Oil price declines have resulted in fatal blows as industry bankruptcies now rival those from the Tech bubble burst at the latest turn of the century. Approximately 60 U.S. oil companies have filed for bankruptcy—just a few less, at this point, than the 68 filings made during the tech crash. Fifteen bankruptcy filings occurred in the first quarter of 2016 alone including Houston’s Ultra Petroleum Corp. and Oklahoma-based Midstates Petroleum Co. Despite rising oil prices, more producers are expected go broke this year as well.
Recent Oil Bust Similar to Tech in 2001?
Innovative technology played a key role in the boom and the bust (ironically) of both oil the dot coms/tech. While the U.S. oil industry prospered on the back of the shale revolution, the tech boom was aided by pioneering communication technology, such as high-end optical fiber (coupled with industry deregulation in 1996).
For both sectors, the rapid onset of innovative technology created strong prospects for future growth and encouraged a rush of new entrants into the space (along with plenty of investors who largely overvalued the growth potential). The end result was the same:
The valuation plunge in the oil sector closely resembles that of the 2000 tech bubble. According to Dow Jones Oil and Gas Index, valuation losses amounted to $1.02 trillion against a 60% drop in crude prices since mid-2014, widely exceeding the $882.5 billion of valuation erosion from the Dow Jones U.S. Telecommunications Sector Index in the aftermath of the telecom bust.
Energy Impact Similar to That of Technology Bust?
Although certain aspects of the oil rout might evoke déjà-vu of the 2000s tech bust, it would be overstating the case to equate their impact. The effects of innovation in the tech space were not limited to that industry alone as the revolution in communications via the internet and wireless phone services emerged as the lifeblood of the 21st century global economy. So, bankruptcies in that space were bound to create acute issues across the economy.
On the crude oil side, the effects of price declines are more diverse across a variety of sectors. Bankruptcies from crude price declines are more likely for companies that exclusively deal in exploration/production. Bigger, integrated players have offset negative earnings from upstream operations with tailwinds provided by lower crude cost for downstream activities. Additionally, the energy sector’s overall market presence is not necessarily threatening for the economy as a whole. While oil and gas extraction’s labor force comprises just about 0.1% of total nonfarm employment and its value added accounting 1.7% of 2014 GDP, most big American banks’ exposure to the sector do not exceed much over 3% of their loan portfolios.
Furthermore, the price declines have already stimulated larger slices of the economy through fuel cost savings for consumers and resource-intensive industries (a positive sign for the overall economy over the longer term). Also, a substantial part of U.S. oil consumption comes from foreign countries, so U.S. oil bankruptcies by themselves are not sufficient enough to deprive the nation of fuel and cause an energy crisis.
Lastly, most oil corporations, under Chapter 11, would continue operations—something that should assuage fears of future production shortages.
Bottom Line for Investors
Although cratering crude prices have dealt a massive blow to the energy sector, it is not likely to create catastrophic impact across the economy, as a telecom/technology bust could and did. The well managed players in energy have already largely restructured their businesses for lower crude prices, and the smaller players that have gone by the wayside probably won’t create any kind of ripple into the broader stock market.
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