During the Great Financial Crisis, Hyman Minsky was rediscovered. Minsky's insight was that long periods of steadily rising asset prices encourages financial engineering and leveraged bets that assume a continued rise in asset prices. The so-called Minsky moment comes when the asset prices stop rising and even fall. The virtuous cycle turns vicious. 

We are now all familiar with how that narrative played out in the housing markets in numerous countries. The question we pose is whether similar forces are unfolding in the oil market.  

For the past several years, oil prices have averaged the highest on record, even though the 2008 peak near $150 has not been approached.  The high price of oil did two thing. First, it helped create a mindset that was predisposed to believe we were at peak oil. That new finds were rare and located in more difficult places to reach. Second, it helped spur technological advances, and encouraged new production. 

The idea that oil prices were going to continue to trend higher for as far as the eye could see became extremely entrenched, and not just in the oil market. This was the basis for both conservation and development of alternatives. Some $90 bln of high yield debt was issued by US energy producers over the past three years. This effectively doubled the energy sector's share of the high yield bond market. The ability of borrow was predicated on the value of the oil in the ground. In addition to the high yield bonds, many banks have provided leveraged loans to the shale producers.   

The leveraged aspect is not limited to the shale producers, but downstream and upstream concerns were also leveraged. This includes the borrowing of money for railroad cars to ship the oil. It include the chemicals and other supplies needed for the fracking. 

The precipitous decline in oil prices changes this dynamic.  Many observers seem to be repeating the judgmental mistakes made in late-2007 and early 2008, and not giving enough due to Minsky's insight. The key is not so much the level of oil prices, but that fact that prices are not rising.  Rising prices was what justified the leverage and capital expenditures.