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Odd Lots

Why Surging Oil Prices Have a Lot to Do With Capital Markets

Prices are rising but all’s not well in oil town.
Photographer: Spencer Platt/Getty Images North America

To understand what’s going on with the nodding oil pumps in U.S. shale country, it helps to look to the gleaming skyscrapers of New York.

A huge chunk of the erstwhile oil boom that transformed American towns in the early 2010s can be traced back to Wall Street, where years of cheap borrowing costs encouraged energy companies to fuel their rapid growth by tapping capital markets. Eager investors would readily hand over a mix of bonds, loans and equity to lossmaking energy firms in the expectation of future growth and profits, but their willingness to bet on energy expansion was curtailed when the price of oil collapsed.

Now as the cost of crude soars to above $85 for the first time in seven years, the question is whether these investors will step back in to finance a fresh round of drilling and new production from U.S. shale. For those concerned about higher oil prices and inflation, the fear is that they won’t.