Why Oil gets a Bailout and you don’t


May 19, 2020

My Dear Reader,

Recently oil companies received 1.9 Billion dollars in bailout money from the federal government.  Because of the nature of politics, this became a hot button issue among the more vocal radicals on the left. I am not one to agree with corporate bailouts, I don’t believe that government favoritism in a free market works all that well, but the reality of the situation calls for such action in the energy sector now.  Sovereign Man investing lays out this problem in an article from March 2020:

“Banks are about to drown in an ocean of defaults. I’ll talk about this a lot more in the coming days, but briefly, there’s $250 TRILLION in global debt right now– mortgages, credit card debt, business loans, government debt, etc. And banks own a large portion of that debt. This virus crisis is going to trigger a wave of defaults from consumers, businesses, and even governments. Think about it: tourism alone makes up 10% of global GDP. Revenue in that entire sector– hotels, airlines, cruise ships, etc. has collapsed, and many of those companies aren’t going to survive. The crash in oil prices is going to wipe out countless oil companies.” 

Essentially, this means that if oil and energy companies default on their loans, it could trigger a chain reaction that could create a banking crisis that dwarfs 2008 and maybe even the great depression.  I don’t make this statement lightly, I have a respect for history and historical catastrophes, but there are a few reasons why an ocean of defaults right now could be so deadly. 

First of all, the power of the US dollar has greatly eclipsed what it was in the 1930s. There are now 11 countries and territories, excluding Puerto Rico, that primarily use the US dollar for their currency: Ecuador, Republic of El Salvador, Republic of Zimbabwe, Guam, Virgin Islands of the United States, Democratic Republic of Timor-Leste, The American Samoa, Commonwealth of the Northern Mariana Islands, Federated States of Micronesia, Republic of Palau, and the Marshall Islands. [Source] This means that the inevitable devaluation of the dollar will hurt more countries and deal outside of the US. Remember, the devaluation of the dollar occurs whenever the Fed prints more money to meet US debt demands.  So when trillions of dollars are added to circulation, it creates a devaluation of every other dollar currently in circulation.  This is the impact of bailouts on any level and the effects can now be global in scale.  

However the cost of bailing out each and every American family, as some would suggest would dramatically increase the reality of this problem, and end up hurting the average family more than helping them.  As we are in the moral relativist age of “politics is good if it does the most good for the most amount of people”, a prudent politician would bailout the oil companies, because the cost of bailing out the banks when all of these oil companies go belly up would be astronomical.  That being said, be careful of the energy sector for a while, should there be a second wave, we could see oil prices plummet again, and if that happens, another round of bailouts could be on the ballot.

To Your Creation and Potential,

Kevin Prendiville