A recent front page story in the Wall Street Journal told the story of a courageous entrepreneur who impressively got in the proverbial door with Costco. She had what Journal reporter Ruth Simon referred to as an “African inspired” snack, and after a great deal of courting, Florence Dennis had a $375,000 order from Costco.
Easy street from there? Hardly. It turns out the truly difficult work had just begun. Dennis subsequently had to find investors or a bank willing to finance a very large increase in inventory necessary to fulfill Costco’s sizable order. Which was the obvious problem. What if the snack doesn’t sell?
Dennis’s difficulties rate mention vis-à-vis the popular notion of “Drill Baby, Drill,” and the frequent corollary to the latter that says banks must finance oil exploration and drilling, or else. Texas legislators have in particular put a bull’s eye on national banks operating in Texas, and who are thought to be boycotting the fossil-fuel sector.
Legislators have met what they presume to be a boycott with one of their own. Specifically, banks thought to be turning their noses up to fossil fuel companies aren’t allowed to finance municipal bond issuances in the Lone Star state. Which requires a pivot back to Dennis.
Just as the Costco order proved the “easy part” for Dennis, so is “Drill Baby, Drill” and finding an oil lease that gushes the theoretically easy part for oil & gas companies. The hard part, not unreasonably, is securing the financing necessary to extract the oil and bring it to market.
This is arguably what the “Drill Baby, Drill” crowd overlooks amid the chants. If it’s challenging to find financing for a new product that Costco is interested in, just think of the challenges that oil companies face.
Assuming their lease or leases bear fruit, there are as previously mentioned enormous costs associated with extraction. Assuming the latter, is it easy street from there? Plainly not. See the price of a barrel of oil in the last year alone if you’re confused. The 52-week high for a barrel was $86, reached in April. At present, a barrel fetches $68.
If you’re a bank, or an investor with full equity, are you necessarily eager to finance the extraction of that which is so volatile in price? Depending on the price you could either get your money back (or multiples of your investment back) with ease, or not at all.
Expanding the price action for oil a little bit more, in April of 2020 the price of a barrel fell all the way to $11.57 amid economy-crushing lockdowns related to the coronavirus. Eventually the lockdowns ended, and oil recovered. The modern high for a barrel of oil was $115 in March of 2022. Once again, pretty big price swings; price swings that would necessarily have investors gun shy.
As for banks, the volatility discussed in the last three paragraphs would not unreasonably make lending to the oil and gas sector entirely too risky. Lest readers forget, banks don’t lend in return for equity, rather they make money from interest charged on loans. In other words, banks profit from loans that are paid back. Except that the volatility of the price of oil renders those loans incredibly risky.
This truth is something Texas legislators and state legislators more broadly would do well to consider. The suggestion that national banks specifically boycott oil is not only empirically false (J.P. Morgan is for instance the largest financier of fossil fuel and “clean energy” activity in the world), it presumes that banks can just blithely lend without regard to whether they’ll be paid back. The view is unserious, as is the notion that the only barrier to a lack of crude oil extraction is a lack of freedom to “Drill Baby, Drill.”
