Low oil prices and massive debt

It struck me the other day that there is something familiar about the current oil price crisis that mirrors recent history. It has to do with alarming debt levels and unbridled lending practices.

While low prices have led to substantial reductions in the active rig count, which will eventually result in falling production and lower prices, massive debt has played a significant role in exploding shale production. To put it bluntly, many oil companies have borrowed massive amounts — some at less than reasonable terms — and must now continue to produce full bore to service that debt. The figures speak for themselves. Oil company debt rose to more than $800 billion this year from less than $200 billion in 2003. Sinking oil prices also lowered the value of the assets used as collateral by producers, forcing them to sell more oil on the futures market to sustain their credit. And falling oil prices have increased borrowing costs for energy companies, with interest rates on high-yield bonds rising to 8% in January, an almost 5% increase in six months.

As the current oil price crisis unfolds, it becomes clear that the situation is much more complicated that was first imagined, but much more familiar. In fact, aside from the fact that it actually benefits the larger consumer society through lower energy prices, the crisis looks a lot like the housing financing crisis that spurred the last recession — lots of unrestrained lending without consideration of the consequences or debt recovery.

About the author

Dr. William J. Pike

Dr. William J. Pike has 45 years experience in the upstream oil and gas industry, including more than 20 years in oil and gas drilling and production operations, both onshore and offshore. He has worked in the U.S., Canada, Britain, Europe and Russia as a technical and economic advisor to the energy industries and various governmental agencies. Pike was editor-in-chief and editorial director for Hart Energy Publishing’s E&P magazine and was also the editor of the Journal of Petroleum Technology, the official publication of the Society of Petroleum Engineers. He holds a doctorate in energy economics from the University of Aberdeen in Scotland.

Leave A Reply

© Diversified Communications. All rights reserved.