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

Arkady Gevorkyan and Willi Semmler

No 2015-07, SCEPA working paper series. from Schwartz Center for Economic Policy Analysis (SCEPA), The New School

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 (search for similar items in EconPapers)
JEL-codes: D43 Q32 Q43 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-09
New Economics Papers: this item is included in nep-ene
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Journal Article: Oil price, overleveraging and shakeout in the shale energy sector — Game changers in the oil industry (2016)
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