The damage being done by the oil price collapse is far greater than we suspected. Recent news articles indicate that cheap oil could soon wreak havoc upon the financial markets in the United States.
The most disturbing story comes from America’s heartland, where the Federal Reserve Bank of Dallas, popularly known as the Dallas Fed, may or may not have tried to pressure banks not to call in loans to oil and gas companies. The Zero Hedge website reported that officials from the Dallas Fed’s Houston office had met with banks and told them not to take actions that could force energy companies into bankruptcy on January 17, 2016.
The next day the Dallas Fed sent out a tweet denying the rumor. The strange thing about the tweet was that it was sent on January 17, 2016, Martin Luther King Jr. Day, which is a federal holiday in the United States when all banks and federal offices are supposed to be closed. Obviously, the bankers at the Dallas Fed are afraid of something, but what?
Could Oil Prices Trigger a Banking Crisis?
The fear the Fed was responding to was that a large number of defaults on loans to oil and gas producers could produce a chain reaction similar to the subprime crisis that triggered the Great Financial Meltdown of 2007–2008. Zero Hedge’s Tyler Durden had previously noted that some U.S. banks could be under-reporting potential losses from energy-industrial loans.
Projected credit losses on energy industry loans at one U.S. bank, BOK Financial (NASDAQ: BOKF), have increased from $3.5-$8.5 million (€3.5 million to €7.78 million) to $22.5 million (€20.59 million), Darden pointed out. That may not affect BOK, which owns several regional banks in the South Central U.S., much because it reported a free cash flow of $260.74 million (€238.52 million) and revenues of $1.34 billion (€1.23 billion) on September 30, 2015. Yet it is proof that oil losses are beginning to have some effect on the U.S. banking sector.
Officials at the Fed might be afraid of a market reaction. In recent weeks BOK’s share price fell from $59.79 (€54.70) on December 31, 2015, to $44.57 (€40.78) on January 20, 2016. The price recovered to $46.34 (€42.74) on January 21, 2016. They could be scared of a collapse in U.S. banking share prices similar to that seen at oil companies.
Havoc in the Heartland
A big problem here is that the actual exposure of U.S. banks to the oil and gas sector is unclear, as Darden pointed out. It can be hard to tell just how many of a bank’s loans are dependent upon high oil prices.
For example, for a bank that financed the building of a new hotel or a new shopping center in North Dakota with the expectation of lots of business from highly-paid oil industry workers, such a loan would not be listed as energy related even though it is dependent upon high oil prices. Those workers might now be out of work or having their pay slashed and not spending money at that hotel or shopping center.
BOK Financial is based in Tulsa, one of the centers of the U.S. oil industry. Tulsa is in Oklahoma, a state with a weak economy that depends heavily upon the oil and gas industry. Observers are expecting a new round of energy industry layoffs because the count of active oil and gas rigs in the U.S. fell by 61% in 2015, according to USA Today.
Oil and gas companies have already laid off as many as 60,000 people in the U.S. state of Texas alone, Karr Ingham, an economist for the Texas Alliance of Energy Producers, told USA Today. To make matters worse, many energy companies are also slashing wages, Houston Energy consultant John Graves told USA Today.
Some Oil Is Already Trading at Less Than $10 a Barrel
The situation could soon get far worse because some varieties of oil are already trading at less than $10 (€9.15) a barrel, Bloomberg Business reported. The bottom has already fallen out of the market for lower grades of oil that are hard to process.
Canadian bitumen, which is produced from Canada’s oil sands, was trading at $8.35 (€7.64) a barrel during the week of January 11–15, Bloomberg noted. The same crude was selling for $80 (€73.19) a barrel less than two years ago.
The most frightening story comes out of North Dakota, where the Koch brothers are reportedly paying customers $1.50 (€1.37) a barrel to buy a high sulfur grade of crude called North Dakota Sour, Bloomberg reported. North Dakota Sour was selling for $47.60 (€43.55) a barrel in January 2014; on January 18, 2016, it had an effective price of -50¢ (-€.46) a barrel.
The oil price collapse is far worse than has been reported, and its effects could be far worse than previously thought. Financial markets could soon be experiencing the kind of panic and havoc that’s already devastating the energy industry.