Low Oil Prices Could Destabilize Financial System
By Charles Kennedy
OilPrice.com
Thu, 30 April 2015
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.
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.
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