This story seems pretty obvious but the gravity of the situation gets missed by many.
Here are the headlines:
BP is cutting 7000 jobs after profits crumbled by 51%
Shell suffers 80% drop in 2015 profits on oil price collapse
Exxons profits tumbles 58% as low crude hurts
You can just go on and on with this. Now an important part of how oil companies announce profits is by ‘Replacement Cost’. Obviously once oil is out of the ground and sold you need to replace it, if you sell your current oil at a lower price than it will cost to produce a future barrel of oil then you’ve made a loss in oil company terms. All these stories of oil companies losing money is a statement of a replacement cost loss or as I see it a declaration of a bad future for them if prices stay the way they are. Oil companies need high prices today as all the oil they will extract in the future is a hell of a lot more expensive than the stuff they had in the past.
So oil companies need high prices and pretty much everybody is predicting oil prices to be up in at least say the next 18 months, but there may be a few bumps in the road. Recent high oil prices were exceptional compared to the history of oil prices, they were consistently high for a period of years and this was driven by an exceptional occurrence, the economic crisis and introduction of QE.
Quantitative Easing occurred all over and not just the U.S, Europe had a go at it and is actually still distorting things (as best it can) today, the UK got in, Japan did as well and the Chinese did it in their own special way. Pouring so much fuel on the fire did not create inflation in a typical sense but so many construction projects were spawned by the money that a demand for energy was obvious and oil shot up. Now the era of QE is pretty much done, it’s lost it’s gumption and doesn’t really work anymore and has been left behind. Everyone predicts that oil prices will go up because production will fall, less supply of a product in demand will result in higher prices. No one seems to consider what happens if demand for oil drops along with production, the price will stay low and companies will continue to declare losses.
I think that the chances of world economic stagnation holding back oil demand is quite probable. You’ll see the oil majors doing more of what they’re doing — capital expenditure will be cut back meaning less investment in new oil and as time goes on (say over the next decade) a consistent reduction in production, oil majors will continue to sell assets to prop up profits and they will continue to take on larger and larger debts mainly to pay dividends to maintain share price.
I’m by no means an expert, I’m sure there are people on this site who’ll tear my views to shreds, but I like a good discussion and other’s points of view are good for the soul.