way of dealing with the fall of Rome?

Likewise, was Hapsburg Spain’s rapid rise and fall attributable to a brief renaissance under the Reyes Catolicos and the concommitant flowering of intellectualism and humanity, after which these were extirpated from Spanish cultural life by the reactionary forces of the Council of Trent, the Inquisition and the Counter Reformation? Or were there other cultural and/or material realities that led to the demise of the Spanish Empire?

And if the American Empire fails, will it be because of its embrace of primitivism (or some other philosophy that is equally dismissive of this world), or because material/physical realities, such as peak oil, bring about its defunction?

PRIMITIVISM—Back to the basics! When people feel that accretions and complications have buried the original purpose of an institution, when all arguments for reform have been heard and have failed, the most thoughtful and active decide that they want to be “cured of civilization.”

Jacques Barzun, From Dawn to Decadence, 1500 to the Present: 500 Years of Western Cultural Life

"And if the American Empire fails, will it be because of its embrace of primitivism (or some other philosophy that is equally dismissive of this world), or because material/physical realities, such as peak oil, bring about its defunction?"

That is exactly the question! Do we keep developing along the current scientific technical path, but just get a hell of a lot better at it, or do we finally just say "oh screw it, I'm goin' back to the farm!" :-)

(In the interest of full disclosure, I personally am Christian, of the Unitarian (Emerson/founding fathers type) and so do not accept the disavowel of intellect and I am something of a mystic in that I think much dogmatic Christianity is misapplied when it becomes a power struggle...I do think however that the "spiritual" questions (what is right, what is beautiful, what do we really want to become) are central driving forces in every culture...thus I probably would be swayed to the "spirit" aspects of Hegel, the search for the core idea of Platonism, and the humanitarianism of Schweitzer and Sorokin)

Thanks again for what has been a fascinating discussion!

"And if the American Empire fails, will it be because of its embrace of primitivism (or some other philosophy that is equally dismissive of this world), or because material/physical realities, such as peak oil, bring about its defunction?"

It (is/will be) clearly due to the overthrow in ancient Greece of the pragmatic scientific Thales et al by the mystics Socrates and Plato, which mode of thinking (physical proof is inferior to mystical explanation) underpined the christian movement, undermined Rome and all western thought until the 1700's and even much of logic for most people today (see foolishness that anyone may be president of USA PROVIDED they ara a loudly professing christain. Is that the religious freedom for which the founders of the 13 colonies left Europe and which is enshrined in the constitution?)

Quite a few people on this website posted comments saying that at $150 oil was due to crash. Sure not everyone, and not many of the editors but I doubt Prof Goose was surprised. I don't understand why you think you are special in this regard.

'Then, I pointed out that speculation was indeed a factor in the fast run up in energy and commodity prices, as did several other folks on TOD and in the business press. Anyone who pointed out the major role that hedge funds and speculators were playing in the almost completely erratic and almost insane jumps in commodities prices were dismissed as “peak oil deniers” and accused of “hunting for scapegoats”.'

Do you have any evidence to support your assertion that hedge funds and speculators were responsible for the 'fast run up in energy and commodity prices'. It's not like only energy and commodity prices are coming down. Equity prices in general have been falling fast.

It seems to me that rather than hedge funds / speculators being responsible the logical conclusion is that the credit crunch is causing deleveraging across several asset classes.

On the other hand I can't prove that what you are saying is false. I am looking forward to seeing what the closing price of the Nov contract for crude oil will be. I'm interested to see if it spikes up like the last contract did at the close.

I don't know if that will occur. But it it does then it would indicate that speculators have actually been pushing down commodity prices below equilibrium prices.

"Do you have any evidence to support your assertion that hedge funds and speculators were responsible for the 'fast run up in energy and commodity prices'. It's not like only energy and commodity prices are coming down. Equity prices in general have been falling fast."

My "evidence" at the time was purely circumstantial. I kept asking myself "where could the amount of money needed to drive prices up that fast have come from?" There was no way that individual investors could pour that much money in that fast! The other issue was that I simply could not believe that every single commodity was in short supply and that demand climbed that fast for every single commodity at the same time! In certain areas there were indeed supply and demand issues, as there still are, but in every commodity at the same time?

Many fuel consuming industries had long term contracts for their fuel, such as airlines for example. And on natural gas, demand has been weak for awhile in the U.S., due to mild weather and "outsourcing" of natural gas consumptive industries to nations where gas is cheaper. Only the ethanol industry and the tar sand industry have increased consumption in a major way.

So given the above, I had no choice but to assume that the "speculators" and hedge funds were up to their ears in money and needed somewhere to run to after the collapse of the tech industry.

So they flooded the commodities and then the real estate industry with money. I couldn't "prove" it, but it made sense.

I also went by the business press. Only 4 or so years ago, most analysts were saying, "oil above $50 bucks, not likely." Then they started singing a different tune, with the business press predicting oil prices that even the "peak community" had not been, over $200 per barrel!

Then the post facto evidence as a hedge fund hurled everything at natural gas, and then got busted.

The problem is that I couldn't be sure. It could have actually been the real thing, "peak oil"....but "peak everything"? (a theory that I still find fundamentally ridiculous.

And now the downside price...gee, did everything "unpeak"? The whole thing just had the stink of financial manipultation, just as this "mortgage crisis" does. The government is now force selling banks and brokerages at 12% on the dollar. It is shameful. when was the last time you saw a $200,000 house selling for $24,000?

Of course we know what happened, just as with the commodities, 10 bets were made on the same dollar. Only the hedges and speculators had the ability to do that.

The tragedy is that there are many people within only a few years of retirement, with medical issues that will be WIPED OUT. They will not be able to make up for a wipe out of 6 years plus of investing. They will be impoverished at exactly the worst possible time.

I used to say that for the aging boomers, there would be a battle as to who would get their nest egg, the biggest hunk of money in history. Would it be the medical community, or would it be the financial community. Using some of the most disgraceful tactics in financial history, the financial vultures got it.


Regarding speculators some say 'ultra-secretive network rules independent oil trading' you might find this article interesting Although I'm still skeptical as it sounds like a conspiracy theory.

Regarding all commodities going up, it would seem logical to me that if oil goes up then most other other commodities would go up to as oil is used to produce them.

But actually not all commodities did go up that much sugar and frozen concentrated orange juice are still pretty cheap. Cotton too.

Another point regarding high oil prices, I also suspected it would crash (you can see my comments here or at seeking alpha). But didn't know exactly when. I do wonder if it was just coincidence that the US strategic petroleum reserve was filled a few days before oil peaked. I wonder if the US govt was the key speculator. (Some say China also filled their strategic petroleum reserve at the same time).

I'm not so inclined to blame the average pension fund or hedge fund that invests in oil futures, or anyone else that doesn't take physical supply.

Anyway thanks for your reasonable and polite reply.

Iron ore prices, after floating between $20 and $30 per metric ton from the 1970s through 2003, suddenly rocketed upwards after then, with the biggest gains coming after 2005. In August of 2008, iron ore prices came close to $200/tonne. Since then they have dropped dramatically, just like oil, natural gas, copper, and just about any other industrial commodity you care to name.

Why is that significant? It is significant because there is no futures market for iron ore. There is effecively no way to speculate on iron ore as a commodity. And yet it increased 8x or 10x, just like oil. All without speculators.

Unless you can show why iron ore is different from oil, natural gas, copper, etc, then I think the only reasonable conclusion is that iron ore rocketed because of supply and demand, and its price collapsed because of supply and demand, just like oil.

