U.S. oil companies spent less on interest over the last decade despite higher rates
Note: Production expenses include costs of goods sold, operating expenses, and production taxes from company income statements. Interest expenses are in 2024 dollars and deflated using the Consumer Price Index.
Higher oil prices, increased drilling efficiency, and structurally lower debt needs have contributed to lower interest expenses for some publicly traded U.S. oil companies over the past decade, despite the level of interest rates across the economy being relatively high.
Based on the published financial reports of 26 U.S. publicly traded oil companies, interest expenses per barrel of oil equivalent (BOE)—a measure that accounts for crude oil, hydrocarbon gas liquids, and natural gas production—in 2024 were about $1.50/BOE, or around 6% of production expenses. In real dollar terms and as a share of production expenses, interest expenses are lower than they were before the pandemic, even though general interest rates are now higher.
Although interest expenses typically represent a small portion of production expenses—those associated with labor, materials, and the costs of extracting and storing oil and other commodities—their variability can fluctuate with macroeconomic conditions. For example, a rapid decline in crude oil prices might lower some production expenses but not interest expenses, which are often fixed throughout the life of a loan. During these times, interest expenses can represent 15% or more of regular production expenses.
The decline in interest expenses may be counterintuitive as interest rates in the United States have generally increased since 2020 and 2021. Short-term interest rates—designated by the federal funds effective rate, which determines the interest rate on overnight bank loans—have reached as high as 5.3% since 2022 and stayed above 4% since then, compared with nearly 0% five years ago.
The Federal Reserve determines the federal funds rate, and the rate serves as a key monetary policy tool to reach the goals of price stability and maximum employment. The federal funds rate affects other interest rates that are determined from market participants’ supply and demand for loans, including bank loans, government bonds, and corporate bonds. For example, Moody’s Aaa and Baa corporate bond rates represent different bond yields based on creditworthiness.
Oil company interest expense has declined despite higher interest rates because of:
- Relatively high oil prices. Crude oil prices increased in the years after the pandemic. Higher oil prices bring in more revenue, which means oil companies need to borrow less to fund their capital expenditures and can also pay down debt obligations. In addition, higher oil prices increase the value of a company’s proved reserves and reduce the risk of loan default, which may lead to better borrowing terms, such as lower interest rates.
- Increased efficiency and cost reduction. Lowering production expenses and improving efficiency increases company profits, which could result in better borrowing terms and lower borrowing costs.
- Tempered investment growth and strategy. In recent years, companies have implemented strategies that favor modest capital expenditure growth by targeting fewer but more profitable projects. With this approach, the company may generate more profits even if the company’s production growth was small or unchanged. This strategy reduces companies’ needs for outside capital, including borrowing.
Principal contributor: Jeff Barron
Tags: prices, production/supply, liquid fuels, oil/petroleum