Tuesday, January 19, 2016

Energy Markets Are Going Sour



The Wall Street Journal's weekend print edition reported that "More Energy Loans are Turning Sour" (Jan 16-17, 2016, B2).  The article cites financial analysts who claim that banks are adding reserves to deal with defaults in oil-and-gas loans.

The fracking boom was financed by Wall Street. I've posted about ongoing bankruptcies because oil from US and Canadian fracking operations must sell for at least $40 a barrel to be profitable. If you've been following oil prices, you know that we are a long way down from $40 a barrel. 

A few days ago ZeroHedge reported that the Dallas Fed had suspended mark-to-market accounting rules on energy debt:
Tyler Durden, "Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears," Zero Hedge, January 17, 2016, http://www.zerohedge.com/news/2016-01-16/exclusive-dallas-fed-quietly-suspends-energy-mark-market-tells-banks-not-force-shale
The Fed's decision points pretty clearly to oil turmoil.

Although one can imagine many end scenarios for this trajectory, the one below hadn't occurred to me but seems most likely given current trajectories in accumulation:
Tyler Durden, "America's Cash Flow Negative Energy Companies Have $325 Billion In Debt Among Them Submitted ZeroHedge, January 18, 2016, http://www.zerohedge.com/news/2016-01-18/these-are-cash-flow-negative-energy-companies-us-total-debt-325-billion

[when discussing Saudi over-production of oil] ...There is just one problem with the Saudi plan: even assuming all of these [North American] companies file Chapter 11, all that would happen is their debt would be wiped out, with the existing creditors getting the equity keys, and becoming the new owners of streamlined, debt-free corporations....This means that after the default and debt-for-equity deluge, US shale would be able to pump even more at far lower breakeven costs, forcing Saudi Arabia to overproduce for even longer ultimately shooting itself in the foot when its reserves run out!

The passage above is addressing challenges faced by the Saudis in navigating global oil politics but the suggestion that existing creditors of US and Canadian oil firms would get the "equity keys" and become owners of "streamlined, debt-free corporations" makes me cringe.

This is how financial capitalism centralizes wealth and decision-making control. The outcome of shale over-production could be even more over-production with profits ever more centralized in financial firms, including the world's largest banks and financial firms (e.g., hedge funds).

Consolidated power and energy will allow the new owners to escape responsibility for the incredible externalizations of fracking-based extractive technologies.


4 comments:

  1. Yes, that's exactly how it's done. The same process applies to many of our assets, such as when corporations snatched up foreclosures during the housing bubble. Homeowners were even forced to pay for utilities and unoccupied house damage while the banks took their sweet time to take over the house, sometimes for years. But then none of us 99% really own our home. Even after we pay off the mortgage (and all that back-breaking interest) to the bank, we are merely leasing the house until the first time we can't make a property tax payment.

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  2. disaster capitalism

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