This is a big problem.
Firms on Wall Street helped bankroll America’s energy boom, financing very expensive drilling projects that ended up flooding the world with oil.
Now that the oil glut has caused prices to crash below $30 a barrel, turmoil is rippling through the energy industry and souring many of those loans. Dozens of oil companies have gone bankrupt and the ones that haven’t are feeling enough financial stress to slash spending and cut tens of thousands of jobs.
Three of America’s biggest banks warned last week that oil prices will continue to create headaches on Wall Street — especially if doomsday scenarios of $20 or even $10 oil play out.
The oil crash has already caused 42 North American oil companies to file for bankruptcy since the beginning of 2015, according to a list compiled by Houston law firm Haynes and Boone. It’s only likely to get worse. Standard & Poor’s estimates that 50% of energy junk bonds are “distressed,”meaning they are at risk of default.
On the bright side, it does not appear that the banks spun out too many derivative financial products on these loans like they did with mortgages, but as long as oil stays so low, 2016 is going to be a rough year for the energy and banking sectors. On a side note, the fact that Obama’s deal with Iran lets them trade their oil on the global market again, thus adding more supply to the glut, will further aggravate this issue.