The 2008 financial crisis and the Great Recession that followed had a pronounced negative impact on the oil and gas sector as it led to a steep decline in oil and gas prices and a contraction in credit. The decline in prices resulted in falling revenues for oil and gas companies. The financial crisis also led to tight credit conditions that resulted in many explorers and producers paying high interest rates when raising capital, thus crimping future earnings.
- The 2008 financial crisis and Great Recession induced a bear market in oil and gas, sending the price of a barrel of crude oil from $133.88 to $39.09 in just a less than a year.
- The recession led to a general drop in asset prices around the world as credit contracted and earnings projections fell.
- At the same time, rising unemployment and lower spending led to less demand for oil by both consumers and businesses.
The Financial Crisis
The financial crisis started in the real estate market in 2006 as defaults on subprime mortgages started to rise. At first the damage was contained. However, it ended up severely reducing economic activity as the rot spread through the economy. For some time, commodity prices continued to rise even as the housing market weakened.
The crisis eventually unveiled a wave of deflation and liquidation that took all assets lower, including oil and gas. At the same time, unemployment rose as companies reduced output since aggregate demand was falling. As a result, less energy was consumed and the demand for oil and gas fell in turn, putting additional pressure on its price.
Oil and Gas Sector
Oil prices fell from a high of $133.88 in June 2008 to a low of $39.09 in February 2009. Over the same time period, natural gas prices fell from $12.69 to $4.52. The lower price for oil and gas due to the financial crisis was the major impact on the sector. Energy prices thus fell due to diminishing demand, a contraction of credit with which to make purchases, and lower corporate earnings which led to layoffs and increased unemployment.
Eventually, aggressive stimulus employed by governments to combat the financial crisis resulted in expectations of increased inflation that led to commodity buying and an improvement in credit conditions. Demand rebounded as the fiscal and monetary stimulus reversed deflationary forces and led to prices climbing higher. However, companies forced to raise capital during this time period suffered higher interest rate expenses for an extended period of time.