The oil industry is in survival mode.

From 2009 to mid-2014, times were pretty good for oil companies. The price of oil surged 130%. XOP, an ETF that holds the largest oil companies, gained 165%.

Then oil prices crashed. The price of oil is now down 57% from its June 2014 peak. On Monday, the price of oil fell 3.4% to $45.17 per barrel. It’s now close to lows we haven’t seen since March 2009, during the worst of the financial crisis.

Oil companies are hurting. Quarterly sales for Exxon Mobil (XOM), the largest oil company in the US, have dropped 33% from a year ago. Earnings dropped 52%.

Chevron (CVX), the second largest oil company in the US, also had a brutal quarter. Revenues dropped 34%. And its profits were the lowest they’ve been in thirteen years.

Oil companies have drastically cut expenses to survive. They laid off more workers during the first half of 2015 than during the past three years combined. And they’ve delayed or canceled $200 billion worth of projects this year.

However, US oil production is still near an all-time high. The US Energy Information Administration (EIA) reports that US oil companies are producing 9.4 million barrels per day (bpd). That’s near the peak US production reached in the early 1970s, as this chart shows:

Shale oil is the reason for this huge spike in production. New drilling techniques have allowed oil drillers to cheaply extract oil they couldn’t before. This caused the oil supply to explode and the price to crash.

US oil companies are trying to fight lower oil prices by selling more oil. With the price of oil down 57% since June 2014, oil companies must sell more than twice as much oil to earn the same amount of revenue.

•  US companies aren’t the only ones pumping a lot of oil…

We recently explained how the Organization of Petroleum Exporting Countries (OPEC), a cartel of 12 oil-producing countries in the Middle East, is producing more oil than it has since August 2012.

We also explained that Iran, the sixth-biggest oil producer in the world, will likely begin exporting more oil soon. Iran reached a deal in July that should end sanctions that stop it from exporting oil to certain countries.

Bloomberg explained how this flood of oil could keep the oil price low for a long time:

“Morgan Stanley warned recently that the current downturn could be even worse than the one that crippled the industry in 1980s. If Saudi Arabia and Iraq keep running full tilt and Libya and Iran get their oil production back on track, crude prices could languish below $60 for the next three years,” said Martijn Rats, an analyst.

“On current trajectory, this downturn could become worse than 1986,” he said.

And Reuters noted how some investors are cutting oil investments:

Hedge funds and other speculators have slashed their bullish exposure to US crude to the lowest in nearly five years, trade data showed on Friday, as local drillers continue to add rigs and pump at full throttle despite a global oil glut.

•  Speaker of the House John Boehner wants to end America’s ban on oil exports…

The US government banned oil exports in 1975.

At the time, President Carter wanted to put America “solidly on the road to energy independence.” The ban went into effect soon after the 1973 Arab oil embargo. It’s been illegal for US companies to export oil ever since.

Last Wednesday, Boehner said he wants to end the ban. Here’s Reuters:

“Until recently our nation's energy policy was rooted in a scarcity mindset that went back to the 1970s,” Boehner, a Republican, told reporters. “But now America is experiencing an energy boom and our policy needs to follow suit.”

The US Senate Energy Committee has already voted to end the ban. The Senate will review the bill later this month.

Ending the ban looks like a good move. Forbes reported that the US is simply producing too much oil for domestic use:

The International Energy Agency says that US stockpiles are at a 33-year high and that the current oversupply may “soon test storage capacity limits.” If there is no place to store the excess oil, which is likely to happen, the domestic price will continue to fall relative to the world market price, and therefore penalize the US economy further. US refiners cannot consume all of the excess production. The result is a self-imposed mismatch that does not allow the markets to function efficiently.

And Reuters explained that the likely-to-end sanctions on Iran played a role in Boehner’s decision:

Boehner said if Iran can return to exporting crude under the deal the United States and other world powers struck with Tehran this month over its nuclear program, the United States should not be the last developed country in the world with a self-imposed ban on oil exports.

The United States Government Accountability Office estimates that US crude oil prices could increase by $2 to $8 per barrel if the US starts exporting oil again. That would give much-needed relief to America’s oil companies.

Chart of the Day

There are 59% fewer oil rigs in service in the US than there were in October 2014.

Oil services company Baker Hughes (BHI) reports that the number of rigs actively looking for or pumping oil fell from 1,609 last October to 664 in July.

Today’s chart shows the steep fall in rig counts in the last couple months.

Notice that there’s been a small upturn in rig counts since their collapse a few months ago. Last week, the US rig count rose by five. And the week before that, it rose by 21.


Justin Spittler
Delray Beach, Florida
August 04, 2015