Once rare financial crises that require dramatic bailouts are fast becoming the norm. Each of the last four US administrations is grappling with an economic crisis serious enough to warrant government intervention. The current banking crisis comes just three years after the Covid-19 pandemic triggered global supply chain disruptions, which in turn came just over a decade after the 2008 financial crisis. Unfortunately, the energy sector is one of the sectors that has historically been hit the hardest when the economy slows. Economic downturns, including recessions, tend to have a strong negative impact on the oil and gas sector, leading to sharp falls in oil and gas prices and a tightening of credit. Falling oil and gas prices mean lower earnings for oil and gas companies and tight credit conditions that mean many explorers and producers are paying higher interest rates to raise capital, further eroding returns.
While swift action by the US government appears to have stabilized the banking sector, some experts are warning that we are not over the hill yet.
Former PIMCO chief Mohamed El-Erian has slammed the Federal Reserve’s belated action to control inflation, saying the central bank’s “least bad” option is to immediately pause its rate hike cycle will be significant because there are two here There are different drivers: first, banks themselves are becoming more conservative and, second, banks are expecting regulation to become stricter, which is more of a regulatory failure than a regulatory failure,” El-Erian told CNBC.
Let’s examine how energy markets have responded to past economic and financial crises.
The Great Depression of 1930
The development of huge oil fields in the United States in the years leading up to the Great Depression of 1930 led to massive flooding and sent prices plummeting to just 13 cents a barrel (~$5.40 today, adjusted for inflation).
In October 1929, US commercial crude oil reserves reached a staggering 545 million barrels, thanks to the discovery of several huge oil fields in Oklahoma, Texas, the rest of the Southwest and California. That corresponded to 214 production days at the time; In some perspective, US crude inventories for the week ended March 24th were 845.27M, which is ~42 days of production.
The first gusher came online in 1926 in Oklahoma’s Seminole field and produced 136 million barrels annually, or 10% of all US oil production. A spate of new discoveries in Oklahoma City, the Yates Field (West Texas), Van (East Texas), Signal Hill in California, and the supergiant Long Beach Oilfield in the Los Angeles area quickly put an end to prevailing peak oil fears Early 1920s.
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By the summer of 1931, the East Texas Field alone was pumping 900,000 barrels per day from approximately 1,200 wells, down from virtually zero just a few months earlier. Unfortunately, too much oil flooded the markets and, together with low demand, triggered a dramatic fall in oil prices during the Depression, with prices falling from $1.88 a barrel in 1926 to $1.19 in 1930 and finally to 13 cents a barrel in the throes of the Depression fell in July 1931.
Oil shock of 1973/74
The oil shock of 1973/74 is considered one of the most significant oil crises after an oil embargo by Arab producers against the USA exacerbated the financial crisis in the early 1970s. In this case, it was the high oil prices that actually triggered a severe economic crisis.
On October 19, 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo on the United States in response to President Nixon’s request to Congress that Israel provide $2.2 billion in emergency aid for the Yom Kippur War place. As a result, the OAPEC nations halted all oil exports to the US and began production cuts that reduced global oil supply. These cuts nearly resulted in a supply crisis, quadrupling the price of oil from $2.90 a barrel before the embargo to $11.65 a barrel in January 1974. The embargo was finally lifted in March 1974 due to disagreements within OAPEC members over how long it should last.
As then Fed Chairman Arthur Burns noted, the embargo and oil price manipulation came at the worst possible time for the United States. By mid-1973, the prices for industrial raw materials were already rising by more than 10% pa. The industrial plants were working practically at full capacity, which led to a severe shortage of industrial materials. Meanwhile, the US oil industry lacked excess production capacity, leading to large oil deficits and fuel shortages everywhere.
To make matters worse, OPEC gained significant market share while non-OPEC sources fell sharply. This allowed OPEC to wield much more power and influence over the pricing mechanism in global oil markets. After the dollar depreciated, OPEC countries resorted to pricing their oil in gold rather than USD, leading to a wild gold rally from $35 an ounce to $455 an ounce in the late 1970s.
Ultimately, the 1973 oil crisis and accompanying inflation triggered a U-shaped recession characterized by a prolonged period of weak growth and economic contraction.
The oil price crisis of 1998–9
The 1998-99 oil crisis was at the opposite extreme of what Americans who had witnessed the oil price surge of the 1970s were used to, with the Asian financial crisis triggering a dramatic price drop.
The collapse of the Thai baht in the summer of 1997 marked the start of the oil price crash and caused stock markets to plummet by 60%. As a result, oil demand in Asia, a pillar of global demand, fell sharply, and demand in other parts of the world also collapsed. To make matters worse, OPEC production continued unhindered as Iraqi oil returned to world markets for the first time since the Gulf War. In fact, Iraq has almost quadrupled its production from nearly 600,000 barrels per day in 1996 to 2.3 mb/d in 1998.
Just as oil prices were beginning to fall, OPEC ministers agreed in November 1997 to increase their production quota by 2 million barrels a day, on the erroneous assumption that world demand would continue to grow at the same rate as the few years before 1997 the peak of the Asian economic miracle. It didn’t take long for OPEC to realize it had been terribly wrong in its timing and cut production quotas several times in 1998 to stem the fall in oil prices. But several members, most notably Venezuela, were reluctant to lose market share and refused to work with swing producer Saudi Arabia. Not surprisingly, prices plummeted 40% to $10 a barrel between October 1997 and March 1998, with some grades falling as low as $6 by the end of 1998 amid OPEC disputes.
For American motorists, the oil price crash was Eden, and car buyers preferred sport utility vehicles and trucks to smaller cars. Brands like Ford Expedition Lincoln Navigator suddenly couldn’t keep up with demand.
“Bigger may or may not be better, but automakers are striving to build the giants that Americans will buy,” reported the New York Times.
The 2008 global financial crisis
The financial crisis of 2008-2009 is considered the largest to hit the globe so far this century. The crisis in the real estate market began in 2006 and was characterized by a sharp increase in defaults on subprime mortgages. Although the first wave of the crisis was contained, it severely curtailed economic activity as contagion spread across the economy. Commodity prices soared even as the real estate market collapsed.
The crisis eventually triggered a wave of deflation and liquidation that drove down the values of all assets, including oil and gas. Oil prices plummeted from $133.88 per barrel in June 2008 to $39.09 in February 2009, while natural gas prices fell from $12.69 per MMBtu to $4.52 over the period.
Fortunately, the crisis ended a year later thanks to aggressive government stimulus measures that led to expectations of higher inflation, which in turn led to an increase in commodity purchases as well as improving credit conditions.
By Alex Kimani for Oilprice.com
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