As far as I'm concerned, the case of iron ore prices disproves the theory that speculators were the major cause of either the run-up in oil prices or the recent decline.

I agree in the sense that commodities cannot have long term speculation. However with the crash of oil prices its far from clear that the market has correctly price oil for current and future demand.

Oil differs from iron in some key ways most importantly all previous production is consumed. For iron generally its used for durable goods as more iron is used the future demand is less. Also its recyclable.

Phosphorus and Potassium are more similar to oil than metals.

I of course believe that at the moment for a variety or reasons that oil, P and K are probably mispriced and will soon increase in a strong correction.

What your saying about a durable resource is even more profoundly true for disposable resources and if they are a supply constrained as we think they are demand will soon cause pricing pressures.

Hey Roger,

You are obviously bright and intelligent.

Your frenetic pace of telling your story was tiring to read, and difficult to tie together.

I agree with many of your points but your time-line makes it difficult to connect them.

In my opinion if you slowed down you would have very interesting opinions.

And Hey, nobody listened to JC until after they had strung him up. Most Artists usually get their credit posthumously.Why would we listen to you while you are still with us.

Regards Graham

"And Hey, nobody listened to JC until after they had strung him up. Most Artists usually get their credit posthumously.Why would we listen to you while you are still with us."

Yeah, my late father used to say, "there was but one perfect one on Earth and they crucified him", so the lesson was, be at least a bit of screw up...:-)

As to my frenetic pace, I have given up sugar and caffeine over the last year and it hasn't helped a bit...:-)


rc ? a relative of jc ?

and if you can "i told you so", so can i.

a few weeks ago, i had a conversation with my brother-in-law and as usual, we talked about stocks and investing. one of the companies we discussed was chk and i told him i didnt think it was a very good investment. and i told him that because i had looked at chk a while back and thought it was overvalued. that, and because it was a favorite of energy holding mutuals, not because i had any real insight into chk. i had no clue about the stock held on margin by the ceo.
so you see, sometimes you can be right and not know why. and i really dont feel very good about being right this time.

Chesapeake also has so-called knockout swap contracts on more than one-third of its 2009 production, and those deals don't obligate the buyers to take gas when prices drop to $6.28 per thousand cubic feet... if gas falls to $6 per thousand cubic feet, Chesapeake would have to sell $3.5 billion of assets.

If NG falls one cent from $6.29 to $6.28, Chesapeake loses a billion (just guessing) in projected earnings. If it falls a further $0.28, they have to sell off $3.5 billion in assets.

Isn't the definition of a chaotic system one where small changes in initial conditions lead to extreme changes in outcomes?

It looks like this and similar complex hedging strategies have created a chaotic financial system. So the world that they thought was predictable at the time they signed the contracts, has become unpredictable because of the very contracts they have signed.

In engineering one tries to create structures that fail gradually and predictably. The financial engineers have built catastrophic failure into the system.

No wonder they don't trust each other. They have no idea what will happen next.

In engineering one tries to create structures that fail gradually and predictably. The financial engineers have built catastrophic failure into the system.

No wonder they don't trust each other. They have no idea what will happen next.

I could be biased but I think that's a great call. We also 'inspect' things, and aim (through design) to be able to see faults with regular inspection before they are critical. (that's one of the tricky things about building planes out of carbon fibre instead of aluminium).

We need more engineers (and scientists) as politicians, but that's not something we can change overnight.

"We need more engineers (and scientists) as politicians, but that's not something we can change overnight."

Never Happen:

Engineers (and scientists) are too busy understanding how things work and controlling things for everyone’s advantage.

Politicians are busy understanding how people work and controlling them for their advantage.

Of course there are exceptions but few.
And to Roger Conner I say :-)

"Never Happen:"

oh, i dunno, herbert hoover was an engineer.

edit: and a distant relative.
edit again: and dont forget jimmy carter. even george washington was as close to an engineer as there was in 1776, surveyor. and sure as hell someone on here can name others.

Of course there are exceptions but few.
Roscoe G Bartlett....1?/535

yeah the jimmy carter who started us on this road with the Community Reinvestment Act.

Wait a minute...your crew have been all over the net blaming the community reinvestment act on Bill Clinton in 1995. (And neglecting to mention that the Republicans took over Congress in 1994 You don't get to blame it on Carter too. Of course I am an engineer...

I'm not part of any crew...but I think that most politicians in both parties don't really consider the unintended consequences of the legislation they make. I believe most of them actually have their heart in the right place but usually fail to take a look at the other side's point of view.

A good example, although I'd hate to stir anything up, is abortion. I would say a lot opponents of abortion think of most children as having good parents and can't comprehend how a lot of screwed up parents exist. I would also bet that most proponents of abortion tend to have seen a lot of poor parenting and kids in situations that promote crime, welfare, bad debt., etc.

This might get me in trouble but I see a lot of blame for this financial mess going to the fact that we live in a form of democracy where decisions are made based on 2, 4, and 6 years or less in the future. During the bailout voting, I heard a lot of "I can't vote for this, my constituents are overwhelmingly against this and the election is coming up." It wasn't I think this is a bad decision. That is the kind of environment that sets the government up for poor decision making. Add in the fact that having that sort of power is by its nature "intoxicating" and you really have a recipe for disaster. We criticize politicians for "flip-flopping" when we should be encouraging intelligent debate that has the potential to change minds of our political leaders.

Do these presidential debates have the potential to change leaders or voters minds...NO. All they are are memorized speeches broken into 3 minute segments. I can't believe people actually watch them, you already know what questions are going to be asked and what their responses are. Don't worry if they say something stupid you will see it on Letterman, SNL, or on the daily show with John Stewart.

I would argue democracy doesn't necessarily get any better government than a monarchy, it just makes it easier to get rid of whoever is in charge.

The notion that owning a house is good for everyone is a bad idea, the notion that going to college is good for everyone is a bad idea. Redlining is bad, but creating an environment where there is a financial incentive for lenders to take advantage of what I may "close-mindedly" label as stupidity is also bad. Does my fellow engineer Jimmy Carter's get some of the blame? Yes he does, but i will admit its easy to be a monday morning quarterback and i sure as hell wouldn't want the responsibility of being president.

The most recent that comes to mind is Jack Ward Thomas. Imagine that, a career biologist-wildlife-as head of the Forest Service. The GD politicians ate him for breakfast.

The whole debacle is extremely distressing. On the last day at Sac ASPO, a board was put up for guesstimates of where the DOW would end. I don't think we really considered it's effects on energy, of the spillover extent. I think the attitude at the conference centered on the mess was poor financials, but with longer term energy effects. I didn't get any sense of the urgency, of the swiftness this has progressed. Certainly none of the financial talks were yelling run for the doors.

I've alot of anger with the McClendons of this mess. Anyone recall Nick Leeson at Barrings Capital? He was vilified and imprisoned for his actions, if I recall correctly. The same should go for today's rogues. Of course Leeson was a lowly trader, and he should have known better. :-)

"Hey Rocky, watch me pull a rabbit out of my hat."

Not all oil and gas compaines are the same, nor are their leaders.

What kind of companies were Chesapeake and XTO?

1) They were not companies that grew in a controlled manner, with a substantial amount of their growth financed by internally generated cash flow, but companies that grew by huge stock offerings and borrowings. Thus these companies grew to a huge size almost overnight before the linchpin of their spectacular growth--"from shale to shining shale"--could be put to the test of time. I have commented on numerous occasions here on TOD that I beleive the shale and other resource plays were perhaps the oil industry's answer to "subprime loans." Chesapeake and XTO have both booked huge reserves from these shale plays. Are those reserves real assets? Or will they prove as "real" as the "subprime loans" that were on the books of many of the banks that we now see imploding?

