Crashing Oil Prices Could Bring The US Fracking Boom To A Sudden And Disastrous End
Technological advances in hydraulic fracturing have fueled what some call the Great American Shale Boom. Oil and natural gas extracted from shale basins have left the US flush with energy. It's been a boon for US energy-related jobs and equipment suppliers.
But it's not cheap to tap these so-called unconventional plays.
In other words, crashing oil prices will soon make many of these energy sources money-losing projects. Morgan Stanley estimates the average breakeven oil price for these US plays to be about $76 to $77 per barrel. Goldman Sachs puts that number at closer to $75.
If the price of oil can't cover production expenses and these companies are forced to idle their operations, then you could expect spending to drop, jobs to get cut, and delinquencies and defaults to rise.
To make matters more complicated, many of these energy companies are financing their operations by borrowing in the junk-bond market, which means borrowing rates are relatively high.
"As oil prices have fallen recently, so have prices of high-yield bonds," Charles Schwab's Collin Martin wrote in October. When bond prices fall, rates rise.
"Oil prices can have a broad impact on the high-yield bond market because energy corporations have been increasing their share of the high-yield bond market. Today, energy companies make up more than 15% of the Barclays U.S. Corporate High-Yield Bond Index. That's up from less than 5% of the index at the end of 2005—and the chart below shows that the share has been steadily increasing over the past decade."
Even worse, this comes as interest rates are broadly expected to go higher from here:
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