• 3 minutes Could Venezuela become a net oil importer?
  • 7 minutes Reuters: OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase
  • 12 minutes Battle for Oil Port: East Libya Forces In Full Control At Ras Lanuf
  • 2 hours Oil prices going Up? NO!
  • 1 day Could Venezuela become a net oil importer?
  • 4 hours Renewables to generate 50% of worldwide electricity by 2050 (BNEF report)
  • 3 hours Reuters: OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase
  • 1 day Gazprom Exports to EU Hit Record
  • 8 hours Oil prices going down
  • 11 hours Could oil demand collapse rapidly? Yup, sure could.
  • 1 day Oil Buyers Club
  • 2 days Why is permian oil "locked in" when refineries abound?
  • 10 hours Tesla Closing a Dozen Solar Facilities in Nine States
  • 2 hours China’s Plastic Waste Ban Will Leave 111 Million Tons of Trash With Nowhere To Go
  • 8 hours Saudi Arabia turns to solar
  • 1 day Russia's Energy Minister says Oil Prices Balanced at $75, so Wants to Increase OPEC + Russia Oil by 1.5 mbpd
  • 10 hours Battle for Oil Port: East Libya Forces In Full Control At Ras Lanuf
  • 2 days EVs Could Help Coal Demand
  • 3 hours Are Electric Vehicles Really Better For The Environment?
Alt Text

What Is The Right Price For Oil In A Balanced Market?

The current shale narrative has…

Alt Text

Robust Demand Could Send Oil Prices Above $60

With healthy demand growth for…

Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

More Info

Trending Discussions

Low Oil Prices Could Destabilize Financial System

Low Oil Prices Could Destabilize Financial System

Could the rising levels of debt in the oil industry contribute to destabilization in the financial system?

The collapse in oil prices has forced drillers to turn to debt markets to keep their operations going. According to the Wall Street Journal, there has been $86.8 billion in new debt issued so far in 2015, a 10 percent increase over last year.

But that trend is not necessarily new. The oil industry has relied on debt for quite some time, but the dramatic fall in oil prices has put a bright spotlight on the practice. The Bank for International Settlements concluded in a March 2015 report that outstanding debt in the oil and gas sector has reached $2.5 trillion, a massive increase over the $1 trillion in debt in 2006. All of that debt could put extra pressure on companies to continue to produce flat out, as cash flows are critical to meet debt payments. Ironically, however, the incentive to continue to produce as much as possible could merely exacerbate the period of depressed oil prices. Related: We Are Witnessing A Fundamental Change In The Oil Sector

That could prevent oil markets from stabilizing. “[I]f the need to service debt delays a pullback in production, a lower price may act more slowly to balance supply and demand,” BIS concludes.

What is interesting is the willingness on behalf of Big Finance to lay out the cash for strapped companies. BIS finds that loose monetary policy since 2008 has contributed to the debt-fueled investment boom in oil and gas. Debt issuance in the oil and gas sector has increased by 15 percent per year since 2006, rising much faster than other sectors. Related: Oil Field Services To Bear The Brunt Of Price Collapse

In the United States, much of the borrowing was done by smaller firms rather than the majors. Some drillers were even cash flow negative, but still heavily tapping the bond market.

Now with oil prices low, banks are cutting their credit lines to the most distressed firms. That could contribute to liquidity problems for drillers that need cash. But it is also indicative of the fact that banks are trying to cut down on the risk to their portfolios. Having heavily lent to oil drillers, some banks are exposed if drillers start to default on debt payments. Related: Can Shell Afford To Drill In The Arctic?

BIS finds that if a broader sell off in oil debt starts to take place, it would bleed over into broader corporate bond markets. And since oil debt makes up a big slice of corporate debt, there are fears (the extent to which is up for debate) that the oil price collapse could have “system-wide” effects. While that could affect the macro economy of entire countries and indeed the global financial system, BIS says that its conclusions are tentative and need more research.

By Charles Kennedy of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News