Low Oil Prices Could Destabilize Financial System

Oilprice.com ^ | 30-04-2015 | Mark Rutte

[Opintel]

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.

[GeronL]

high prices, low prices.... doom & gloom either way

[entropy12]

But oil prices have rebounded from $45 to $60!
So no more financial debt crisis?

[SpaceBar]

It is known that cheap energy correlates positively with economic growth, industrial activity, and standard of living. So if cheap energy is bad for ‘the financial system’, then clearly ‘the financial system’ is the enemy of economic growth, industrial activity, and a high standard of living.

[Blood of Tyrants]

Ironically, however, the incentive to continue to produce as much as possible could merely exacerbate the period of depressed oil prices.

Of course. As long as it costs less to produce than the market is paying, they are making money.

[Fido969]

Stabilizes MY pocketbook, I know that much.

[eyeamok]

How dare you speak truth to emotions

[Veto!]

Does destabilizing the system mean that the average citizen can again afford to buy things at lower prices?

[Opintel]

It seems that most North American Shale oil producers are just breaking-even between $75 and $85, so this would still mean to say that there are a lot of companies heavily in debt without a chance to become profitable soon

[thackney]

I think those prices are from the high price days when more marginal areas were worthwhile to produce. When a company only goes after the sweetspots in the plays, the average price comes way down.

At least 4 counties, the main areas for new oil wells in the Bakken, were having a breakeven cost at or below $37.

Dunn $29
McKenzie $30
Williams $36
Stark $37

https://www.dmr.nd.gov/oilgas/presentations/FullHouseAppropriations010815.pdf
Page 7

That was to drill a new well. For wells already in operations producing oil, the average is $15 a barrel before they operating cost would match selling price.

[Paladin2]

Yeah, all of that derivatives of derivatives stuff based on oil should take it in the end.

[TBP]

I’m willing to risk it.

[RobinOfKingston]

Low oil prices has contributed greatly to the stabilization of my own personal Financial System.