Confronting A Crisis
Fossil fuel companies have long benefited from subsidies that have been sold to the public as vital for a robust economy.
Since the coronavirus pandemic, however, the companies — many already deep in debt — have received billions through programs set up under the CARES Act, a $2.2 trillion stimulus package signed into law by then-President Donald Trump in March 2020. The money includes massive tax breaks, subsidized loans that debt-burdened drillers could use to pay off existing borrowings, and bond purchases that supported their issuance of new debt.
The combined effect of the programs has been to keep the industry afloat, despite hundreds of bankruptcies that began well before the pandemic arrived. Here are some key initiatives that have served to prop up the fossil fuel sector:
Tax Change Windfalls
Tax law changes in the wake of the pandemic have injected companies with $8.4 billion dollars in unexpected tax refunds. Some of the companies benefiting were already in bankruptcy; others filed for court protection from their creditors soon after reporting their tax windfalls.
The changes, which were part of the CARES Act, allow companies to claim tax credits based on previous years’ losses – a boon to fossil fuel companies that were unprofitable before the virus hit.
President Trump assured fossil fuel executives in an April 3 meeting that because of this change, the stimulus bill “gets you a lot of liquidity. And a lot of companies need the liquidity right now.”
As of March 2021, at least 79 oil companies, service firms, and contractors have claimed more than $7.75 billion in tax refunds, BailoutWatch analysis has found. This number will likely continue to grow.
Bond Buying By The Fed
Under its Secondary Market Corporate Credit facilities, the Fed bought $5.1 billion in corporate bonds from private investors, including $470 million issued by fossil fuels. The Fed bought more fossil fuel bonds than if it was assembling the portfolio based on employment, indebtedness, or stock-market value.
At the outset of the program, the Fed could only purchase corporate bonds and corporate bond ETFs that cleared the low standard of “investment grade”. Over time, the Fed relaxed its standards to include companies with even weaker credit, including issuers of “junk bonds” — bonds whose credit ratings fall below “investment-grade.”
Billionaire hedge fund investor Dan Loeb blasted the lower standards, saying the Fed's investments in junk bonds are "fraught with moral hazard on several fronts." Moral hazard occurs when government bailouts lead investors to believe they will be protected against losses, leading to excessive risk-taking.
As a result, fossil fuels were able to issue nearly $100 billion in new bonds in the months after the Fed announced its backstop. In effect, the government empowered private investors to perform their own bailout, based on their confidence that a public bailout would soon follow if the economy faltered.
Main Street Lending Program
The Main Street Lending Program (MSLP) aimed to help companies that were healthy before the pandemic by establishing the Fed as a backup lender to fund their operations if private investors backed out.
The MSLP expanded the Federal Reserve’s emergency-lending operations beyond corporate bond-buying, to companies with fewer than 15,000 employees or $5 billion in revenue for 2019. Backed by $75 billion from the CARES Act, the program funded $17.5 billion in loans to businesses that are too small to benefit from the bond-buying programs, including $2.2 billion to fossil fuels.
The Fed announced the program on April 9, 2020. In the weeks that followed, the fossil fuel industry and sympathetic lawmakers like Sen. Ted Cruz lobbied the Fed to relax its terms so that more companies would be eligible.
On April 30, the Fed appeared to bow to these demands, changing the rules to include:
- Companies that are more heavily indebted
- Companies planning to use government-backed loans to pay off existing loans
- Companies that qualify using easier-to-fudge earnings metrics like “adjusted earnings” and “industry-specific” standards
- Companies that lay off workers, so long as they made “commercially reasonable efforts to maintain payroll and retain employees”
The Fed has denied the changes were made to benefit a particular industry. But Trump’s Energy Secretary Dan Brouillette later undermined this claim, saying in an interview that he and Treasury Secretary Steven Mnuchin “worked very closely with the Federal Reserve” to make the money available to more players in the oil and gas sector. A Congressional Oversight Commission has publicly doubted the Fed's denial.
The changes benefit oil and gas companies like ProFrac, whose owners were Cruz’s key political patrons.
Paycheck Protection Program
The Paycheck Protection Program is an emergency program designed to help small businesses keep more workers on their payrolls. It offers a total of $669 billion to companies with 500 employees or fewer, including many that qualified for the Main Street program. This money is a loan, but companies don’t have to pay it back if they spend it on payroll, rent, mortgage interest, or utilities.
Oil, gas, and related industries collected as much as $9.1 billion, BailoutWatch found. Analysis by BailoutWatch found that coal, oil, and gas companies were more likely to receive bailout money, more likely to get the biggest loans, and tended to save fewer jobs, compared with companies in other industries. BailoutWatch also identified dozens of companies that took taxpayer money after being charged with pollution, safety, and fee violations.
The PPP was managed by the Small Business Administration.