As the coronavirus pandemic tanked U.S. markets in March, the Federal Reserve started lending directly to companies across a wide range of business sectors by buying up corporate bonds.
The $250 billion that Congress authorized the central bank to inject into the bond market helped many otherwise healthy balance sheets weather the sudden financial storm. Of the $1.3 billion in funds whose recipients have been disclosed so far, roughly 8% went to fossil fuel-related bonds ― even though the oil, gas and coal sector comprises just 3% of the S&P Composite 1500 stock index.
But the fossil fuel sector’s credit rating was spiraling downward well before COVID-19. Of that nearly $100 million known to be directed to the industry, $22 million went to prop up bonds with such low credit ratings they are considered non-investment grade ― “junk” bonds. And fossil fuel bonds in general look likely to become riskier in the future.
If the Fed continues buying the same proportion of fossil fuel bonds for the remainder of the program, the central banking system could own about $19 billion worth of high-risk fossil fuel bonds, according to a new analysis published Tuesday by the British nonprofit Influence Map, which tracks corporate lobbying on climate policy. That could include $4 billion in bonds supporting companies that might under normal market conditions go out of business.
“This is a sector that’s in terminal decline in terms of its credit rating,” Dylan Tanner, executive director of Influence Map, said by phone on Sunday. “The credit agencies collectively think there is a good chance of the companies going into default on their bonds.”
The study tracked changes in credit ratings for companies across the S&P 1500, which represents 90% of the U.S. market. Using scores from the big three credit rating agencies (S&P, Moody’s and Fitch), Influence Map’s researchers found that the fossil fuel sector’s average credit rating deteriorated 8% over the five years leading up to January 2020. Stretching the timeline back two decades, the sector’s credit rating had fallen 19%.
Since the start of 2020, fossil fuels declined another 5% after the price of oil and gas plummeted to historic lows as the pandemic crushed demand.
That decline is nearly double that of the second-worst hit sector ― the consumer discretionary category, which includes hotels, airlines and auto sales ― which fell 3% since the start of the year. Over the past five years, the consumer discretionary sector’s credit rating fell just 2%, “suggesting that COVID-19 was the primary cause of its recent drop in creditworthiness and that recovery seems likely,” the report stated.
For the consumer discretionary sector as a whole, “there are dynamics that balance out,” Tanner said. As social distancing shoppers started buying more products from home, online retailers’ credit rating kept rising, even as that of department stores declined.
But the 81 companies in the S&P 1500’s energy sector don’t show that kind of diversification. They are entirely in the fossil fuel industry, ranging from oilfield services and drilling to coal transport and pipeline builders to integrated oil and gas giants, such as Exxon Mobil and Occidental Petroleum. Solar, wind and battery companies, on the other hand, are distributed between S&P’s utilities and technology categories.
“The Fed keeps allowing otherwise unviable companies and industries to function via supporting their debt,” Tanner said. “That hampers the ability of clean energy competitors to take the market.”
The Fed declined to comment on the record. The American Petroleum Institute, the oil and gas industry’s biggest lobbying group, did not respond to questions emailed Monday morning.
“The Fed keeps allowing otherwise unviable companies and industries to function via supporting their debt. That hampers the ability of clean energy competitors to take the market.”
- Dylan Tanner, executive director of Influence Map
The bond-buying program represents only a sliver of the U.S. government support that fossil fuel companies still receive, despite unequivocal calls from climate scientists around the world to dramatically wind down the industry in a bid to avert catastrophic warming scenarios in the coming decades.
In 2015 alone, the United States gave out $649 billion in fossil fuel subsidies, according to an International Monetary Fund study published last year. That places the U.S., also the world’s second-largest emitter of planet-heating carbon dioxide, behind only China, both the top emitter and the provider of $1.4 trillion in subsidies. Since the start of the pandemic, the Trump administration has provided additional aid to oil companies by purchasing oil and storing it in the Strategic Petroleum Reserve, suspending environmental regulations, and pressuring Russia and Saudi Arabia to cut production.
Yet even as many major European oil companies are spending growing shares of their investment on clean energy development, U.S. firms lag far behind.
“We get the feeling that some U.S. companies are digging in their heels and saying, ‘We managed to control regulations for two decades and we’re going to double down on that,’” Tanner said.
While the Fed hasn’t disclosed its mid-pandemic investment strategy, the bond purchases so far do little to encourage change in the fossil fuel industry, he said. “This is possibly just picking winners and losers in the system.”