US energy capital spending to keep falling amid industry collapse: Dallas Federal Reserve

[BOSTON] Capital spending by the US energy sector that has dropped during the coronavirus crisis could fall another 30 per cent or more, which would have far-reaching consequences on the overall economy, the Dallas Federal Reserve Bank said on Tuesday.

US fuel demand dropped at one point by nearly 30 per cent due to shutdowns ordered to stop the spread of the coronavirus, contributing to a dramatic fall in oil prices.

When oil prices have been low in the past, consumers had more discretionary income left for other purchases after paying less at the gas pump. But now, people are restricting their movements nationwide, with the consequence that numerous energy companies have ratcheted down spending and shut wells.

"The sharp reduction in capital expenditures by oil companies explains why this oil price decline, on balance, actually hurt US investment spending - and hence, economic growth - not only in oil-producing regions, but overall," the Dallas Fed article said.

A bright spot is that US banks are not overly exposed to the oil sector's crisis.

"Even for the most-exposed banks, the share of bank loans to the energy sector was no larger than 18 per cent in the fourth quarter of 2019," the article said. Few banks even had an exposure larger than 2 per cent, and tighter regulations mean those banks hold more reserves to guard against losses.

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REUTERS