January 11, 2015 | The New York Times | Michael Corkery and Peter Eavis
As oil prices continue to hover in the sub-$50 range after their precipitous drop of the past six months, most stories have been focusing on how it’s all 1) good for consumers and 2) bad for oil companies. This story from the New York Times adds a new question to the conversation: What does the oil price slide mean for banks?
Authors Corkery and Eavis offer the answer:
“While it may take some time for the crunch in the oil industry to translate into losses, one thing already seems clear: The energy banking boom is over.”
The story describes how investing in the oil and gas industry has been a boon for banks just finally emerging from the throes of recession. Producers operating in the country’s booming shale plays like the Bakken have been needing the help of banks to raise equity and to lend billions in order to finance the expensive drilling projects there.
However, as the article points out, many loans were given with the oil companies’ reserves as collateral–reserves estimated at $80/barrel.
If company defaults become common with persisting low oil prices, that does not bode well for the banks.
We here at Inside Energy have been taking our own look at oil and gas financing:
- Who Owns Oil and Gas?: An examination of the oil and gas makeup of our retirement accounts.
- When Oil Prices Drop, Size and Location Matter: How the low prices are affecting small companies.
- Oil Price Slide Worsens Company Debt Woes: The high-debt strategy undertaken by oil companies, dependent on higher prices.