2) They engaged in all sorts of high-risk speculation in the futures markets. Again, this has its counterpart in the banking industry in those banks that engaged in the $50+ trillion derivatives market. These instruments are so arcane that no one really knows what sort of libabilites Chesapeake and XTO might have lurking on their books. There is no transparency.

What kind of leaders were at the helm of Chesapeake and XTO?

1) I think the words "arrogant," "greedy" and "self-serving" pretty well sum it up. Look at the hundreds of millions of dollars of salaries, bonuses and stock-grants these men have awarded themselves over the past six or seven years. The compensation that heads of much larger companies like Exxon/Mobil, Chevron or Conoco/Phillips have received pale in comparison to what the heads of Chesapeake and XTO received from their stock holders.

2) In the Republican Party's drive to dupe Joe Six Pack into voting controversial wedge (social and racial) issues over pocketbook issues, Aubrey McClendon was out front leading the parade:

The millionaires who've turned to this state's left-leaning Legislature to authorize a $300 million tax subsidy for a new basketball arena have been playing right-wing politics.

Two members of the new Sonics ownership group are heavyweight financiers of a national political group dedicated to banning gay marriage.

Together, co-owners Tom Ward and Aubrey McClendon donated more than $1.1 million to Americans United to Preserve Marriage, a conservative Christian group that opposes gay marriage.

Dr. Martin Luther King was most articulate in denouncing this sort of politics:

It is unfortunate, indeed, that at this time the leadership of the white South stems from the close-minded reactionaries. These persons gain prominence and power by the dissemination of false ideas, and by deliberately appealing to the deepest hate responses within the human mind.

Martin Luther King, Give Us the Ballot, We Will Transform the South

3) The irony of right-wing, free-market fundamentalists like McClendon out rattling the cup, begging for a $300 million tax subsidy for a private business, will also not be lost upon astute observers.

Of course we all pay for the actions of persons like McClendon and Simpson. Bob Herbert said it well this morning in the NY Times:

The G.O.P. has done a great job masking the terrible consequences of much that it has stood for over the decades. Now the mask has slipped [and] we survey the wreckage of the American economy and the real-life suffering associated with the financial crackup of 2008...

I believe Gail the Actuary is on the right track in her comment above, pointing out the small portion Chesapeake's and XTO's production is to the national total. I follow oil stocks fairly closely and believe that, in the world of oil and gas producers, the Chesapeakes and XTOs are the exception, not the rule.

But while this may be comforting to investors in the domestic oil and gas industry--that we may not see the same kind of meltdown in this industry that we have seen in the banking industry--this nevertheless does nothing to ameliorate the disappointment many may feel at the demise of the idea of abundant natural gas, of the dream of "shale to shining shale."

1)Shale gas is for real. And it is cheap. But the payoff structure is highly capital intensive - lots of upfront capital and its estimated that Haynesville central plays will cost $1-$1.50 per mcf - but almost all of that is up front.

2)You are absolutely correct in that these 2 firms are different. They grew business by acquisitions, and financed these acquisitions. However you are incorrect that the rest of the business can carry on without them - they operate 12% of the natural gas rigs.

3)Haynesville is the last cheap nat gas jewel that we have and we ought not waste it on electricity but on things that electricity cannot do (like Haber process fertilizer and plastics, etc.) Marcellus is already running into water restrictions. 2008 was a new peak (probably) in US gas production. But it will be THE peak.

Nate, thank you for your reply.

In response:

1) I suppose that depends on what you are referring to when you speak of "cheap." Natural gas, on a BTU conenet basis, is certainly cheap. On an equivalent BTU basis, with oil at $78/barrel, gas would need to fetch $13/MCF.

However, I am highly skeptical that the Finding and Developing costs of the Haynesville Shale are only $1 to $1.5 per MCF. If I am not mistaken, only a handful of wells have been drilled in the trend, all very recently, and there has been precious little time to evaluate the performance of those wells. (And as a petroleum engineer who spent a lifetime in the oil and gas industry, I do know a little bit about what I speak.) Could this not be just more hype coming out of the XTO/Chesapeake noise machines?

In a presentation Helmerich and Payne made with the release of its Q2-2008 report, there was some information on F&D costs for the 20 largest natural gas producers in the U.S. The 3-year group average for the years 2005, 2006 and 2007 was $2.89. Looking at the graph, it looks like Cheapeake came in at about $2.90 and XTO at about $1.80. An examination of more recent financial statements shows those costs to have increased significantly over the later years--that is the cost in 2007 was greater than in 2005.

Don't get me wrong. I am not saying that the F&D cost for the Haynesville Shale is not $1.00 to $1.50. What I am saying is that if it is, it is considerably less than the demonstrated, proven industry average, and these costs are estimates, not proven, demonstrated results.

I also seem to remember that here a few months ago Chesapeake layed off about half its Haynesville Shale properties, I think it was to Plains Energy. If it is such a hot play, why would they do this?

You need to remember that when it comes to promoter wheeler-dealing, the bankers don't have anything on the oil men (again spoken by a person who spent a lifetime in the oil and gas industry).

2) Again, it depends on how you define "the industry." As I stated above, I think the Exxon/Mobils of the world as well as the better managed domestic independent oil and gas producers will do just fine, and by this I mean they will survive--they will not be forced into bankrupcy and liquidation in the current financial storm. And for those that survive the clouds have a silver lining.

Now if by "the industry" you are referring to contractors and service companies, they may have a tougher go of it.

But the pain of the service industry may work to the benefit of the surviving oil and gas producers. Idle rigs and other equipment may drive down what they can charge the producers, bringing the finding and production costs down for the producers.

We can almost certainly rest assured that U.S. natural gas production will now go into a steep decline. This should help drive up the price of natural gas. The producers who manage to survive the storm will be big winners. I'm in full agreement with westexas and with the optimism he has expressed about the long-term prospects for the business, for those who survive.

Now for people like yourself who concern themselves with macroeconomics, with things like national natural gas production volumes, does this capitalistic way of doing things result in optimal performance and efficiency for the nation's oil and gas industry? To that I must resond I don't know.

3) I'm in total agreement. It is incredibly stupid to waste natural gas to generate electricity. But again I think the process we use to allocate natural gas to such a stupid use is capitalism and the free market system.

But where we have tried other allocation processes, such as the political allocation process used in the corn-to-ethanol fiasco, it hasn't proven any better.

So what's the solution?

This may be a problem with no solution. At least not one that is politically tenable for 300 million, or 6.8 billion. I have no idea what the G7 will come up with this weekend, but I doubt much that energy is being discussed - the economists will say that energy prices are low, signalling we have plenty of product - the real problem is banks, etc.....The actual real problem is natural capital, declining energy surplus and a system that was allowed to leverage itself with 'digits' that had no relationship to real capital

The only immediate answer to 'start' with is disallowing anything more than 10:1 leverage, after an unwinding grace period, so as not to continually have rhinos and elephants head for the exits. Beyond that we have to convey the difficult message that infinite economic growth is impossible. We will need Madison Avenue in all their glory using the billions they have been paid to research human neuromarketing to send a media message that people are NOT happier with 'more', and that most of what we make/buy, after a quick dopamine surge, ends up in the garbage dump. Repeat. Someone in government needs to draw the line between basic necessities like food and energy and non-essentials. The non-essentials should be taxed and /or eliminated. We also should have a massive renewable stimulus program. Take this financial crisis as an opportunity (after 9/11 our President told us to go out and shop to solve the nations melancholy).

