Monday, January 18, 2016

Is oil the next sub-prime mortgage debacle?

As I look over all the stories about the price of oil I was surprised to find out how leveraged the industry is. What happens if most of the loans to oil related companies are defaulted on? What happens if many of the oil related companies file for bankruptcy protection? What kind of exposure do banks have to these loans that were once “risk free” and are now basically “junk”? I think this all could turn out to have a major impact on our economy just as the debacle with sub-prime mortgages had in the last financial crisis. As the price of oil stays low (or goes lower) we can expect a wave of defaults and bankruptcies across the oil industry that will have a serious negative impact on banks and other financial institutions. I think we can see another “Lehman” event occurring in the near future all because the price of oil has fallen so low. How would have ever thought that this could happen? Oil was supposed to be risk free. Maybe nothing is risk free.
What do you think?