How Rising Interest Rates Could Spell the End of the U.S. Energy Boom
The winding down of extraordinary measures taken by the U.S. Federal Reserve to ameliorate the effects of the financial crisis could reverberate through energy markets.
The Fed has kept short-term interest rates near zero for several years, a target that the institution hoped would spur lending and kick start the moribund economy in 2009. With job growth anemic for half a decade after the crash, the Fed has maintained its monetary stimulus right up until today.
But with the economy on more solid footing, the Fed is preparing to wind down its stimulus, known as “quantitative easing.” And although details are murky, the Fed will likely decide to raise interest rates sometime in 2015.
So what does this have to do with energy?
The oil and gas industry is extremely capital intensive, with billions of dollars required in some cases to pull hydrocarbons from the ground. That means that companies need to sell a lot of debt to financial markets, and use the cash to bring projects online.
But if interest rates rise, it will significantly raise borrowing costs for oil and gas operators. And the repercussions will amount to a double whammy.
via How Rising Interest Rates Could Spell the End of the U.S. Energy Boom.