For the world’s once-prosperous oil companies, the recent dramatic drop in crude oil prices is resulting in billions of dollars of lost profit. And while it’s giving Americans a welcome respite …
For the world’s once-prosperous oil companies, the recent dramatic drop in crude oil prices is resulting in billions of dollars of lost profit. And while it’s giving Americans a welcome respite at the gas pump, it could have more dire consequences for the people who depend on oil for a living.
According to a recent USA Today Money article, oil companies will be met with maturing debt throughout 2015 in addition to falling oil prices, which will only add onto their financial woes. And with these prices not expected to pick up anytime soon, oil companies are facing a bigger threat — the near-inevitability of bankruptcy.
Oil conglomerates like the nations of OPEC have refused to let up on production in order to intimidate U.S. oil companies into lowering their production — and U.S. companies haven’t backed down. This constant excess in production has also caused prices to fall, as demand fails to meet the amount of oil entering the market. In addition, growing government initiatives to push renewable, clean energy sources are making fossil fuels increasingly obsolete.
Bankruptcy filings in the U.S. typically manifest in either Chapter 7 or Chapter 13 bankruptcies, which both help individuals manage excess debts. However, for larger oil conglomerates, Chapter 11 bankruptcy, which reorganizes debts for companies and businesses, is likely the best option. In these bankruptcies, companies create a creditor-approved repayment plan that allows them to recover financially.
And because business-filed bankruptcies are generally very uncommon right now — these bankruptcies fell 23% in 2014 to their lowest frequency since 1980 — the rise in filings throughout the oil industry would be an interesting anomaly.
Already, the oil and gas industry stood out as the second-largest source of Chapter 11 bankruptcies last year, perhaps due to oil prices falling more than 40% in a six-month span, USA Today Money says. With reports of price drops continuing into January, the financial pressure is likely only going to get worse.