Publications: Notes at the Margin

An Industry on the Verge of Collapse (March 23, 2020)


The IHS Markit CERAWeek conference scheduled to kick off March 9 in Houston was canceled due to the novel coronavirus. IHS expected ten thousand to attend. The Hilton convention complex was totally booked. The firm took a write-off of $10 million, according to an SEC filing, after axing the gathering.


The 2021 event will be much smaller if it happens at all. If trends continue, the summit could be held at a Holiday Inn Express on the city’s outskirts. There might even be rooms to spare.


The downsizing will occur because the oil industry is under unprecedented economic pressure. This problem has not been caused by the price war between Russia and Saudi Arabia, although that battle does contribute. No, the crisis is occurring because COVID?19 has obliterated petroleum demand. The resulting price collapse will destroy hundreds, if not thousands, of firms. The deaths will happen quickly in the coming weeks as banks cut off credit to oil producers, refiners, marketers, and others.


The likely impending bankruptcy of Boeing, a pillar of the US economy only a few weeks ago, signals that the foundations of even the most financially solvent companies rest on quicksand. The situation of many oil companies is much the same.


Boeing’s potential failure stems from the company’s slipshod handling of the 737 Max’s development. Hundreds of these planes now sit on the tarmac, waiting for software updates.


Meanwhile, the airlines that only three months ago were anticipating breathlessly the delivery of these planes have been destroyed economically. These firms are seeking government relief just to keep operating. They have no funds and no need for new aircraft.


Oil companies will be equally devastated by the virus, although the firms do not realize this yet. The oil and gas industry will fall victim to it just like the airlines, although some, such as Pioneer Natural Resources CEO Scott Sheffield, would rather blame OPEC.


Collapsing demand for their product will kill many airlines and oil companies. Anyone skeptical of this view should conduct the following thought experiment. Airlines are facing ruin despite the price collapse in jet fuel, their most costly input. If low prices do not stimulate increased demand for airlines, why should oil companies be different?


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