Black Gold was once a very tempting prospect luring investors with promises of big payouts as the oil and gas industry boomed. Fast forward to this year and many investors are now looking at their energy portfolios in horror.
The boom started after Federal Reserve drastically reduced interest rates during the financial crises, causing investors to for alternatives with better earnings. This demand was met by the energy sector which, unlike before, focused on drilling rather than just the storage and transport of oil. With promised yields of at least 6 percent, the last five years up to and including 2014 showed investment in energy companies at $21 billion, over double the previous five year period. Now plunging oil prices are causing a downward spiral and threatening to wipe out investor’s savings.
In just the past year, almost $20 billion have been wiped off the value publicly traded drilling partnerships or an astonishing $8 for every $10 invested. That number does not even include the losses incurred on the $37 billion in bonds issued by drilling companies over the last five years, the majority of which are down by as much as a half in the past year. On top of that there are also losses from private companies which generally do not publicize their losses.
While this situation could have been foreseen, investors and financial institutions ignored the high risk nature of the industry and instead funded it by providing blank checks and almost unlimited access to credit while oil prices were high. In retrospect, this points to either sloppiness on the side of investors looking for a quick buck or recklessness on the side of brokers and bankers as they were blinded by the fat fees. But actuality it is a combination of both and a cycle that seems to be endlessly repeated. Maybe this time investors will learn, or maybe oil will just go up again.