The largest banks in the United States are preparing to seize the assets of shale companies across the West Texas Permian Basin. What was once the epicenter of the U.S. shale revolution is now ground zero for bankruptcy and sweeping layoffs numbering in the tens of thousands of jobs. Now, according to reporting by Reuters this week, “JPMorgan Chase & Co (NYSE:JPM), Wells Fargo (NYSE:WFC) & Co, Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) are each in the process of setting up independent companies to own oil and gas assets [...]. The banks are also looking to hire executives with relevant expertise to manage them.”
The banks are preparing to move into an industry where “oil and gas companies working in shale basins from Texas to Wyoming are saddled with debt.” The Reuters article continues: “The industry is estimated to owe more than $200 billion to lenders through loans backed by oil and gas reserves. As revenue has plummeted and assets have declined in value, some companies are saying they may be unable to repay.”
The U.S. shale industry is just one small part of a global energy industry crisis as we experience a historic oil price crash. Last month the economic devastation wreaked by the spread of the coronavirus drove down oil demand around the world, leading to a spat between the OPEC+ leading members Russia and Saudi Arabia as to how to proceed. This soon turned into an all-out oil price war and a severe international oil supply glut, leading to a devastating dip in oil prices, which fell over 60 percent. “Although oil prices may get some support from the agreement Thursday between Saudi Arabia and Russia to cut production, few believe the curtailment can offset a 30% drop in global fuel demand, as the coronavirus has grounded aircraft, reduced vehicle use and curbed economic activity more broadly,” says Reuters. The global oil glut remains at an oversupply level of about 10 million barrels per day.
Some experts, however, say that the United States will be able to maintain its energy dominance if it plays its cards right. “In the face of economic and political uncertainties, a number of initiatives and policy changes today could help sustain our energy industry and keep us globally competitive tomorrow,” Bernard L. Weinstein wrote in an opinion column for The Hill last week. Weinstein is associate director of the Maguire Energy Institute and adjunct professor of business economics at Southern (NYSE:SO) Methodist University in the Cox School of Business.
Weinstein opines that if the United States wants to maintain the energy dominance and near self-sufficiency that it won in with the shale revolution in recent decades and avoid becoming a net energy importer in the near future, certain policy and private sector changes need to be implemented immediately. The first of these changes, according to Weinstein, is that President Trump (in conjunction with other world and energy industry leaders) “must convince Saudi Arabia and Russia that they’re playing a negative-sum game in which everyone — including America — loses.” Despite the fact that “both countries have sizable financial reserves that can cushion the blow from low oil prices” this doesn’t change the leverageable fact that “those resources would be better allocated to diversifying their economies.” This angle is particularly salient as oil markets have become increasingly volatile in recent years and even Saudi Aramco (SE:2222) had to admit that peak oil will likely arrive by mid-century.
Despite that fact, oil and gas are still going to be a key sector of the global economy for the next 50 or 60 years, and the U.S. needs to plan ahead to stay competitive in that window of time, says Weinstein. “Once the global economy starts to recover from the coronavirus, the demand for energy will grow quickly. To ensure America is able to meet that growing demand we should use this downtime to improve the infrastructure for transporting and processing our oil and gas resources. For example, in recent years serious mid-stream bottlenecks have occurred in the Permian because of a lack of pipeline takeaway capacity.”
In the meantime, the U.S. should think about diversifying as well. Oil and gas will remain key for the next 50 years, but on a longer timeline, supporting the U.S. renewable energy sector is vital as well. Going forward, it seems that the most resilient (and ultimately dominant) energy economy will have to be a diverse one.