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With all grades of oil now down into the $45 range and credit disappearing in the energy sector of the U.S. economy, the New York Times led its business section yesterday with “As Oil Prices Fall, Banks Serving the Energy Industry in for a Jolt.”  The Times reported that the big Wall Street banks have lost their revenue from oil/gas debt, and that the banks with the biggest exposure to this debt are Wells Fargo (15% of all its investment banking revenue last year), with Citigroup at 12%, and the much-more-exposed big Canadian banks, led by Scotiabank at 35%.

The paper further pointed out that Wall Street firms that financed energy deals now have trouble offloading the debts. 2014 was a frothy return to record levels of mergers and acquisitions — $3.4 trillion “worth,” more than in 2007 — and energy mergers were the biggest chunk of that at $409 billion. But merger waves need following price increases (plus austerity) to handle the huge resulting debt; this wave is getting the opposite.

“Morgan Stanley, for instance, led a group of banks that made $850 million of loans to Vine Oil and Gas, an affiliate of Blackstone, a private equity firm. Morgan Stanley is still trying to sell the debt…. Goldman Sachs and UBS led a $220 million loan last year to the private equity firm Apollo Global Management to buy Express Energy Services. That debt has not been sold. A precipitous drop in oil prices can quickly turn loans that once seemed safe and conservatively underwritten, into risky assets.”

• OilPrice.com reported Jan. 7 that there will be a $1.6 trillion loss of earnings of oil companies in 2015 if the price stays around $50, and “without a swift rise in oil prices, a wave of write-downs and impairment charges is about to wash over the industry.”

• Moody’s announced Jan. 7 it is preparing to downgrade debt of TransOcean to junk. This is the largest builder/operator of offshore oil rigs in the world, with debt of $9.1 billion.

• Canadian oil sands producer Laracina Ltd. defaulted on $127 million in debt. Texas oil driller WBH Energy LP declared bankruptcy, its lender had cut off credit, debts about $50 million. Three other publicly traded oil firms went bankrupt in October-November.

• CreditSights Inc. said Jan. 7 that 25 U.S. shale firms are in near-term danger of defaulting on leveraged debt. This is the $200 billion loans part of the $500 billion shale debt bubble, to which rollover credit has essentially disappeared.

• Junk bond interest rates in the energy sector, 4% about investment-grade last July, are now 11% above — there is no credit. For the overall “high-yield,” $2.2 trillion bubble, interest rates were 2.5% above investment grade; they are 4.75% above now, so the oil/gas “contagion” is spreading.

• Capital expenditure is falling fast. Among 40 publicly traded U.S. exploration and production (E&P) companies in oil/gas, the average cut in capital expenditure for 2015 has been 31% from 2014. Overall, energy is one-third of all capital expenditures, so this means a total cut by at least 10% from 2014 to 2015 for the whole economy.

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Writing in the Daily Telegraph, Liam Halligan, a strong supporter of Glass- Steagall banking reform, calls the push for a policy of quantitative easing (QE) “madness.” While discussing the fact that there is pressure on German Chancellor Angela Merkel to approve massive QE to fight “deflation,” Halligan writes,

“No matter that ‘deflation’ is an almost entirely bogus argument. Strip out an oil-driven 6.3% drop in energy prices, and inflation was positive in December. Yes, we’re below the ECB’s 2% target, but that’s because the economy has stalled, with survey data pointing to fourth quarter growth of barely 0.1%. But that’s not down to a lack of printed money. Firing up the ECB’s virtual presses will do nothing to address the genuine obstacles to Eurozone growth—the silted-up labor markets, the ghastly demography, the still massively debt-soaked banking sector that is too fragile to lend, so starving creditworthy firms and households of finance, in turn strangling aspiration and commerce…But to think that QE will fix the Eurozone, and solve ‘deflation’ is just nonsense. Once begun, fully-blown Eurozone QE will go on for years. By cossetting busted banks and draining resources, a euro-QE drip-feed will send Europe into a decade or more of near-zero growth.”

He then writes that even QE will not solve the political reality if anti-bailout Syriza wins the Greek elections on Jan. 25.

“If Germany then punishes Athens, the Greeks could walk, putting us in extremely dangerous Eurozone break-up territory. Even if Syriza agrees to negotiate, other bailed-out countries will then demand less onerous terms, which could send bond markets hay-wire…History shows, time and again, that this policy is madness and, ultimately, deeply counter-productive. But since when did we learn from history?”

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