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Is Declining Oil Price The Only Concern? – OpEd

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Somewhere I read a story about the energy giants ‘seven sisters’ that virtually control the global economy. Currently, analysts are talking about the declining earnings of these companies, but not about the benefits of low oil prices. The same is also true in Pakistan, where analysts are also worried about the lower earnings of half a dozen oil and gas exploration companies, but hardly demand the government to stop the persistent hike in taxes on petroleum products.

A few months back I raised a question in one of my articles that asked 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 a lapse of a few months I still hold that point of view. I even go to the extent of saying that not only all the other oil producing countries are plunging into a serious financial crisis, but Saudi Arabia and Russia are the worst hit. And while lower oil prices may keep proceeds from oil exports low for Iran, it may gain the most after the easing of the sanctions it has endured for more than three decades. Iran’s non-oil exports are likely to increase substantially and Tehran may also succeed in attracting enormous foreign direct investment in virtually every sector.

Declining oil prices have enabled the US to increase its strategic reserves, with oil imports remaining high and indigenous oil production still hovering 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 ending February 5. However, faltering global economies offer a chance for the US Fed to not hike the interest rate, resulting in weak dollar and pushing oil prices even higher.

The western media is 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 downturn in oil exporting countries, from Saudi Arabia to Russia, Venezuela, Iraq, Nigeria, and others. In doing so, they have a strange rationalization that cheap energy should bolster consumption, but the fact is that the drop in commodity prices has been so sharp that questions continue to arise about the credit-worthiness of some oil producers, with Venezuela topping the list. With billions of dollars in debt due this year and 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 US 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 US 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.

Shabbir H. Kazmi

Shabbir H. Kazmi

Shabbir H. Kazmi is an economic analyst from Pakistan. He has been writing for local and foreign publications for about quarter of a century. He maintains the blog ‘Geo Politics in South Asia and MENA’. He can be contacted at [email protected]

One thought on “Is Declining Oil Price The Only Concern? – OpEd

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    February 7, 2016 at 10:59 am
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    I would like to help the author about the problems with the declining oil prices. First, oil exporting countries are losing huge of money. For example, the KSA was making about $400 Billion a year and is making less than $100 Billion. All oil producing countries have lost 75 percent of their earnings. These funds in turn could have been invested in many projects such as infrastructure, education, industries and agricultural projects, investment that generate higher economic growth and employment. These countries can use billions of dollars of oil revenues for importing commodities from exporting countries by which exporters and workers can make income to spend on domestic and imported items. In short, there is a large direct, indirect, and induced effects (or multiplier) of oil funds. All these effects are gone now and become negative when the price of oil has collapsed. Even your country, Pakistan, will lose money when millions of your people will not be able to work overseas in oil exporting countries or will not be able to send money to their families who live in Pakistan. Second, thousands of high-paying jobs in oil industry are lost and these income losers will affect their communities. Third, almost a trillion of dollars have been invested in oil industry through junk bonds, high yield risky bonds, funds that will not be paid back to investors who are regular people saved money and now are trying to make returns in order to survive as the interest rate is close to zero for depositors. Lastly, for your information in the USA we used to pay $3.00 a gallon of gas when the price per barrel of oil was $100.00 and now we pay $1.50 per gallon, given the price of barrel of oil is $30 or less. That is, gas stations are making more profit per gallon of gas than before. Consumers are making advantage of the decline in oil price but other prices are going up. Education, rent, health care, drugs, utilities, and taxes are all going up to the roof. And remember that some of those consumers are the one who have lost their jobs.

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