Oil Price, Overleveraging and Shakeout in the Shale Energy Sector -- Game Changers in the Oil Industry

27 Pages Posted: 16 Oct 2015

See all articles by Arkady Gevorkyan

Arkady Gevorkyan

New School for Social Research; Federal Reserve Bank of Cleveland

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Date Written: October 14, 2015

Abstract

In recent years, we have observed significant growth in unconventional energy, shale energy, in particular in the United States. There was a boom, followed by a bust. The plunge in oil price triggered a prolonged bust in the energy sector. Which firms will benefit, and which will be squeezed out due to this persistent oil price decline? A new equilibrium is about to evolve under these conditions. In this paper, we develop a theoretical model that accounts for recent features in the energy sector. In particular, we focus on the shale energy companies and illustrate a trend toward a boom in external borrowing, overleveraging, and, now, a high risk of insolvency. With the use of a new method, called nonlinear model predictive control (NMPC), we show dynamic paths toward two equilibria: either a tight oligopoly or extensive competition, with the shakeout of some firms. This is also tracked by studying leveraging and overleveraging by groups of firms. We further undertake an empirical analysis using a vector error correction model (VECM), which helps identify the short- and long-term effects of those new challenges on the stock performance of the energy companies. The main finding is that large-cap companies are less dependent on the fluctuation in oil price than are mid- and small-cap firms.

Keywords: Oil price, fracking, overleveraging, insolvency, NMPC, shale oil

JEL Classification: D43, Q43, Q32

Suggested Citation

Gevorkyan, Arkady and Semmler, Willi, Oil Price, Overleveraging and Shakeout in the Shale Energy Sector -- Game Changers in the Oil Industry (October 14, 2015). Available at SSRN: https://ssrn.com/abstract=2673066 or http://dx.doi.org/10.2139/ssrn.2673066

Arkady Gevorkyan (Contact Author)

New School for Social Research ( email )

6 East 16th Street
New York, NY 10003
United States

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

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