It has been a long time since drivers in the U.S. have seen the price of gas as low as it was at the start of 2016. Thanks to the bottom falling out on the crude oil market, everything from gasoline to home heating oil is as cheap now as it was back in the late 90s. This is good for the average consumer looking to get by in the midst of sluggish economic growth. It is not so good for dozens of oil companies. It turns out we could all learn a few lessons from these companies and what they are now going through.
Lower oil prices mean you and I pay less to heat our homes and drive our cars. It also means that the companies employing us do better by way of lower energy costs. But low oil prices are also affecting those that produce the energy we use, and not in a good way. We can look at them to learn three important lessons relating to our own finances:
1. Debt Can Quickly Become Overwhelming
Some 42 oil companies filed for bankruptcy in 2015. Making matters worse, 11% of oil industry companies defaulted on some sort of debt this past December. The biggest problem many of these companies have boils down to the difference between income and the amount of money required to service their debt.
In simple terms, a lot of oil companies leveraged themselves heavily by assuming a large amount of debt when oil prices were still high. They based their ability to repay what they owe on the revenues they were enjoying at the time the debt was incurred. They no longer experience the same level of revenue due to falling oil prices.
The lesson to be learned here is how easily debt can become overwhelming. Even we consumers run the same risks. We take on mortgages, car loans, and credit card debt based on today’s income stream. But what happens if that income stream is interrupted? Debts can quickly become unmanageable, thereby leading to overwhelming financial problems.
2. Debt Cannot Always Be Rolled Over
A tactic that some of the oil companies have been using to stay afloat is rolling over their debt. In other words, they sell new bonds in order to repay the bonds currently coming due. This keeps past creditors happy while encouraging new investors to get on board in the hopes that the oil price will eventually rise. However, this is becoming a more challenging proposition with each passing day.
Likewise, consumers sometimes use credit cards to pay off other debts from the past. Others will use debt consolidation loans to pay off credit cards. The problem is, the person in severe financial straits cannot continue taking out new credit in order to pay off existing debt in perpetuity. Eventually, all of that debt catches up.
3. Bankruptcy May Be the Only Answer
The third and final lesson is that sometimes bankruptcy is the only answer. Dozens of oil companies
will reach that conclusion this year, attempting to discharge their debts or reorganize in the face of low oil prices. Undoubtedly, tens of thousands of consumers will reach the same conclusion in 2016.
Those of us who deal with bankruptcy on a regular basis know that it is an action of last resort. However, exhausting every other option may leave a consumer with no other choice. In such cases, a well thought out bankruptcy prepared by an experienced attorney can bring an end to severe financial problems.