Oil and Gas

Could the US bail out its own oil sector?

Oil stocks will see 'massive correction' in 2015: Pro
Oil stocks will see 'massive correction' in 2015: Pro

An economist who correctly predicted the fall in oil price this year has told CNBC that the U.S. government could look to bail out its energy sector in 2015 as the commodity's low price starts hitting the country's economy.

"The U.S. energy sector is clearly important," Steen Jakobsen, the chief economist at Danish investment bank Saxo Bank, told CNBC Wednesday. "They are paramount to the long-term strategic issue that the U.S. will be self-dependent on oil."

Jakobsen is part of team that puts together an annual "outrageous predictions" outlook that has been running for more than a decade. He concedes that these so-called black swan scenarios are "relatively controversial", but says they could help investors navigate any real-life turmoil that arises. His prediction on a U.S. bailout is his own personal prediction and did not make the formal list that the Copenhagen-based company published on Wednesday morning.

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A large number of economists believe the drilling frenzy and huge domestic energy boom has helped the U.S. to recover since the global financial crash of 2008, contributing an estimated 0.3-0.6 percentage points to U.S. gross domestic product. But Jakobsen believes this tailwind could soon become a headwind despite gas becoming cheaper at the pump for U.S. citizens.

"It will subtract 0.5 percent from GDP, bare minimum," he said. "There's a precedent here, back in the 80s we also had an oil crisis and that led to bank recoveries."

He added that oil companies are in for a "massive correction," similar to the downtrend seen in mining stocks, explaining that exploration was getting "hugely expensive" with energy majors having little free cash flow available.

Win McNamee | Getty Images

The has clocked gains of around 11 percent so far this year, but the energy sector within the benchmark is currently down nearly 12 percent. Oil prices are trading at five-year lows with Brent futures losing around 40 percent in value since June.

One of Jakobsen's "outrageous" predictions this time last year was for the commodity to drop below $80 per barrel which was achieved in November with oil now trading at around $65. BP sounded the alarm on Wednesday morning by saying that it is implementing a cost-cutting program due to the tumbling prices.

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Any potential bailout for the sector, or even the banks that lend to them, would prove vastly unpopular in the U.S. The country is still reeling from a financial crash in 2008 when taxpayer money was used to backstop major financial institutions on Wall Street.

Dennis Gartman, a commodities investor and the editor of The Gartman Letter, told CNBC that any bailout is simply inconceivable.

"We bailed the banks out and the public's anger has been very real and very long standing," he told CNBC via email. "Bailing out the oil companies would be even more seriously hated."

U.S. oil production is a private-sector venture and differs wildly from the state-run companies in the Gulf states and South America. However, the latter countries are able to extract oil from the ground at a cheaper cost than U.S. shale firms and there has been some speculation by economists that the two different industries could be playing a "game of chicken" before cutting back on any oil production to ease the oversupply.

BNP Paribas' Global Head of Commodity Strategy, Harry Tchilinguirian, was equally in incredulous at the possibility of the U.S. government stepping in.

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"In the event that oil prices fall further into 2016 and hurt smaller un-hedged independent operators as their free cash flow declines and their ability to raise finance is curbed, it is possible to see closures or consolidation in the sector," he told CNBC via email. "But is this reason enough for the government to intervene?"

'Hard to call' when oil prices hit bottom
'Hard to call' when oil prices hit bottom

Christian Schulz, the senior economist at Berenberg Bank, agreed that U.S. oil producers, and their lenders, could get into trouble if lower oil prices remain but said they are not "systemically important enough" to be bailed out by the government.

"Instead usual insolvency procedures will apply where necessary and some investors and lenders would lose some money," he told CNBC via email.