New Deal programs and federal relief efforts of the 1930s provided jobs and funding that contributed to the construction and improvement of roads throughout the country. In Wisconsin alone work completed under the Emergency Relief and Construction Act of 1932 totaled 227 miles of construction, including 160 miles of grading, drainage, and concrete surfacing (

Energy should be at the top of our list of priorities. Right now an average domestic photovoltaic system will cost $8 - $10 /Watt. Large-scale solar electricity plants average $3- $4 per watt of capacity ( Total capacity from all fossil fuel electric generation is 850 GW ( Wind is even cheaper. So investing our "bail-out" money into renewables we can replace 1/3 of our fossil energy consumption, certainly all petroleum and most of the natural gas. This will also create jobs and expertise and produce a good return on the investment from ecosystem service 'interest' provided from the sun. Certainly something like this is a much better idea than simply sending out $600 checks like was done this spring.

In the end, we need lots of changes. Many will not be popular, but will be necessary. As Heinberg said earlier this week 'A crisis is a terrible thing to waste'

..but I doubt much that energy is being discussed - the economists will say that energy prices are low, signalling we have plenty of product..

Nate, on that one I think I would have to say I disagree.

I think when Dick Cheney made the decision to invade Iraq, despite the public face he may have put on his reasons, "real capital" was very much first and foremost on his mind.

And did you watch the presidential debates on Tuesday night? I think both candidates are very atune to the fact our economic problems cannot be solved unless we solve the energy problem. And I thought that there were some fundamental differences in how they want to set about solving those energy problems. With McCain it's "drill, baby drill," Nuclear with a capital "N" combined with a continuation of our tradition of crusading militarism. With Obama it's a single "drill," nuclear with a small "n" plus a move to sustainable alternatives. Was conservation mentioned? I don't remember. Anyway, I think maybe they are both overly optimistic, at least publicly, as to the ease with which the problem can be solved. And I think they are both loath to abandon the "happier with 'more' " paradigm.

The banking problems? They are more circus than anything else--ephemeral (5, 10 years?) if the underlying energy dynamic can be successfully addressed. I think both candidates know that, even though they may not be explicit in articulating it.

We've been here before. The Great Depression marked the end of America's geographic expansion. As Frederick Lewis Allen put it, writing of the year 1937:

Still there was a chance for a far richer development of the country, and the chance was most visible west of the Great Plains. Yet if this development was to be durable, the new pioneering must be more disciplined than the old. The hard fact that the days were over when Americans could plunder and move on, stripping off forests, ripping out minerals, and plowing up grasslands without regard to the long consequences...

Frederick Lewis Allen, Since Yesterday

Following the Great Depression we entered upon another era of expansionism, not geographic like before, but of an abstract "sphere of influence," whereupon we helped ourselves to the resources (oil, minerals, and agricultural products) and, more recently, the human resources (cheap labor) of the rest of the globe. I believe (McCain certainly does not, and perhaps Obama doesn't either) that this era of what I call neo-colonialism is now drawing to a close.

Our current "bank" problems mark the end of the expansion of this area of influence, just like the Great Depression marked the end of the expansion of our geographic area.

This represents a complete paradigm change for the United States. Can we overcome it and settle into more of a European type of existence?

For a historical example of just what we are up against I highly recommend J.H. Elliot's Imperial Spain: 1469-1716. In it he sets out the great difficulties a nation faces in weaning itself off the crusading militarism a la 16th-century Spain or 20th-century USA to a more central/northern European type industrialism:

All the signs therefore seem to indicate that in the early sixteenth century there were very fair prospects for the development of a dynamic 'capitalist' element in Castile, which--like its equivalent in England or Holland--might gradually have imposed some of its ideals and values on the rest of society. The fact that these prospects were not realized would suggest that at some point adverse circumstances proved too strong, and that the enterprise of north Castilian bourgeoisie failed to withstand serious change for the worse in the country's economic and social climate.

It is clear that much of the responsibility for Castile's economic failure needs to be sought at a higher level than that of the entepreneur--with the Government rather than with the businesman... [I]t seems to have escaped the notice of the Government that a more logical method of dealing with the problem would have been to foster the growth of industry at home... But the most serious failure of all was the failure to devise any scheme for using the supply of American silver for the benefit of the Castillian economy. While the responsibility for this failure lay immediately with the Council of Finance, it was ultimately bound up with the much wider question of the means employed by Charles V to finance his Imperial policies.

P.S. Excellent interview of George Soros by Bill Moyers that speaks to some of these issues:

BILL MOYERS:One of the British newspapers this morning had a headline, "Welcome to Socialism." It's not going that way, is it?

GEORGE SOROS:Well, you know, it's very interesting. Actually, these market fundamentalists are making the same mistake as Marx did. You see, socialism would have worked very well if the rulers had the interests of the people really at heart. But they were pursuing their self-interests. Now, in the housing market, the people who originated the houses earned the fee.

And the people who then owned the mortgages their interests were not actually looked after by the agents that were selling them the mortgages. So you have a, what is called an agent principle problem in socialism. And you have the same agent principle problem in this free market fundamentalism.

BILL MOYERS:The agent is concerned only with his own interests.

GEORGE SOROS:That's right.

BILL MOYERS:Not with...

GEORGE SOROS:That's right.

BILL MOYERS:The interest of...

GEORGE SOROS:Of the people who they're supposed to represent.

BILL MOYERS:But in both socialism and capitalism, you get the rhetoric of empathy for people.

GEORGE SOROS:And it's a false ideology. Both Marxism and market fundamentalism are false ideologies.

BILL MOYERS:Is there an ideology that...

GEORGE SOROS:Is not false?


GEORGE SOROS:I think the only one is the one that I'm proposing; namely, the recognition that all our ideas, all our human constructs have a flaw in it. And perfection is not attainable. And we must engage in critical thinking and correct our mistakes.

BILL MOYERS:And that's one...

GEORGE SOROS:That's my ideology. As a child, I experienced Fascism, the Nazi occupation and then Communism, two false ideologies. And I learned that both of those ideologies are false. And now I was shocked when I found that even in a democracy people can be misled to the extent that we've been misled in the last few years.

Riveting discussion - Nate / DownSouth.
Must agree prima face no way that roll-out of America / American Way can encompass 6 or 8 billion planet. (Highly modified versions might prove useful here and there.)
Could it be that 'wheeler dealing' (see Oil Men trumping Financials, example above etc.) is going to be what determines events, good and/or bad, rather than the fatality of the hedonistic 'pull' of consumption? Combat psychology and tactics as in 'buddy'groups, and 'in-group thinks', are powerful stuff. Bling is just medals and insignia?
Cultural modes and social mechanisms that made USA successful might actually become the ones that pull the culture down - despite the good sense of your overview and obvious need 'not to waste the crisis'? See also debate with ThatsItImOut up thread.

Perhaps some of the other players can do well without Chesapeake around Nate. As a consultant of one of the other big UNG players I'm sure my guys would be glad to pick up those rigs (assuming the credit crunch doesn't slow them down). Not having CHK around paying upwards of $25,000/acre in the Haynesville Shale won't hurt either. And even more important: if CHK isn't out there replacing their rapidly depleting NG wells we should see some additional price support for NG just as demand destruction might be taking the edge off.

I am sympathetic for the employees at CHK. I've had more than one company shot out from under me by arrogant management. But we all know the risk when you run with the "new money" types. And almost without fail, those failures came from trading on the futures side of the game and not the E&P side.


Do you have a particular favorite company in the UNG area?


