Somewhere I read a story about the energy giants ‘seven
sisters’ which virtually control the global economy. All analysts are talking
about declining earnings of these companies but not about the benefits of low
oil prices. The same is also true about Pakistan where analysts are too worried
about earnings of less than half a dozen oil & gas exploration companies but
hardly demand the government to stop persistent hike in taxes on petroleum
products.
A few months back I raised a question in one of my blogs,
who are the beneficiaries of declining oil prices? At that time my own inference
was that the US is the biggest beneficiary, being the largest consumer of
energy products. After lapse of a few months I still withstand my point of
view. I even go to the extent of saying that not only all other oil producing
countries are plunging into serious financial crisis but Saudi Arabia and
Russia are worst hit. Lower oil prices may keep proceeds from oil export low for
Iran but it may gain the most after easing of sanction it had endured for more
than three decades. Its non-oil exports are likely to increase substantially and
it may also succeed in attracting enormous foreign direct investment in
virtually every sector.
Declining oil prices have enabled the US in increasing
its strategic reserves, oil imports remain high and indigenous oil production
still hovers at record high levels, above 9.2 million barrels a day. Reportedly
the US crude inventories have surpassed the 500 million barrels milestone. Two
of the global benchmarks WTI and Brent bounced up and down throughout the week
ended on 5th February. However, faltering global economies offer a chance to
the US Fed not to hike the interest rate, resulting in weak dollar and pushing
oil price higher again.
The western media is now trying to create an impression that the collapse in
oil prices is now bleeding over into the broader global economy. They talk
about the ongoing down turn in oil exporting countries, from Saudi Arabia to
Russia, Venezuela, Iraq, Nigeria, and more. They have strange rationalization
that cheap energy should bolster consumption, but the drop in commodity prices
has been so sharp that questions continue to arise about the creditworthiness
of some oil producers, Venezuela tops the list. With billions of dollars in
debt due this year a rapidly shrinking ability to deal with the crisis, a debt
default may not be too far off.
Citigroup added its voice to those concerned about the health of the global
economy, citing four interlinked forces – a strong U.S. dollar, low commodity
prices, weak trade, and soft growth in emerging markets – for the sudden
fragility and potential for a global recession. "It seems reasonable to
assume that another year of extreme moves in U.S. dollar (higher) and
oil/commodity prices (lower) would likely continue to drive this negative
feedback loop and make it very difficult for policy makers in emerging markets
and developing markets to fight disinflationary forces and intercept downside
risks," Citigroup analysts warned.
ConocoPhillips (NYSE: COP) made news this week when it
became the first US-based oil major to slash its dividend. Italian oil giant Eni
(NYSE: E) was the only other oil major to have done so – it cut its dividend
almost a year ago. ConocoPhillips cut its dividend by 65 percent this week, and
the company’s CEO argued that the move would save $4.4 billion in 2016.
The oil majors are having trouble covering spending and also their shareholder
payouts with their underlying cash flow. By and large, they are making up for
the shortfall with new debt. Chevron took on an additional $9.6 billion in debt
to cover dividend obligations, ExxonMobil added $10.8 billion in fresh debt,
and BP took on another $4.6 billion. At some point, something has to give.
S&P downgraded a long list of oil companies this week, including Chevron
and Shell. It also put BP and ExxonMobil on review for a possible
downgrade.
A quick rundown of the full-year earnings from some of the oil majors:
• BP (NYSE: BP) lost $6.5 billion in 2015, one of the company’s worst on record.
• ConocoPhillips (NYSE: COP) posted a loss of $4.4 billion in 2015.
• ExxonMobil (NYSE: XOM) saw profits halve to $16.2 billion.
• Royal Dutch Shell (NYSE: RDS.A) posted a profit of $3.8 billion, down 80 percent from 2014.
• Chevron (NYSE: CVX) reported a loss of $588 million, its first loss since 2002.
A quick rundown of the full-year earnings from some of the oil majors:
• BP (NYSE: BP) lost $6.5 billion in 2015, one of the company’s worst on record.
• ConocoPhillips (NYSE: COP) posted a loss of $4.4 billion in 2015.
• ExxonMobil (NYSE: XOM) saw profits halve to $16.2 billion.
• Royal Dutch Shell (NYSE: RDS.A) posted a profit of $3.8 billion, down 80 percent from 2014.
• Chevron (NYSE: CVX) reported a loss of $588 million, its first loss since 2002.
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