E Pis Aller: We’ll Be Forced To Use Last Resorts Again In Dealing With The Next Economic Crisis

Many years ago I was involved in an oil well blowout.It started for me when I received a frantic call from one of my staff geologists that the well we were drilling had blown out and everyone had evacuated the drilling location.I quickly drove 75 miles out to the northeast of Denver to see what was going on at the well.As I drove I turned things over in my mind, but I couldn’t figure out how it could have happened.I was perplexed because we were at a total depth that was still about 1400 feet above the nearest oil and gas productive zone in that area of Colorado.  Anyway, when I got there I sent my staff geologist home and took over.Around the same time my colleague, the chief field engineer also showed up, so we discussed the situation together with the tool pusher and got a better idea about what had occurred so far in the incident.Essentially, without any warning, the mud system in the well came roaring back up the hole and blew out through the top of the drill stem, creating a plume about 60 feet high.The plume grew rapidly from there to about 125 feet tall (well above the top of the rig), and changed from a mud and water slurry to almost pure gas condensate vapor (liquefied natural gas), an extremely dangerous substance. 

Oil Well Blowout


This might have caused an explosion, but we had a great rig crew, so it didn’t.The driller had immediately triggered the dead man’s switch, cutting all motors, and then engaged the blowout preventer, or “BOP.”At first we thought this had worked, and he had stopped the blowout in its tracks.Unfortunately, these actions worked only for a while, and did nothing to permanently stop the blowout.The “BOP” ultimately didn’t work because it only seals off the inside of the pipe; our blowout had so much pressure behind it that when the “BOP” was engaged, the gas was rerouted and ended up coming to the surface via the annulus, or area between the pipe and the wall of the hole, so it could not be stopped by the closing of the “BOP’s” rams.We spent the next 60 hours trying every engineering trick in the book to seal off the blowout and stop the huge flow of natural gas condensate.While we worked we had to keep our eyes on the wind sock to make sure we were upwind all of the time, because condensate can kill you even when it’s not burning.This can happen simply because it’s heavier than air, and can flush all of the oxygen out and asphyxiate you if you’re overtaken by the cloud of vapor. 

To make a long story shorter, the gas was flowing out under pressure, about 4,000 psi to be exact, and nothing we had available could hold that kind of pressure down.During a lull in the action, I sat down and looked carefully at the well data to try and figure out what had happened.Eventually I was able to show that we had crossed a fault within the very thick Cretaceous Pierre Shale, and that fault was supercharged with natural gas under pressure.Anyway, we threw everything but the kitchen sink in the hole, and it all came back at us in short order.We tried increasing the mud weight dramatically; then we tried pumping marine cement in under pressure.Nothing worked.Finally we decided to use the old-fashioned oil patch “last resort,” which was to pump the drill-hole full of a bauxite (aluminum ore) slurry that was very heavy, and then we followed that with sticks, pebbles, cement, and anything else we could find. 

If it had worked, we would have in the process made it difficult to complete the original drilling plan, and elevated well costs already guaranteed that even if we hit a good pay zone deeper down, the well was not likely to ever make money; but at least the blowout would have been contained.However, even that final effort failed, so we called Boots and Coots, the emergency well control firm, and put them on standby.Calling an emergency well-control firm was the real “last resort,” because the cost of the blowout would have “exploded” higher if they had to deploy their emergency team on the well.But then a few hours later, the well stopped all by itself, literally because it had run completely out of gas.We had nevertheless spent about $100,000 in 1982 dollars on emergency well control measures in just three days.Shortly thereafter the rig of a rival firm hit the same fault about 80 acres away from us, but they weren’t as lucky.Their rig caught fire, everyone got burned (none fatally), and the flames were so hot that part of their rig literally melted into a pool of glowing liquid steel. 

I’ve retold this story because it involves an example of a situation in which circumstances were so dangerous that “last resorts” had to be tried.The French have a phrase they use to describe such a situation: we were using a “pis aller,” which means simply that we followed a course of action that was extreme; i.e., it was our absolute “last resort.”How is this relevant to the markets?I believe that sometime in the next few months, or perhaps as much as two years, we may face another great economic crisis that could be as devastating as the one in 2008.There are things that could probably be done to delay this crisis, but it is highly unlikely that we will get away completely unscathed.So we will be forced to apply extreme remedies.To explain my thinking on this, I would ask the reader to bear with me as I recount a brief history of the last crisis, compare that to present circumstances, and then suggest a pis aller, or last resort that could potentially be used to mitigate the huge damage that such a crisis might entail.

A Sign of the Times in 2008


There was such a deep sense of panic and crisis in the halls of government in the fall of 2008 that every conceivable kind of “last resort” was tried out.Each new measure was even bigger and more extreme than the one before it, with fantastic sums of money being thrown at the problem from every part of government.It is in fact difficult to define which of the many extreme measures undertaken would qualify as the “pis aller” of the crisis.My favorite for this honor is the clandestine provision of huge (trillion dollar) loans by the Fed to banks and insurers that were supposedly safe.It was so bad at one point that Treasury Secretary Hank Paulson famously suffered a collapse from the strain of it all.The fear was so enormous that in the end, even blatantly unconstitutional measures were considered perfectly acceptable, by both the Treasury and the Fed.Congress had its doubts but went along anyway.The standard response of the Fed, which is to lower interest rates dramatically in a crisis, was taken to the extreme of the zero bound by December 2008, and this descent happened very rapidly.  Yet this demonstrably had no effect on the markets (Chart 1).All manner of liquidity support programs (Chart 2) were also put in place by the Fed and other central banks, acting as lenders of last resort, including direct bailouts of GSE’s (Fannie Mae and Freddie Mac), and direct bailouts of individual corporations (e.g., AIG).  I have said elsewhere how wrong-headed this kind of intervention was.Anyway, direct fiscal intervention was added by Congress and the Bush Administration, most notably via the infamous TARP funding program ($350 billion in the first funding tranche) for banks, but that was completely dwarfed later by the then-secret Federal Reserve bailout funds ($7.7 trillion in loans) given mainly to the largest US financial corporations (Chart 3).Another $9 trillion was loaned out to foreign corporations.

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