Financialisation of an industry or sector of the economy occurs when there is more money to be made out of the debts it carries than the goods and services it produces. The housing sector, for example, has been financialised since deregulation began in the mid-1980s. More recently, the hydraulic fracturing industry exploded on the back of financialisation. A plethora of relatively small shale drilling companies were able to tap into Wall Street funding to create the myth of Saudi America – producing more US oil in the last couple of years than had been achieved since the 1971 production peak.
The money in fracking is not, however, in the oil and gas that is recovered. The real money stems from the massive debts that underwrite the industry. Indeed, the shale drillers themselves have never been profitable. Even at the high prices prior to June 2014, breaking even was as good as anyone could achieve – a key reason why none of the global oil giants got involved in fracking. The bankers issuing the loans to the fracking companies, on the other hand, got rich by selling them on to secondary investors who believed that at $140 per barrel they were buying into a sustainable profit centre.
Thus far, “Big Oil” (global corporations like Exxon, BP and Shell) has avoided financialisation. However, the sustained fall in oil and gas prices since 2014 have strained the deep pockets of even these economic giants. Writing in the Financial Times, Ed Crooks reports that:
“The net debts of the largest Western oil companies have surged by a third over the past year, increasing their vulnerability to another fall in oil prices. Oil companies’ revenues have slumped as a result of the crash in crude prices that began in the summer of 2014. Although they have cut capital and operating costs sharply, most of them have had to borrow to finance their investment programmes and dividend payments.”
This does not bode well for an industry that by necessity has to operate to long timescales. It takes decades to explore, find, extract and produce new oil and gas. But in order to continue refinancing growing levels of debt, the industry has to adjust to the shorter-term timescales of the financial markets. As Crooks notes:
“That pressure has been reflected in oil companies making strategic shifts, such as Chevron’s move away from large developments that can take many years and billions of dollars to complete, towards smaller more flexible projects. BP has similarly said it is pulling back from expensive frontier exploration that can take a decade or more to pay off.”
What this amounts to is severe global shortages of oil and gas in the 2020s. This is not to be confused with the likely shortages that are expected later in 2016 or 2017 as a result of reduced US shale drilling. These are expected to push prices back above $100 per barrel, but would also result in renewed shale drilling that would prevent prices going much higher. However, it is the ongoing production of large-scale oil and gas fields by Big Oil that prevents high prices morphing into a full blown crisis. By the mid-2020s, the failure to invest in the big projects today will create precisely the kind of shortages that could drive prices well above $200 per barrel – far above the point where global recession would be inevitable.