Being a consulting insider I never make recommendations. But they're not to difficult to evaluate if you stick with the heavy NG companies. Just study the essentials like you would any other stock. For the moment, any way, it looks like Wall Street likes the energy stocks again. One I just noticed was Devon....right now they're up about 20% from just 4 days ago. With the NG stocks remember we haven't begun the winter heating season yet and NG is selling right now what is was selling for las Jan. The the NWS forecasts a colder then normal winter (but I never use such optimism in my expectations).

That is crap (IMO)

Can you show us the Math?

Just one question: Why has the board of directors not already demanded the resignation of this clown?

Because they would likely have to pay him hundreds of millions to exit. Just like the clown CEO who recently having only spent 18 days on the job walked away with something like $116 million in severance or due to end of his 'contract'.
And right now they might not have that much cash laying around.

This suckers are worse than the Mafia.


There is no reason why if the taxpayers can suddenly find that they are liable for losses which they had nothing to do with incurring, that execs should not be made taxable on monies they have received via these sorts of agreements where they have manipulated the system so that they can gut the companies they would for and walk with tens or hundreds of millions of dollars.
A tax rate of, say, 125% should give them a more genuine sympathy or at least closer acquaintance with the sufferings of those who will loose everything from this mess.

Their passports should be taken and accounts frozen whilst a determination is made as to possible charges for gross negligence.

Gonna put a hurt on T. Boone's plan for CNG vehicles.

Guess Aubrey won't be making any more TV commercials...

I agree whay wasnt this clown tossed out to the curb? Should have been booted a LONG time ago.


Your link doesn't work.

Maybe someone has already noted this, but check McClendon's transactions...

Ouch...Maybe dropping $40 million in July (and much more earlier) was an attempt to prop up the billion he already had in CHK stock, but ....ouch.

Makes the 39 million I've lost this month look good. ;)


Simply amazing. It brings back memories. I saw transaction histories like this with a few guys worth hundreds of millions at Salomon Brothers. One guy deposited $5.5 million and bought leveraged 30 year treasuries during big rally in 1992-3 and as we he was making money he bought more and more - eventually he owned 500 million in treasuries and had turned the $5 mil into $120 million. He kept buying on way down in 1994 and eventually the margin clerks instructed his broker (who sat next to me) to blow him out. I think we wired him out $2 mil after all was said and done.

The brains 'feeling' from all this is identical to someone playing online poker at 25 cent limit tables. It is not about the absolute but the relative.

And if you really did lose 39 million in last month, my condolences. I know you are not alone.

As an aside, what do you think Mr McClendon was thinking adding $100 mil in CHK stock at $40, at $45 and $50 and $59, etc. in July? (traded as low as $12 yesterday) Have the future prospects for the industry and natural gas prices gotten better or worse since then?

The California lottery is 41 million tonight. So if I don't win that, I will have an "opportunity loss" in this ballpark. But not to worry...I'm not in an income bracket that allows losing millions. One of those laws of thermodynamics.

But yes...what was he thinking? No where but up, or or trying to make/corner the market? If he had any confidence at all, one would think that CHK is worth more than it is now selling for and his misfortune should be someone's benefit. Even if CHK goes belly up, it isn't like all their assets will be tossed in a bonfire; someone else will buy them (credit problems aside) and keep moving gas. It will be interesting to see how the events of the next 2-3 months unfold.


(edit) Someone in another thread recommended a book a week or two ago. The nice folks from Amazon just delivered it. Egan's "The Worst Hard Time". A tale of the dustbowl years following the crash of '29. Scarey and excellent read. yikes.

A dust bowl picture from Pampa, Texas where Boone Pickens plans to build windmills.

I'm shocked that these fine upstanding NG companies turn out to be ponzi schemes.

Well, I am Shocked! Shocked! that there was gambling going on.

Out whole economy is based on a ponzi scheme.
Capitalism need to grow or die. This is impossible in a finite environment.
Any smart ten year old can predict the outcome.
The question at this point, is who will be the one holding the last buy that is worthless?
The second law is about to kick some azz! It is hilarious to watch the micro world of finance play it's game out, with all the complicated rules that are meaningful only when everyone agrees they pertain.
This will soon end.
"Some day this war will be over"

Is there an economic law that Capitalism must grow or die? Do you not expect pockets of Capitalism to thrive during the dieoff or will governments care for dieoff participants? Were there not examples of Capitalism at work in Kunstler's novel World Made by Hand?

I just finished World Made By Hand-- More like feudal serfdom in Kunstlers vision.
Capitalism is ownership of the means of production, where the difference between user value and exchange value a profit is extracted. This always is with labor, and the labor is exploited, or a profit can not be extracted in the exchange. This also inhibits creativity, as one does not have control over the process, profit does.
In World Made By Hand one had craftsmen and women trading, selling and bartering, but in control of their own production, and no one extracting wealth out of their labor. The feudal serf world is trading safety for freedom of action.
Capital cannot say still, so it has to grow or lose it's value-- Expansion is built into the very process.
Take a look for yourself-- Are companies getting bigger and more concentrated? Are more or less resources being used?

Matthew Simmons said:

...In the E & P business, you get companies like Chesapeake, for instance, who have an unbelievably high talent, quality senior management, and they basically figured out a decade ago that the only way you grow production is by monopolizing drilling rigs and drilling like crazy. And so they’ve had double-digit production growth in their natural gas while almost every one of their peer group is in decline. I guess that’s one thing that I would observe in forty years of energy investment banking is that management matters.

I have a very high respect for Matthew Simmons and I truly believe he was right.

The CEO took the hit for the margin call. The sell off forced the stock down way more than the fear market could have done on its own. The hedging contract will likely be honored, as Morgan is combined, rescued, etc. This company is selling for about a 4 PE ratio. Worst case is that it is stalled out for a year and reaps major returns as NG goes gangbusters in 2010/2011. CHK looks like a screaming steal. Can anyone point out why this stock does not rebound to 25 next week?

well, for one thing that 4 pe is the forward pe. the ttm pe is negative.

"Can anyone point out why this stock does not rebound to 25 next week?"

it very well may return to 25 next week, imo. then again, this may not be the bottom or we could find out all kinds of creepy things about this company.

the $25 call for 10-18-08 was trading at about $0.20.

These companies are a joke and in my opinion shale plays if they are exploited at all will be small players in the long run.

You cannot run a company off wells that deplete 50% the first year.

If this was possible we would be drilling every little whiff of NG and oil that existed.

if one likes ng companies drilling wells with rates that drop by 50% the 1st yr, then one would have to love the bakken oil play where rates typically drops by 75% the 1st yr. the 2nd year doesn't look much better. some of the wells being completed though, pay out in a few months, but definitely not all.


You make some valid points but there's more to the story then the rapid decline. The shale gas plays are, for the most part, tremendously profitable. You may recall that I consult for on the big players in unconventional NG. Yes….rapid declines which does present a big negative factor with regards to any company’s ability to increase its reserve base y-o-y. This is a critical factor in stock valuation. But let’s look at the profitability. With improved fracing technology we’re consistently getting payouts of 12 months or less. That essentially equates to a 100% rate of return. For those that aren’t familiar with discounted cash flow economic analysis I’ll offer a real life example: drill, complete and frac a Haynesville Shale well for $8 million. The well comes on at a high rate. In 12 months your net income (production sales less royalty and operating expenses) is $8 million. True that revenue will fall to half or less than you averaged the first 12 months but remember you’ve already recovered 100% of your investment. Which means that you have virtually no money invested in a project that will produce you $4 million the second year. $2 million the third year, etc. By the way, after you’ve recovered your $8 million investment after the first year you spend it on a second well that produces the same results.

