Update and correction of chart

I have updated the chart for Value's latest horizontal gas drilling rig data. I also corrected a slight error (I had the series a week later than it should have been). Clearly the horizontal gas drilling rigs are falling at an alarming rate. If this continues, the production is going to have to fall. With 30% depletion rates, you have to drill or production falls.

Feb 24th Update of the Robry Chart

The following chart has several updates.
1) The chart has the latest Robry data and additional data in the past.
2) The chart has Valueconscious' data (with his blessing of course) for NG Horizontal Rig count.
While the data is short, it should be very interesting over time to see the two series.

Luckily, the numbers from both series are currently in the 400-600 range, so they easily fit on the same chart.



Notice that the production levels of natural gas, while at record levels are not that much higher than the past. A 50 bcf/week difference between last year and this year is important, but not as big as I expected. With a 30% decline rate, natural gas production could easily fall by 50 bcf/week. The key is natural gas is a flow. If the flow is even a little above the demand, storage will rise quickly. But the reverse is also true. With the credit being limited and cash flow down at all E&P companies, the flow can drop quickly.

Robry Supply of Natural Gas

With the large miss in the natural gas storage number today, the supply of natural gas is a key concern. Below is a chart of the weekly estimated production by Robry.


Clearly production has been increasing and putting pressure on the price of natural gas. But the number of rigs has started to decrease and with the high natural rate of decline, production declines MUST occur. The only question is how fast production falls. In the following weeks I will be expanding this study and including more data points, prices and other factors. But this chart tells us why natural gas prices are lower today than anytime in the past 5 years. As electric demand and industrial demand have fallen, production has skyrocketed. A perfect storm for low prices.

Why Big Banks are bad for the economy.

For many years we have heard the mantra that we have too many banks; We need consolidation of the banking sector. But this is FALSE. While it is true that big banks can lower transaction costs, these costs are a minor part of the cost of banking. The major cost is loan losses. In controlling loan losses, the big banks perform significantly worse than small banks. This post will first show this is true and then show why the consolidation in the banking sector is a key reason for the economic crisis.

First, big banks have higher loan losses. The Fed of St. Louis has a database that aggregates the loan losses by size of institution. Let's look at the small banks loan losses:

You can see range for the small banks is ~.01 to ~1.05. Note the current loan losses at .4. Now for comparison let's look at the largest banks:

Notice the scale on the left is about twice that of the small banks and currently is about 1.5%. At NO time has the small banks had a loan loss rate at the current rate of the big banks! The simple fact is the larger the bank, the higher the loan losses.

Still not convinced? Look at the intermediate banks and they show the VERY same trend:


And the larger medium banks:



So you can see that as banks grow bigger than have higher loan losses. Why might this be true?
1) As a bank grows bigger, it is harder and harder to evaluate the credit risks of companies. Often credit risk is not a simple formula, but experience and knowledge of local markets. A local hardware store may look fine on paper, but have rotten parking. Thus, everything looks good on paper, but a bad location is hard to evaluate from hundreds of miles away.
2) Risk aversion. The larger bank personnel are paid more the larger the bank. The bank has an incentive to grow at higher rates and take on more risk. In a large organization, you can 'bull-shit' away many bad credit decisions. If you have the 'right' politics, you can escape blame. Thus, many managers will take on more risk the bigger the organization. As a bank grows bigger they have higher rewards, lower risk to the bank officers for taking risk. Multi-levels and multi-lines of authority make pinning bad decisions on individuals harder the bigger the organization.
3) The larger the bank, the greater the distance between an individual decision and real results on the bottom line. In a small bank a million dollar loan gone bad will impact the stock price. In a big bank, a million dollar loan gone bad will have no impact on the stock price. Thus, a bank manager in a small bank is very careful, while a bank manger in a big bank has far less incentive to be careful. The larger the bank, the more difficult it is to make every employee responsible.

In the past 10 years, the consolidation of the banking sector has lead to the increased size of banks. This in turn has lead to more loan losses. Currently, the losses at the largest banks are threatening the entire banking system. But this should not come as a surprise, because as a bank gets bigger the loan losses increase. The banks have gotten WAY bigger and thus the loan losses have increased. In order to prevent future loan losses, we need to break up the large banks and return to smaller banks.