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Corporate earthquakes

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By Ed Crooks: February 5, 2016

Earnings reports from the largest listed oil companies have this week given a series of seismograph readings on the upheaval in the crude market. The implications for investors, employees and suppliers are grim. Worse, those earnings were all recorded in a period when oil and gas prices were significantly higher than they are now.

In a run of generally grim reports, BP’s was perhaps the worst: in 2015 it made a $5.2bn loss, the largest in its history. ConocoPhillips of the US, which after spinning off its refining business in 2012 became the world’s largest pure exploration and production company, was another standout, cutting its dividend by 66 per cent just two months after promising that the payout would be its “highest priority”.

Even ExxonMobil, famously built to last through bad times as well as good, is showing signs of financial strain. S&P, the rating agency, downgraded Chevron and nine other investment grade US oil and gas companies, three of them slipping to “junk” status.

Ben van Beurden, chief executive of Royal Dutch Shell, suggested the $30 oil that is inflicting all this pain could not last. Bob Dudley, BP’s CEO, made similar observations. However, there are reasons to think that the global oil market could remain oversupplied for some time. The FT’s Nick Butler, on the other hand, said the oil companies were desperately in need of some new ideas.

Vanishing revenues are causing mounting strains in oil-producing countries, too. The FT’s Shawn Donnan reported on expectations that many once-booming producers of oil and other commodities would now need bailouts from the IMF. Ricardo Hausmann of Harvard warned that a Venezuelan default was now “almost inevitable.” As oil fell, there were hopes that it would deliver a jolt of stimulus to the world economy. It hasn’t quite worked out like that. At Quartz, Steve LeVine explored some of the reasons why.

With US petrol prices down by about $1.90 per gallon since summer 2014, President Barack Obama saw an opportunity to propose a $10 tax on every barrel of oil used in the country; a measure that would add an estimated 25 cents or so to every gallon of fuel. With less than a year left in office, he may be trying to put a marker down for his successor. But Republican strength in Congress, which is expected to persist after this year’s elections, means the proposal has no chance of becoming law for the forseeable future.

Meanwhile, Bassam Fattouh complained in a paper for the Oxford Institute for Energy Studies that the US and European news media often misunderstood the oil and energy policies of Saudi Arabia and other countries in the Gulf region. Among the pieces criticised, this one from October 2014 on how Saudi Arabia was putting its relationship with the US to the test by allowing oil prices to fall.

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