Two of the world’s biggest international oil companies, ExxonMobil and Royal Dutch Shell, have just announced plummeting profits for April-June compared to the same period in 2008 when oil prices hit record highs. Other major oil companies also report similar massive falls in profits.
In a period that saw oil prices nose-dive from an all-time high of $147 a barrel to well below $40 and now to around $60, it is hardly surprising that there has been a dramatic change in fortune for the producers. Nonetheless, there will be few tears shed, other than among oil company shareholders. For the rest of humanity, the announcements merely confirm the view that the oil giants like nothing better than high oil prices, the higher the better. They allow them to justify passing on even higher prices to the customers at the pump.
The companies themselves blame the slump in profits not on a market glut forcing them into price wars — indeed, it is one of the major complaints of customers worldwide that they have seen no significant drop in petrol prices over the past year despite the slump in the price of oil. For the oil companies, the sole reason for the drop in profits is the recession.
No one would seriously deny that link; companies like ExxonMobil and Shell, market driven as they are, cut production only when demand is down — and Shell’s production was down 6 percent between June 2008 and June 2009. Nonetheless, the link between oil prices and the state of the economy poses wider questions — most pertinently, the extent to which high oil prices last year helped trigger the economic crisis. The general wisdom is that it was caused by the subprime crisis in the US housing market. But that was in large part caused by people being laid off from work and being unable to pay their mortgages — and one of the reasons why people were laid off was because companies faced difficulties as a result of the rising costs of energy and transport.
At the time, Saudi Arabia and other GCC producers said that prices were too high and moved to try and reduce them by increasing production. Saudi Arabia too hosted a meeting of producer and consumer countries to plan action to calm the market. Its view has long been that there needs to be much greater coordination between producers and consumers to ensure oil price stability.
It makes sense. It does not have to mean fixed oil prices. Unfortunately, it seems that consumer nations are no longer interested. They wanted help when prices were high but now when they are low they are quite happy to leave things alone.
It is unfair and shortsighted. It is unfair because producers need to know what prices will roughly be like in a year or so; otherwise how can they plan? It is shortsighted because, sooner or later, when the recession finally ends, consumption will rise — and prices with it. They will probably rocket again.
A recurring cycle of high-speed economic growth followed by a crash following by new growth followed by crash is crazy. Nobody gains. Now is the time to plan ahead, and where better to start than with oil. Doing nothing is not a sane option.
