THE PERFECT STORM 99Investors today can see Fisher’s thesis at work in the field of
shale oil production. From 2009–2014, several trillion dollars
of debt was issued to support shale oil exploration and drilling
using a method called hydraulic fracturing, or “fracking.”
Most of this debt was issued on the assumption that oil
prices would remain above $70 per barrel. With oil now trad-
ing in a range of $50–60 dollars per barrel, much of this debt
is unpayable, and defaults can be expected in early 2016 if oil
prices do not recover. This has caused new exploration and
new credit in the shale industry to dry up.
The next stage, exactly as Fisher predicted, will consist of
the bankruptcy of the smaller producers and the forced liqui-
dation of assets. This causes existing wells to be pumped even
faster to generate what revenues they can to maintain cash
flows in the face of falling prices. This pumping, a kind of asset
liquidation, puts more downward pressure on prices, making
the situation even worse.
Unfortunately, the process has far to run. Eventually, a new
equilibrium of supply and demand will be achieved, but for
now, the debt-deflation story has just started. There are many
ways to “liquidate” in the oil patch.
These include laying off workers, cancelling new orders for
pipe and drilling rigs and shutting in existing shale reserves
until prices recover. This liquidation stage affects not only the
drillers, but also oilfield suppliers, labor, landowners who lease
their properties for drilling, equipment leasing companies and
municipalities that will see declining tax revenues.
Fisher also pointed out that once deflation begins in one
economic sector, it spreads rapidly to others. When debtors
are in distress, they don’t sell what they want — they sell what
they can. A debtor involved in one sector of the economy who
needs to raise cash will sell assets from an unrelated sector to
meet his obligations.
Today, this behavior that Fisher identified in the 1930s is