How many here have made an investment in any instrument or company and recovered that total investment in 12 months or less? And still have an investment generating significant additional income. A rapidly declining investment for sure but one in which you no longer have money invested. Again, such plays represent a problem for public companies trying to grow a reserve base against such a decline race. But imagine how this investment profile looks to a non-public company. If you know what you’re doing at the technical level, your essentially running a money printing press. I’ve never research the financial side of CHK. Despite the CEO loosing his butt they may be in great shape…or not. The market has overly down graded the NG companies IMO. Perhaps CHK should have taken a hit in its stock value. But so have my guys and that makes no sense what so ever from a technical level. In my 33-year career I’ve had my share of companies collapse under me. And with no exception it has always happened because management made errors playing the futures markets. It has never been because they failed on the E&P side of the equation. In the early 1990’s I helped start a small E&P company. Our first profitable year generated a $3.5 million profit from operations. But we lost $4 million on a NG hedge because our president “just knew NG prices would stay up”. All our technical achievements were lost because of a gut gamble. But we recovered and continued to be successful. So successful we became the target of a successful hostile take over by Carl Icon. Another sad story I won’t go into. BTW, Icon lost his butt within 2 years because the first thing he did was eliminate the technical staff. And he’s supposed to be one of the smartest guys on Wall Street.

i'm just wondering rockman, is that $8 million first yr revenue an average or even typical ?


I haven't seen enough data to offer an average. Given production records in TX are public we should have some usable numbers to characterize the play in 18 months or so. I used $8 million for illustrative purposes. But I've seen initial flow rates reported as high as 20 million cubic ft/day. If such a well declined 50% the first 12 months that would still average 15 million/day for that first year. At $7/mcf that would be $38 million gross or around $26 million net. The sruff that dreams are made of.

Deau deau time....I'll address your comments tomorrow memmel.

we see that also in the bakken oil play. things are happening so fast that the play may be over before we figure out if it is economical. the sweet spots provide good short term economics.

this is exactly what happened in what has been refered to as the bicentennial-elkhorn ranch area of the 90's.

18 0r 24 months out, some of the wells are still declining at about 60% per yr.
most of the economic models i have seen assume a hyperbolic decline with a long tail and as far as i can see, it aint happening(yet).

Rockman I disagree. Farming for example returns a profit year end and year out covering costs until it doesn't. Given what your saying farming should be immensely profitable. They basically get the same out of production. In general construction works the same way in less then a year if you build a house you recover your costs and make a profit. Certainly some years don't work out this way but countless industries work by making a large investment and recovering the cost shortly therafter.

Lets look at farming again growing corn for example depletes a field of nutrients very similar to what happens with UNG next exactly the same but if you grew corn in a field for five years strait the field would be worthless at the end of that time.

It does not work in farming and it does not work for UNG. Right now we are just really leaving the first five year Cinderella window for UNG and are dealing with the issue that we have to drill as many wells as exist just to stay even as you mention you can't increase production.

Who finances these new wells ? Where does the money come from. If a UNG well costs 8 million to drill and produces a profit of 8 million 4 million 2 million. The well only produces a net profit of 6 million not enough to drill a new well or grow. You really need the wells to produce 24 million in profit so each well can finance 2 more wells and then some.

The point is every well has to pay for 1-2 more on average. And you need a healthy number of 24 million dollar payout wells to make it.


While I really respect your opinions, you are flat-out, dead wrong here. Historically, there are hundreds of examples of wells that decline 50% in their first year. Many Gulf of Mexico wells produce for 3-5 years with a decline of 50% in the first year. THESE ARE CONVENTIONAL GAS WELLS.

Your post would be accurate at low initial production (IP) rates At very high IP's it would be inaccurate. If you can get payout in 18 months, then the rest of the net revenue is 'gravy', even if it is small.

I believe that recent F&D costs for most unconventional plays are in the $6.50 range, but the Haynesville is anomalous because of the existing conventional infrastructure. I believe the F&D costs in the Haynesville are under $5/mcf.

Fine show me that these are long term profitable wells and I'll agree.

Any resource that declines at 50% a year is of marginal use within 5-10 years.

Basically every four years you have to drill as many wells as you have ever drilled in the preceding years to just stay even much less grow.

I think you will find that this entire industry will collapse over the next couple of years all the rapidly depleting plays will soon not be developed.

It seems what people are missing is they don't look at the ever increasing population of declining wells that have to be replaced once the growth stops the money stops when the money stops the drilling stops when the drilling stops production crashes.

Then if your lucky prices increase dramatically but they can't go that much higher then the world LNG prices so there is a upper limit. The strong price increase may induce more UNG drilling but now it has to make up for all the wells not drilled during the shakeout which it can't do so its a rinse and repeat of the same sequence but at a lower peak point.

Eventually of course if it makes sense vs world LNG prices some UNG production will be produced by a few players at a steady state yearly rate. Enough to make money but not a big contributor to US NG my best guess is 2-4%.

The problem is the very success of these types of resources leads to a boom bust cycle. You can't see the forest for the trees. The dynamic is exactly the same as a population explosion and crash.

UNG will crash and crash hard over the next year are two. When it does please remember who told you it was following population crash dynamics.

I can show you production economics for individual wells in many plays. Shale gas is really not that different than conventional natural gas production. Shale gas wells are typically shallower, but horizontal rather than vertical. Stimulation costs are higher, but, platform and drilling costs are usually lower. Production profiles are not that different from conventional plays.

If a typical well costs $4MM, it would probably be expecteed to produce at least 4bcf during its 5-10 year lifetime, with probably 70% of that production in the first 3 years. THe remaining 30% in 'out' years.

Your comments on reserve replacement are true, but they apply to any gas project.

Well we can certainly assume that your correct. If I'm correct then then a good bit of the Natural Gas industry in the US is going to be facing some serious problems in the near future its not just a unconventional problem.

Note that the fast depleting off shore oil fields face similar problem.

The underlying reason of course is that these swift declines make it exponentially harder to maintain production much less grow it.

I like to liken the situation to slash and burn agriculture it works in the short term but long term or basically widespread adoption of the method is intrinsically destructive and it will result in crashing production.

The same holds true for rapidly depleting wells as more and more production comes from these types of wells the system become ever more unstable and poised to crash.

Every example I can think of that has similar dynamics is known to be unstable.

i dont disagree with you

I think it is important to separate profitability (for the NG exploration companies) from sustainability. A company can make money playing shale gas for a period of time, but at some point it won't be able to replace reserves. These companies are not thinking more than a few quarters into the future, so I doubt they care about long term reserve replacement.

i dont disagree with you

I think it is important to separate profitability (for the NG exploration companies) from sustainability. A company can make money playing shale gas for a period of time, but at some point it won't be able to replace reserves. These companies are not thinking more than a few quarters into the future, so I doubt they care about long term reserve replacement.

quick pay-out wells, oil or gas, can offer attractive pw economics and this can be good for the next quarterly report, but is it sustainable ?

and i am reminded of paulson, when he was 1st appointed he made a trip to china, encouraging them to modernize their financial system.

Heck memmel...let's just say these wells are completely worthless after 5 years....forget 10 years. Easy model: drill one well every year for the $8 mill I showed above. Generates $8 mill net income Y1. Then $4 mill Y2 (50% decline), then $2 mill Y3, then $1 mill Y4, and finally $0.5 mill Y5. After Y5 we’ll assume no more revenue (not true but let's keep it simple). Thus at the end of Y5 the $8 mill well has generated $15.5 mill income. Now let's drill one well per year. We take the cash flow from the 1st year of Well 1 and drill Well 2 the second year, then drill Well 3 the 3rd year with revenue from Well 2. Do the math: at the end of 5 years there is a sustained net income of $7.5 mill ($15.5 - $8 mill cost for the next well).

