In April, the price of oil fell so far so fast that oil futures contracts went negative. Oil prices have recovered somewhat, but not enough to ever return the industry to its prior state. Analysts predict the U.S. has reached peak oil production and will never again “return to the record 13 million barrels of oil per day reached in November 2019.” ExxonMobil, which has been a part of the Dow Jones Industrial Average market index for 92 years, was removed last week and replaced with the software firm Salesforce. But while financial analysts sound the alarm about this dying industry, the Federal Reserve has been buying up the debt of fossil fuel companies through a pandemic emergency program. We the public, together with the Fed, now own over $315 million in bonds of fossil fuel firms, including those with a track record of environmental racism.
Among the many Fed rescue programs is the Secondary Market Corporate Credit Facility (SMCCF), which buys corporate debt of companies. The program is supporting fossil fuel corporations in notably disproportionate numbers: More than 10 percent of the Fed’s bond purchases are fossil fuel companies, even though fossil fuel firms only employ 2 percent of all workers employed by firms in the S&P 1500 stock market index.
These bonds are effectively a public investment because the Fed is leveraging $25 billion from the CARES Act as a down payment for the SMCCF’s bond purchases. Together with the Fed, the public now holds the corporate bonds of ExxonMobil, Chevron, BP, Phillips 66 and Noble Energy. And it seems likely the Fed will be holding these fossil fuel bonds until they mature — up to five years into the future for some of them — based on comments Fed Chair Jerome Powell made to Congress.
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At a time when students at universities are calling for their endowments to divest from fossil fuels, and shareholders are pressuring banks to stop financing fossil fuel projects, the world’s largest central bank is sending a different signal: that fossil fuel debt is worth owning, and safe enough to be held by the Fed and the public. This is very different from the signals the market is sending about the industry. Exxon wrote in a memo leaked to the press that due to “prolonged negative market impact” in the sector, it is weighing layoffs in the U.S. and other high-cost countries. And while the energy sector made up nearly 16 percent of the S&P 500 market index in 2008, it is now the smallest sector in the index, making up just over 2 percent. As former Federal Reserve Board Governor Sarah Bloom Raskin wrote, the Fed purchasing the debt of oil and gas firms not only “sends a false price signal to investors” about the viability of these companies, it also “increases the likelihood that investors will be stuck with stranded oil and gas assets that society no longer needs.”
As of August 10, the public now owns $15 million in bonds of dirty energy firm Marathon Petroleum. (You can see all the Fed’s bond purchases in the SMCCF in the spreadsheets they post online.) Marathon is the largest U.S. oil refining company with 16 refineries nationwide, including one in Detroit, Michigan. The company’s Detroit refinery, which sits in the majority-Black Boynton and Oakwood Heights neighborhoods, has violated Michigan state emissions limits 15 times since 2013. Those who live near the refinery have faced large, fiery flares in October 2018 and vomiting or labored breathing in February 2019 due to the rupture of a propane line and malfunction of its gas flare. After a toxic chemical leak from the refinery in September 2019, Rep. Rashida Tlaib (D-Michigan) said that Marathon “cannot be trusted to protect our health,” and held a congressional field hearing to highlight the problems.
Marathon’s violations extend well beyond Detroit. The Political Economy Research Institute lists Marathon as the 33rd worst air polluter in the nation, and its refineries disproportionately impact communities of color. In 2016, Marathon released more than 35,800 gallons of diesel into a river near Crawleyville, Indiana, which resulted in a $335,000 penalty for violating the Clean Water Act. In a 2016 settlement with the Department of Justice and the Environmental Protection Agency (EPA), Marathon agreed to spend $334 million to settle a dispute over refinery pollution in five states: Michigan, Louisiana, Ohio, Kentucky and Illinois. This was a follow-up to a 2012 agreement with the EPA regarding Marathon’s violations of the Clean Air Act.
Even before the Fed invested in Marathon’s bonds, the company was already enjoying support from the nation’s policy makers thanks to a $1.1 billion tax break it received in the CARES Act. The tax change allowed companies to apply current losses to past tax returns, which is especially beneficial to oil firms like Marathon because it will help them offset the record profits they made in 2018 using the massive losses they’ve seen in 2020 as the price of oil crashed.
The public is now also invested in Energy Transfer Operating, the company behind the 1,172-mile Dakota Access Pipeline that faced Indigenous-led resistance at the Standing Rock Sioux reservation. The Fed has purchased $28.5 million in corporate bonds from Energy Transfer to date. The brutal, violent crackdowns at Standing Rock included both surveillance and a counterintelligence campaign led by Energy Transfer’s hired security team, TigerSwan. Energy Transfer is also behind the 167-mile Bayou Bridge Pipeline in Louisiana that crosses through Black and Indigenous communities, raising serious health and safety concerns. In 2018, Energy Transfer’s security team sank two boats carrying 15 Water Protectors and members of the press at a Bayou Bridge Pipeline construction site. Energy Transfer has also been embroiled in controversy as it has tried to build the Revolution Pipeline in Pennsylvania. The pipeline has been out of service since 2018, when it ruptured and exploded, and has faced 596 new environmental violations since January.
The Fed and the public also own $24 million worth of bonds in the utility giant Southern Company and its subsidiaries, including Georgia Power and Southern Power. In 2016, the NAACP gave Southern Company an “F” corporate environmental justice performance rating due to its high emission of pollutants like sulfur dioxide and nitrogen oxides that cause health issues, noting that there are many low-income people and people of color living within three miles of its coal plants. The Southern Company-owned utility Georgia Power plans to begin shutting off the electricity of people in default on their utility bills. Advocates warn those most at risk of losing power are Black, Latinx and Native American. Georgia Power also owns Plant Bowen, soon to be the biggest coal plant in the U.S. Another Southern Company subsidiary, Virginia Natural Gas, is facing resistance from communities of color for its proposal to build a new natural gas pipeline. The proposal includes a compressor station that would impact a neighborhood with high populations of low-income communities and communities of color, according to Stop the Abuse of Virginian Energy, a coalition formed to oppose the pipeline. And in 2018, Southern Company subsidiary Alabama Power was found to have polluted the groundwater with arsenic, lithium and selenium at a plant in majority-Black Greene County, Alabama.
Donald Trump has long been trying to turn back time and prop up the dying fossil fuel industry. First it was campaigning on coal in 2016. Then it was his pledge to “never let the great U.S. Oil & Gas Industry down” in 2020. Energy Secretary Dan Brouillette told Bloomberg TV that the Fed also worked with the Energy and Treasury Departments to change the rules of one of its lending programs to address the concerns of the fossil fuel lobby. And now, the Fed has made the public unwitting investors in fossil fuel debt.
One of the Fed’s key stated missions is “promoting financial stability.” Climate catastrophe presents both physical and transition risks to the financial system overall, as documented by Graham Steele and Gregg Gelzinis. Now that a decade of bad bets and heavy indebtedness have combined with low oil prices to decimate profits in the fossil fuel industry, there’s a real risk that the Fed’s investments in these firms will cost the public in the future. The Fed should ensure that it is taking these climate-related financial risks into account. In addition, the president of the Federal Reserve Bank of Atlanta, Raphael Bostic, wrote that the Fed “can play an important role in helping to reduce racial inequities and bring about a more inclusive economy.” The Fed’s purchase of fossil fuel debt of companies exacerbating environmental racism moves in the opposite direction of both these roles. The Fed should not be using public money to help prop up a dying industry that endangers our health and safety. The Fed should stop leveraging public funds to buy risky fossil fuel debt.