The oilpocalypse continues. The industry has been in a tailspin since the coronavirus lockdowns drove demand into the ground. Fossil fuel companies have scrambled to figure out what to do, and it seems the latest tactic is not paying loans.
On Tuesday, Wells Fargo posted a quarterly loss for the first time since 2008, which isn’t exactly a comparison that inspires confidence. Within its report on the second quarter, Wells Fargo noted that the oil and gas industry is in particular trouble. Despite making up 3% of its loan portfolio, 47% of the second quarter delinquent corporate loans were tied up with oil and gas companies.
All told, the industry is past due on $1.4 billion, and the Wells Fargo report projects it could get worse. The report also helpfully points out that $3.9 billion in oil and gas loans are “criticized,” which is bankspeak for loans that are in danger of not being repaid. Keep in mind, this is only one bank, but things aren’t looking too great elsewhere.
JPMorgan saw its revenue fall 70% in the first quarter this year, in part due to dip oil prices. Oil and gas companies are also writing down their assets because they simply can’t do the thing they do, namely extract dead dinosaur goop out of the ground. The biggest problem is nobody wants their oil, and prices are in tough shape.
After briefly going negative earlier this year, the price of oil has rebounded a bit. Just not to levels needed to make drilling profitable. The Kansas City Federal Reserve Bank saw oil production dip sharply last quarter in the region it looks after as well. That region covers a huge swath of the Midwest and Southern Plains, including all of Oklahoma, one of the epicenters of the fracking boom. Companies included in its survey said they would need oil to get up to $51 per barrel to be profitable. That’s not really happening, though, with oil camped around $40 per barrel. That means more companies are at risk of defaulting on loans or laying off workers to cut costs, something even massive companies like BP are doing. Or both.
It also raises the chances that we could in fact see banks get in the oil business themselves, taking over the fossil fuel companies that default. Wells Fargo was among a group of large banks scheming to do just that in April. It feels like a lifetime ago, but the prospect of bank-owned oil and gas companies is now a good bit closer to the horizon.
I’m all for collective action when it’s people against oppressive systems. But I have to be honest, I’m not really sure how I feel about this one. It’s the opposite of whatever asking someone to choose their favorite puppy is. On the one hand, fossil fuel companies have engaged in a campaign of deception and delay and funded politicians to do their bidding. On the other hand, banks. I mean, what else is there to say?
Whatever comes next, it’s clear the current environment is unsustainable (even aside from the whole oil and gas industry ushering in a climate catastrophe). Oil and gas, particularly producing it through fracking, has never been a great investment. Now, the risk is rising for companies to default on loans, go bankrupt, and otherwise throw a wrench into the financial system as well as world energy markets. If only there was some way to transition the world away from these terrible investments and also stave off the destruction of life as we know it.