Let's now say you have 100 UNG locations. Easy enough given there are many thousand out there being leased right now. Thus for the next 95 years you have a sustained net income of $7.5 mill/year after Y5. That's over $700 million in net income. And this is from a single investment of $8 mill. Remember: all the drilling after the first well is paid for from cash addition investment $'s.

UNG not profitable? Name another investment that returns 100% of your investment in 12 months and then delivers perpetually almost as much net income every year.
Also remember that UNG is some of the lowest risk projects in the history of the oil patch. Certainly some won't meet the economic model. But some will also deliver 2 or 3 times the values also. On average the model is a good representation of where we're at right now. Given another 5 years of drilling we'll have even more evidence to analyze.

But I completely agree with your thoughts on the inability of public companies to sustain GROWTH with this model. I've gone into great detail on the subject in the past. But I've never said UNG was a way to grow company's reserve base indefinitely. No such play exists. But no such play has ever existed. The mega fields of the Middle East were't capable of unlimited reserve growth. And that's what we call PO. But that doesn't reflect on the profitability of UNG. Would you or anyone else here not jump into the previous investment model I just presented. That’s a far different question then would you buy into a UNG public company as a long term investments.

Rockman I agree I did not have real numbers but I figure out a similar scheme.

However UNG has been portrayed as the next great hope that will provide abundant NG supplies.

The dynamics however are fascinating you can have a sort of sustainable model with steady production rates and steady profits or a boom bust model all depending on how you decide to drill. I think its becoming obvious that a lot of companies chose the boom bust approach I assume primarily for investment.

The positive side is that given the dynamics we probably have plenty of NG to make critical petrochemicals such as nitrogen fertilizer. This is whats important. The bad thing is its not clear how much we can depend on NG as a fuel going into the next couple of decades.

Just to expand my conclusion so far is that our society will be taken down by Natural Gas shortages not oil shortages. Once we run low globally on NG the party is over.

So its pretty interesting how North American NG extraction goes. I've pretty much settled on it being the Ghawar for the world economy once NG production collapses here in North America thats it the entire world is toast and LNG sources simply cannot meet additional demand from North America. Oil is not the weak link in the global energy construct its North American NG.

This could easily be two decades out it could be ten years it all depends on the details but the end result is pretty clear for me at least.

Just wanted to let you know that when you guys hit the wall our civilization is probably over :)


would love your thoughts on fst/tlm and small companies (gmr, qec...) in the quebec lowlands shale play that has incredible economic. Seems with the expected reduction fron CHK and others that plays like this one become even more viable. Would love to hear your thoughts.

This is not a forum to discuss pros and cons of various stocks, but reading I do think this news is incredibly bullish for natural gas - much of it psychological. The greater issue at stake, which I've written about here for years is the the volatility in natural gas paralyzes policymakers from planning for NG's long term best societal use. Low nat gas prices signal long term abundance so we build more electrical plants.

In sum, its clear there has been a global margin-clerk exacerbated margin call on energy stocks, which at the margin will reduce supply due to capex cuts, rig availability, lack of bank credit etc. NG is going back up, sooner rather than later, and possibly alot. I could see $15-$20 mcf floor in less than 24 months. Same logic applies to oil but a)oil is international market and b)oil has higher price elasticity than NG so global depression will reduce oil demand more than north american NG demand. (If time permits, I'll try to do an analysis on that, but if anyone would like to take that up as a guest post it would be great)

One more instance where appetite for risk knew no bounds... must have been something in the air...
Say what you will, McClendon was a true believer.

Great discussion, ng could be a buy, but so could lots of e&p's... the question is, how many more forced sales are in the q?

I wonder just how much more we will hear of these kinds of events, Mr. Margin (and others) calling...

Wonder when the banks and hedgies' (is there a difference?) finish unwinding...

Good evening Mr Roger Conner Junior, I think from your interesting comments you are saying that we may have hit the bottom of the latest economic boom-bust cycle. I wonder if we had a bit of overshoot on Wednsday 8th Oct when the Dow bumped a bit due to General Motors shares falling in price, causing a Bear-Rush in nervous stock exchanges right around the world. Hence this would be the best time to be buying shares for the next 10 years. But one would need to pick what business was going to recover from the Bear-run over-shoot.

"But one would need to pick what business was going to recover from the Bear-run over-shoot."

M_Heath-Caldwell, I agree with your overall premise, but here's the problem: Fistly, how long can the "trough" at the bottom last? I remember the 1970's all too well, when the bottom lasted for about 12 years or so. Inflation adjusted we are already about half through that long on this downturn, so the bottom could be getting here, but even a small misjudgement in timing could mean sitting for a few years at current prices, even the prices do not drop more.

Second issue: What if I am wrong and you decide to be wrong with me, and we still have a good bit more to drop? Then you are into the problem of "trying to catch a falling knife", and getting cut to pieces doing so.

And the third point is the one you mentioned, what businesses are ready to bounce back from the overshoot?

Here are the closest things to real "hedges" (not those fake "hedge fund" hedges, but really playing for safety) I can come up with, but this is just me...I wouldn't recommend stocks or any other investments to anyone if I have to be responsible for what happens to their money! There is simply too much weirdness going on below the surface, and too much inside manipulation going on to "know"

First, find something that is cheap and pays a good dividend, and is in a relatively reliable business. That way if it sits still you get paid while you wait. If it is a business that has access to plenty of energy all the better. My pet in this area right now is something like the propane distribution companies, such as APU (Amerigas Partners LP), now at $19.59 per share, down from a high on the year of $37.99, P/E of 5.77 and dividend yield (actually a cash distribution in the case of an LLP) of $13.10 (we know that can't hold, as the share price must go back up (good) or the dividend/cash distribution has to be cut (even in normal times it pays about a 8% dividend/distribution though! :-)

If you like the energy partners and LLP's, here's something else to look at:
The upstream oil and gas partners:
These are a bit riskier, but potential great returns, LGCY has an astounding 18% cash distribution right now, plus possible big climbs in share price possble.

If you think that the "electrification" of the transportation sector and the need for advanced controls will continue, and bet that it is possible that the auto industry will recover before too long (whatever that means), then Johnson Controls is not to be dismissed.
Now at $22.07 down from a high on the year of $44.46 with a P/E of 9.30 and a little 2% dividend, it could be a strong recovery play.

O.K., that's three places to go, one is very safe (APU) and good dividend, one is riskier (LGCY) but GREAT dividend and JCI is a straight play on the recovery and the continued electrification of the world. Now for one ultra safe place, a place that would be hard to picture how much could happen to: Tennessee Valley Authority Bonds. These will be good for safety until Deffeyes stone age hits, and is the closest thing you can find to a bomb shelter in finincial terms.

If you like diversity, try out this list of "pre-screened" stocks, 38 value stocks picked for P/E, Dividend yield and earnings history, not a bad article, especially for free:

yeah, I think we are close to coming back into the market, but with GREAT caution. Walk very, very quietly, any false step could set something off in this booby trapped age were in!


The declines in the stock market so far represent a run-of-the-mill bear market. If you think this is a run-of-the-mill economic downturn, then you might consider getting back in soon. If, on the other hand, you believe (as I do) that this is the worst economic downturn since the Great Depression (and may even surpass the Great Depression), then you should be very wary of getting in any time soon.

Now that's not to say there won't be a bear market rally soon that might last for weeks or months. For an excellent example of one such, check out the DJIA in the first 3 months of 1930.

