Oil supermajors caught by falling prices

The drop in profits can also being attributed to lower demand for oil, while a loss in refinery activities did not help profitability.

ExxonMobil has not been the only oil major to report a significant drop in profits. The results of British Petroleum, Conoco Phillips and the Italian ENI also dropped dramatically.

Royal Dutch Shell (RDS) is another supermajor which faced severe turbulence. Profits dropped 73% to $3bn, which forced the Board to announce a huge reorganization, which operation will cost 'several hundred millions of dollars'.

Approximately 5% of the workforce will be released, of the more than 100,000 employees of the Anglo Dutch oil company. To put the profit in perspective: in 2008, RDS realized a profit of $26.3bn. RDS-CEO Peter Voser, who took over the position of former CEO Jeroen van de Veer in July, does not notice any improvement in the short term. However, Voser does notice small signs of improvement of demand and higher prices.

At the time of writing, WTI crude oil (December futures) hovers around $80 per barrel. Recently WTI broke out of a trading range of several months. The high of 2008, around $147, is still far away however. A further rise of oil prices depend on many factors, not the least oil demand.

Due to the severest recession since the 1930s, world wide demand dropped, resulting in a plunge in oil prices. It is still in question whether the world economy will improve strongly, although there are signs of improvement. The GDP of the United States increased in the third quarter 3.5% (year-on-year basis) after falling for four sequential quarters. Of course oil price development depends also on the strength, or rather weakness, of the greenback. As long as the US dollar weakens, this will put upward pressure on commodity prices, including oil.

Even if oil prices rise sharply, it remains to be seen whether oil supermajors will benefit from it. Oil producing companies are facing many challenges. Oil fields are getting more difficult to explore and exploit, and new fields are located in remote and deep areas. Oil servicing companies, in contrary to oil producers, are most likely to profit from these developments, albeit that capital expenditures of oil companies have been reduced drastically.

Oil producing countries including Venezuela, Nigeria and Russia are demanding a bigger share of the pie, thus reducing the profits of the (big) oil companies. In other words, simply cutting costs and reorganizing will not help the oil producing multinationals. Oil companies must also solve their structural problems, which were hidden for a long time by high oil prices. Last year's drop in oil prices, starkly illustrated these structural problems.