Bubble of 2008 Reappears as '$5 Trillion Oil Debt Bomb'

November 2, 2015

Financial consultant Jim Rickards, of the Strategic Intelligence newsletter, used that title to describe a Wall Street debt bomb preparing to explode, like the mortgage derivatives bubble which melted down the banking system in 2007-08. Rickards' piece is published in Australia's Daily Reckoning financial blog.

Rickards outlines a 2015-16 crash of the commodities bubble, with oil debt blowing out. "The first place losses will appear are in junk bonds. There are about US$5.4 trillion ... of costs incurred in the last five years for exploration, drilling, and infrastructure" with inefficient oil recovery at very high prices, which have long collapsed.

"With oil in the US$45-55 per barrel range, that debt will begin to default in late 2015 or early 2016." In fact, 10 drilling companies have already declared insolvency in and around the Bakken Oil Shale Basin during October.

"That means those debts will need to be written off. How much? That's a little bit more speculative. I think maybe 50% of it has to be written off. But let's be conservative and assume only 20% will be written off. That's a trillion dollars of losses that have not been absorbed or priced into the market."

Rickards notes that "in 2007, the total amount of sub-prime and Alt-A loans was about US$1 trillion. The losses in that sector were well above 20%. There, you had a US$1 trillion market with $200 billion of losses. Here we're talking about a US$5 trillion market with US$1 trillion of losses from unpaid debt — not counting derivatives."

This is a warning about only one part of the immense bubble of debt linked to commodities which have collapsed in price, and the much larger arena of derivatives bets linked to them. One of the largest exposed "counterparty" holders in that derivatives arena is Deutsche Bank, and its crisis, like that of the big commodity companies, is rapidly heading in the direction of the "debt bomb" Rickards indicates.