The plunge of global oil prices began in June 2014, when benchmark Brent crude was selling at $114 per barrel. It hit bottom at $46 this January, a near-collapse widely viewed as a major but temporary calamity for the energy industry. Such low prices were expected to force many high-cost operators, especially American shale oil producers, out of the market, while stoking fresh demand and so pushing those numbers back up again. When Brent rose to $66 per barrel this May, many oil industry executives breathed a sigh of relief. The worst was over. The price had "reached a bottom" and it "doesn't look like it is going back," a senior Saudi official observed at the time.
Skip ahead three months and that springtime of optimism has evaporated. Major producers continue to pump out record levels of crude and world demand remains essentially flat. The result: a global oil glut that is again driving prices toward the energy subbasement. In the first week of August, Brent fell to $49, and West Texas Intermediate, the benchmark for U.S. crude, sank to $45. On top of last winter's rout, this second round of price declines has played havoc with the profits of the major oil companies, put tens of thousands of people out of work, and obliterated billions of dollars of investments in future projects. While most oil-company executives continue to insist that a turnaround is sure to occur in the near future, some analysts are beginning to wonder if what's underway doesn't actually signal a fundamental transformation of the industry.
Recently, as if to underscore the magnitude of the current rout, ExxonMobil and Chevron, the top two U.S. oil producers, announced their worst quarterly returns in many years. Exxon, America's largest oil company and normally one of its most profitable, reported a 52% drop in earnings for the second quarter of 2015. Chevron suffered an even deeper plunge, with net income falling 90% from the second quarter of 2014. In response, both companies have cut spending on exploration and production ("upstream" operations, in oil industry lingo). Chevron also announced plans to eliminate 1,500 jobs.
Painful as the short-term consequences of the current price rout may be, the long-term ones are likely to prove far more significant. To conserve funds and ensure continuing profitability, the major companies are cancelling or postponing investments in new production ventures, especially complex, costly projects like the exploitation of Canadian tar sands and deep-offshore fields that only turn a profit when oil is selling at $80 to $100 or more per barrel.
According to Wood Mackenzie, an oil-industry consultancy, the top firms have already shelved $200 billion worth of spending on new projects, including 46 major oil and natural gas ventures containing an estimated 20 billion barrels of oil or its equivalent. Most of these are in Canada's Athabasca tar sands (also called oil sands) or in deep waters off the west coast of Africa. Royal Dutch Shell has postponed its Bonga South West project, a proposed $12 billion development in the Atlantic Ocean off the coast of Nigeria, while the French company Total has delayed a final investment decision on Zinia 2, a field it had planned to exploit off the coast of Angola. "The upstream industry is winding back its investment in big pre-final investment decision developments as fast as it can," Wood Mackenzie reported in July.
As the price of oil continues on its downward course, the cancellation or postponement of such mega-projects has been sending powerful shock waves through the energy industry, and also ancillary industries, communities, and countries that depend on oil extraction for the bulk of their revenues. Consider it a straw in the wind that, in February, Halliburton, a major oil-services provider, announced layoffs of 7% of its work force, or about 6,000 people. Other firms have announced equivalent reductions.
Such layoffs are, of course, impacting whole communities. For instance, Fort McMurray in Alberta, Canada, the epicenter of the tar sands industry and not so long ago a boom town, has seen its unemployment rate double over the past year and public spending slashed. Families that once enjoyed six-digit annual incomes are now turning to community food banks for essential supplies. "In a very short time our world has changed, and changed dramatically," observes Rich Kruger, chief executive of Imperial Oil, an Exxon subsidiary and major investor in Alberta's tar sands.
