GRAND THEFT OIL PATCH – PART ONE

Guest Post by starfcker.

Jim Quinn, I am NOT. I’m not the best researcher in the world, and my ability to find charts and such is more limited than the master of that particular science. What I am good at, is taking information about things I know to be factual in one context, and applying them to other situations, and drawing conclusions that generally tend to be very accurate. So with that in mind, let’s proceed. I have two stories about things that I have more knowledge of than the oil business, but that I think are relevant. These are people I know, and situations that I am familiar with. They have to do with information technology and the predatory way that sort of thing is applied in conjunction with a criminal wall street/banking sector.

Those of you who root for no government at all would be wise to pay close attention, this sort of thing is what happens when government allows big business to operate unchecked. The first situation is a small one. I know a couple of guys who runs specialty pet stores. These are small businesses, storefronts, maybe gross a million, million two a year. They happen to be within a quarter mile of each other, but somehow both have prospered for 15-20 years. Both guys have been able to own nice homes and raise children off these small businesses, pure Americana type stuff. They bought their wholesale dry goods from one of three companies who existed in our area. A couple of years ago, a new national competitor arrived on the scene, offering lower prices and most importantly better credit terms. What could go wrong?

Well, what most people who don’t have businesses and quite a few people who do, don’t realize, is credit applications for business have become very intrusive. You are basically giving the bank, or the company you’re dealing with a complete look at your finances, or, as I like to think of it, a blueprint to destroy your company. Let’s take my pet store friends, they jumped all over lower prices and better credit terms. However, in filling out the applications for credit, they were unaware of that by dealing with a new national dealer, they were most likely dealing with Wall Street.

Next thing you know, some computer somewhere was blinking in glee at the fact that this little intersection where these two shops had prospered, was selling a couple million dollars in pet supplies every year. No need to study demographics, or traffic flows or anything else. Directly in between the two shops, up went a Petco. Those guys are doomed. Nice knowing you, fellas. The computers that decided to put the Petco in, know everything about my friend’s businesses. By looking at their weekly orders, they know exactly what they sell and by the credit application information they provided, they know their margins and they know their weekly take. If their best item was $10 aquariums, then Petco will sell them for $9. Like I said, finished.

The second one is a much larger heist. if you’ve ever been in any sort of chain store or garden center that sells live plants, you’ve seen little dish gardens of cactus and succulents. Common everyday kitchen window houseplant type stuff. One business in Homestead pretty much grew all the dish gardens for the entire country. they had 40 acres dedicated to that. To grow cactus and succulents in Florida you need poly houses, to be able to control the water and a modern operation relies on quite a sophisticated computer control system to provide optimum temperature, humidity, etc..

It was a very lucrative business, every inch of 40 acres growing those little succulents and cactus, remember they are tiny things. The gross on that operation was about 18 million dollars a year. Hold that thought. Then there’s another guy who had a bromeliad nursery. About the size, 40 acres, and sold most of his bromeliads to chain stores as well. However, there are quite a few bromeliad places, and they were already being consolidated, whereas the dish garden thing was unique. The dish gardens are also much more lucrative per square foot, because of the tiny size of the product. Well, the guy with the bromeliad operation was approached by the chain stores with this pitch.

We love your product. We love your quality. However, you are just not efficient enough or large enough to support the amount of material that we need. However, since you’re so good at it, we would like to see you expand. We will lend you the money to modernize your entire operation, basically giving you the ability to double your production on the same footprint. Paying off the loans will be a snap, because you can double your production, and we can still take everything you produce. Win-win, right? A no brainer, right?.

What actually happened is a little bit darker. He went ahead and borrowed 10 million dollars, and rebuilt his entire operation, state-of-the-art. he put in place all the protocols and technology, and indeed, looked like he was going to be able to double his production, and his profits. But something was happening over at dish garden. The owner had decided that he was going to sell his land for development. I’ve mentioned before, the foliage industry in south Florida has been undergoing rapid consolidation like many industries, wall street money has been running rampant over the independents, buying out the good ones, bleeding out the bad ones, and in general becoming one gigantic business that used to be a thriving diversified industry.

And then there’s this. With dish gardens selling out, an enormous new opportunity arose, as an 18 million dollar a year segment of the indutry was going to become available. But it takes very specialized facilities and equipment to run that sort of operation efficiently and effectively. Anybody who has not applied for a commercial loan in the last seven or eight years doesn’t realize how many stipulations are in place, on how the money gets used. You’re no longer borrowing and then using the money as you see fit to grow and drive your business.

There are clauses written all through the contracts, dictating that you will buy all new equipment, and in some cases exactly which equipment you are going to buy. The reasoning given is, it’s for collateral purposes. Not really. As in the case of the bromeliad guy, sometimes there are other things at work. Shortly after doubling his production, and getting going full steam, and I’m sure counting in his head just how rich he was going to become, something terrible happened. The chain stores, instead of doubling their orders, cut their orders. With his new and now massive overhead of servicing a 10 million dollar loan, he was in trouble very quickly.

A business that had been in the family for 35 years went into receivership less than two years after taking out the loan. His 40 acres, with all that brand new infrastructure, and all that inventory, was sold at auction for 1.2 million dollars . Who bought it? Who else had 1.2 million dollars in cash sitting around? The wall street consolidators. Amazingly enough, that 40 acres of brand new production facility was exactly the same as the 40 acres that produced the dish gardens. And amazingly enough, immediately after purchasing the facility at auction, the wall street consolidators begin using it to produce succulents, cactus and dish gardens.

In both the bromeliad case and the pet store case, the big mistake was letting the banks into their books. Some computer somewhere knows exactly where you make your money, whether it’s big enough to want to take from you, and exactly where your Achilles heel is, if they decide to take it . And that is what they do. If you wonder what causes the disappearance of so many mom and pops, while publicly traded chains explode into every available inch of of commercial space, this has a lot to do with it. The same people that control the wholesalers that sell to mom and pop, also own the chain retailers. and if they get a look inside your books and decide they want your piece of the pie, brother, you are fucked. which brings me to the meat of the issue here. I read articles and publications all of the time, predicting the impending doom of the shale oil industry. Nothing could be further from the truth. Yes, companies will fail, but the industry? That’s what part 2 will be about.