Nate-
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

steveedney.wordpress.com/2006/09/26/misbehavior-of-markets-mandelbrot/

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.

G

PS: XTO press release tonight on CEO's sales:
http://phx.corporate-ir.net/phoenix.zhtml?c=97780&p=irol-newsArticle&ID=...

Nate:

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.

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.

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?

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

"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.

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:
http://en.wikipedia.org/wiki/Augustine_of_Hippo#Life

St. Ambrose, trained in Rome in literature, law and rhetoric:
http://en.wikipedia.org/wiki/Ambrose

St Jerome, the “doctor” of church literature and language:
http://en.wikipedia.org/wiki/Saint_Jerome#Life

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:
http://en.wikipedia.org/wiki/Saint_Marcella

And the aristocratic and well connected Paula, as Roman as they come before her conversion:
http://en.wikipedia.org/wiki/Saint_Paula

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:

http://en.wikipedia.org/wiki/Anarcho-primitivism
http://en.wikipedia.org/wiki/Eco-anarchism
http://en.wikipedia.org/wiki/Deep_ecology
http://en.wikipedia.org/wiki/Green_Anarchist
http://en.wikipedia.org/wiki/Green_Anarchy

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.
RC

"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.

RC

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.

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.

"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 :-)

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."

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.

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.

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.

-d

(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.

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?

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.

memmel,

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.

Memmel,

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.

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.

...is happier then a puppy with two peckers

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

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%.