VOL. 130 | NO. 149 | Monday, August 3, 2015
Extended Slump in Oil Taking Toll on Industry, Economy
NEW YORK (AP) — As drivers, shippers and airlines continue to enjoy lower fuel prices, the oil industry is responding to much lower profits with sharp cuts in spending and employment that are hurting economic growth.
Low oil and gas prices are good for the overall economy because they reduce costs for consumers and business. U.S. economic growth was higher in the second quarter, and economists say that was partly fueled by consumers spending some of their savings on gasoline at stores and restaurants.
But with oil prices down around 50 percent from last year, major oil companies are cutting back, offsetting some of this good news. For instance, Exxon Mobil said Friday it cut spending by $1.54 billion in the second quarter, while Chevron announced it is laying off 1,500 workers. Until about six months ago, booming U.S. oil and gas production was helping the country's economy grow during a time of economic sluggishness.
David Kelly, chief global strategist at J.P. Morgan Asset Management, said this week that a $29 billion decline in oil exploration and mining activity in the U.S. cut economic growth by 0.7 percent in the second quarter, a sizable chunk for an economy that grew 2.3 percent.
Investors also feel the pain. Lower oil profits have an outsized effect on stock markets because the companies are so enormous. Analysts at RBC Capital Markets wrote that when oil prices drop by 10 percent, earnings for the overall S&P 500 fall by 1 percent.
Industry layoffs seem to be accelerating. Royal Dutch Shell, while announcing Thursday that profits fell 25 percent in the second quarter, said it would cut its global workforce by 6,500. Chevron's quarterly profit fell 90 percent and CEO John Watson said the company is reducing its workforce "to reflect lower activity levels going forward."
Layoffs at three of the big oil and gas service companies are near 60,000 after two of them, Halliburton and Baker Hughes, revealed further layoffs in quarterly filings last week.
BP CFO Brian Gilvary told investors Thursday that the company has been cutting workers "and I think you'll see more of that before we get to the end of the year." BP's oil and gas profit dropped 64 percent from April through June.
Exxon Mobil's profit fell by half, to its lowest level since the recession of 2009, the company said Friday. Its operations in the U.S. — the center of the global oil and gas boom — posted its second straight quarterly loss.
"The surprise really was here in the U.S.," said Brian Youngberg, an analyst at Edward Jones.
Shares of Exxon and Chevron, both components of the 20-member Dow Jones Industrial Average, fell 4 percent on Friday after they announced results.
The companies are in some ways victims of their own success. A surge in oil and gas production brought on by technological advances and high prices in recent years has flooded the market, sending global prices sharply lower.
But geopolitical forces have also increased the pressure on prices. Iranian oil is poised to return the world market after years of sanctions, the Greek debt crisis is reducing economic growth in Europe and a shake-up in Chinese financial markets is reducing demand growth in the world's second largest oil consumer.
After nearly four years near $100 a barrel, the price of oil began slumping a year ago, falling to $43 by March. It surged briefly all the way to $61 in June, but then fell again. Oil traded just above $47 a barrel on Friday.
That has translated to sharply lower fuel prices. The U.S. average retail price of gasoline through the first half of the year was 30 percent lower than during the same period last year. On Friday the national average was $2.67 a gallon, 85 cents lower than last year at this time, according to AAA.
Retail prices for diesel and heating oil have averaged 27 percent lower than last year, and airlines have posted some of their highest profits in years thanks to lower jet fuel prices.
These low prices, along with the pain for the oil industry and pleasure for consumers, are likely to continue for a while, analysts say. There is plenty of oil in storage tanks and the global oil industry has the capacity to produce more if demand picks up.
In a report Friday, IHS Energy analysts predict further declines in oil prices. IHS says oil will have to fall into the low $40 range and stay there for "several months" before U.S. production growth slows and the supply glut eases.
"It's not good news for producers," said IHS Chief Economist Nariman Behravesh. "It's very good news for U.S. households and consumers."
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