When the oil price fell below $100 in 2014, it spelled doom for the U.S. and global oil industry. As oil prices continued to decline, energy companies were forced to increase their debt and reduce their capital expenditures (CAPEX). Cutting CAPEX spending while adding debt aren’t a good recipe for positive financial earning in the future.
According to several energy analysts, they believe 2018 will be a turnaround year for the major oil companies. Unfortunately, the fate of the price of petroleum and the oil companies are tied to the broader markets. When the markets rise, it’s good for the oil price and energy companies, and when the markets fall, then the opposite is true. However, the next major market selloff will likely cause irreversible damage to the global oil industry.
Investors need to realize that the global oil industry required $120+ oil in 2013 to replace reserves and bring on more oil production. When that price level was not obtained that year, oil companies began to cut CAPEX spending even before the price fell below $100 a barrel in 2014. Today, with the price of oil trading at $64, it is approximately half of what the global oil industry requires to fund new production growth.
So, there lies the rub. Even though oil companies are more profitable currently, it was achieved by destroying future production. As we can see in the chart below, CAPEX spending in eight of the largest global oil companies fell 56% from $245 billion in 2013 to $109 billion in 2017:
Now, to offset the falling oil price, many of the oil companies resorted to adding more debt to pay shareholder dividends or to fund CAPEX spending (or both). For example, Shell’s long-term debt increased from $36 billion in 2013 to $74 billion in 2017 while ExxonMobil, one of the most profitable major oil companies in the world, saw its debt increase significantly from $7 billion to $24 billion during the same period:
In 2013, these eight oil companies paid $5.7 billion to service the interest on their debt. However, that nearly tripled to $15.4 billion in 2017. Thus, $10 billion in profits were vaporized just so these major oil companies could service their debt. We must remember, during major market corrections, ASSET VALUES DECLINE, while DEBTS & LIABILITIES stay the same. Which means, a much lower oil price will make it increasingly difficult for these oil majors to remain profitable as a large portion of their profits is now being used to pay their interest expense:
While this may seem like I am overly pessimistic, the data and the facts speak for themselves.
Lastly, the public has no clue just how critical the oil supply is to our Just-In-Time-Inventory-Economy. Even though the housing market is still booming, what would our Suburban Economy look like with 50+% less of petroleum liquid fuels?? Please don’t belch out that Electric Cars (EV’s) are the answer… they are not. Also, the current electric battery technology used to power a semi-tractor trailer would only have enough energy to also transport a fraction (2,000 lbs) of the freight compared to a typical diesel engine (48,000-50,000 lbs).
Unfortunately, technology has not solved our problems…. it has just created even bigger ones. When you understand this simple principle, then it’s easy to see how the world unfolds in the future.