One's mental attitude has to be different in a bear market. If you buy on the dips in a bear market, you will get ground to hamburger. That's what happened in the Great Depression. Paraphrasing Galbraith, every time it looked like the end, it was just the beginning of the next downturn. People who completely missed the crash in '29 wound up losing everything. The DJIA lost just under 90% of its value from its peak in August of 1929 to its lowest point during the Great Depression.

Edit: found the Galbraith quote from The Great Crash: 1929

A common feature of all these earlier troubles was that, having happened, they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune.

The total oil + petroleum products stocks rose a bit more than 17 million barrels in last week's EIA Petroleum Report:

"Total Stocks (Incl SPR) (7) 1,667.3 1,649.7"

There may have been margin calls for other energy co. stockholders as well. The gasoline/diesel price shocks of July have changed people's energy consumption habits, the United States has imported more than a million barrels a day less oil + products this year than last year.

Both CHK and XTO had some liquids production affected by this new trend in oil/liquids consumption and dropping prices.

True rain. But I'll make a small point that some may not be aware of. Ignore for a moment whatever sort of hedge operators might have made on their production as well as any other investments (stock buy backs, options, etc). I'm just referring to the pure exploration and production side of the oil patch. All wells currently producing, whether new drills or acquisitions, were based on economic analysis utilizing oil/NG prices far lower then they are today....typical $50 or so for oil and $5/mcf for gas. With respect to those investments energy prices are not currently low...they are sky high. Yes...down from the peak a few months ago but at the same level (for oil) as a year ago. NG was actually selling during the "low price season" this summer for about the same price as it was last Jan...the "high season". Economic analysis of new drills or acquisitions being evaluated today are looking at current trends. But even when oil hit $147 I knew of no company using a future oil price greater then $70 - 80 per barrel. And most were actually dropping the price after year 2 in their economic analysis. The oil patch has been nothing but peaks and troughs on the pricing side since Day 1. No one with any sense uses peak prices in econ analysis.

Trust me....the oil patch, as far as current prices go, is happier then a puppy with two peckers. But, again, this is the view strictly from the E&P side of the fence. Some companies may have taken some foolish, and ultimately, destructive position as far as options, etc go. But the production side is still generating cash flow far exceeding those assumed when those investment decisions were made. happier then a puppy with two peckers

May I use this in my next keypost? ;-)

Sure Nate. I actually stole it from "City Slickers".

Here are this mornings comments on the CHK situation from Johnson Rice analyst Ken Carrol:

Chesapeake provided updates on several fronts, including a further
reduction in capex, management holdings, Haynesville highlights and
liquidity before its scheduled Investor/Analyst meeting on October

Key Takeaway: Operationally, things continue to click for CHK though
they are not immune to falling commodity prices and spending plans are
moving down with gas prices. Rumored liquidity issues simply do not
exist though management's forced stock sale is certainly
disappointing. In the end, the stock sale has no direct impact on
company operations or future prospects and we continue to believe the
selling pressure of the last few trading days is over done. Ahead of
next week's Investor meeting, we will maintain our Overweight rating
on the stock as seemingly worst-case scenarios are already priced in.

* Capex for 2009 and 2010 has been cut by an incremental $1.5
billion due to continued weakness in commodity prices, primarily
natural gas. No detail on where the cuts will occur but given
previous cuts by management core areas such as the Haynesville and
core Barnett are likely at the bottom of the list. Acquisition
spending is also reduced as CHK holds a deep drilling inventory in
core areas, allowing management to tweak spending until prices

* Guidance remains unchanged at production growth of 16% for '09 and
'10. This now incorporates 135-140 rigs by year-end and a downward
bias going forward.

* Additional asset sales totaling $2.5-$3.0 billion are slated for
4Q08, including the previously highlighted Marcellus JV, a fourth
VPP, non-core property sales and the sale of a minority interest
in midstream operations. Just over $5 billion in cash from asset
sales has been received since the end of 2Q08.

* With the asset sales and a further draw on its line of credit, CHK
has $1.5 billion in cash on the balance sheet. The credit facility
is now fully drawn with all lenders except Lehman Brothers
participating. The facility matures November 2012 while the first
maturity of long-term debt is July 2013, giving CHK ample wiggle
room in this time of weak gas prices.

* Despite multiple rumors to the contrary, CHK is not in violation
of its debt covenants. The key covenant is the debt-to-EBITDA
ratio which is maxed out in the covenants at 3.75x. As of
September 30, 2008, this stood at roughly 2.05:1. In fact, to push
CHK into violation of this covenant, we estimate that all hedging
positions must be lost (failure of counter parties?), not just the
knock-out provisions, and NYMEX gas and oil prices would have to
fall to $4/mcf and $60/bbl for a prolonged period, basically a
doomsday scenario.

* A brief Haynesville update as well. CHK now holds 480,000 net
acres following the closing of the Plains (PXP: $19.26 NR) JV with
the six most recent wells having IP rates north of 10 mmcfe/d. 14
rigs are currently running in the play.

Great update Nate. will be interesting to watch the stock movement now the issue of credit is set.

And a similar JR note on rig counts:

We are reducing our 2009 estimates for most oilfield service companies in
response to recent announcements of cuts in natural gas drilling budgets by
many North American E&P companies. The E&Ps are reacting to $7/mcf gas
prices, the result of continued gains in the U.S. gas supply.
The numbers
After reaching a high of 1,606 in Q3, the U.S. natural gas rig count stands
at 1,544 today, . We have assumed that the gas rig count dips down to
1,350, or down some 250 rigs (16%) from the peak, during the 1H'09. The gas
rig count has not averaged less than 1,400 since Q'06, so if it fell to our
estimate it would be a fairly meaningful decline. A rig count below 1,400
should lead to the type of production response (down 1-2 bcf/d) that would
help bring the market back into equilibrium.
The gas rig count ramped up in the first half of 2008, adding ~100 rigs
from the start of the year. Running the numbers out to get yearly averages,
we expect the natural gas rig count to average 1,502 in 2008, but decline
to 1,381 in 2009, a decrease of 8%. However, we expect the U.S. oil rig
count to hold up, and average 400 rigs in 2009 vs 380 in 2008. The U.S. oil
rig count hasn t received much attention, but it is quietly up ~100 rigs
(or ~30%) in 2008. In total, we expect the 2009 U.S. rig count to average
1,790 rigs compared to 1,890 in 2008, a decrease of 5.3%.

The updates are appreciated.

And thus the Yin and Yang of rig activity. On the one hand companies want to drill their opportunities as fast as the budget allows. On the other hand, reduced rig utilization would, hopefuly, drop day rates some. Same hopefully for steel prices. The rapid rise in drilling/completing costs have hit the bottom line pretty hard this last year. Only improved performance from better fracing techniques helped offset those costs.

Drill fewer wells then costs drop as well as NG on the market: not neccessarialy bad news for the E&P side of the coin. We were authorized to up our UNG rig count by almost 50% for 2009...if we could find rigs available. So there are a few folks around here that the news of CHK cutting backs makes them happier then.....

nate, i am wondering if you would comment on the hedging losses some companies such as chk are showing on their quarterly report ?

i realize that these losses are not real, but it seems to me that if a company looses enough "could have been" revenue in a quarter to offset the already (relatively) high product price they are probably not necessarily making good decisions.

in some cases, these companies are forced by their bankers to hedge, guaranting a certain revenue stream to service the debt. and yet the counterparty in these hedges is often the bank.

hope this comment is not too late as the expiration date on this post is niegh.