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Layoffs Surge As Oil Price Outlook Remains Sober

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Lately the leaders of some of the world’s biggest energy companies have been saying oil prices will remain depressed for some time – perhaps for the next five years – and now they’ve decided to cut their costs in the most painful way possible: massive job cuts.

Royal Dutch Shell announced July 30 that it expects to eliminate 6,500 positions. The announcement came the same day it reported that earnings in the second quarter were $3.4 billion, 33 percent lower than the $5.1 billion it made during the same period of 2014.

The same day, the British utility Centrica said it plans to cut fully 6,000 jobs and reduce the size of its division for producing oil and gas. The day before, Chevron Corp. of the United States expected to eliminate 1,500 positions.

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And as oil producers struggle to rein in spending elsewhere in their operations, the pain is being shared by the oil service companies they rely on. The Italian energy contractor Saipem, for example, says it plans to cut 8,800 jobs in two years.

“We have to be resilient in a world where oil prices remain low for some time,” Shell CEO Ben van Beurden said in the statement. “These are challenging times for the industry, and we are responding with urgency and determination.”

It may be too early to determine whether the price of oil, which began falling a year ago, was now forcing the energy industry to go beyond cutting fat and is now gouging into the very sinew of its operations, but it’s clear that they’re convinced that other economies simply weren’t enough to keep themselves afloat.

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And all because of the steep decline in the price of oil. In June 2014, its average global price was more than $110 per barrel. Now it’s around $50 per barrel, despite a brief, small spike recently that brought it up to around $60 per barrel.

The price fall began because drillers in the United States had increased oil production, mostly from shale deposits, which are more expensive to exploit. Instead of reducing its own production to help boost prices, OPEC, under Saudi leadership, decided at its semiannual meeting in November to keep production at 30 million barrels a day in an effort to make shale drilling unprofitable.

To make matters worse, OPEC members are exceeding that cap by about 1 million barrels a day. And the future doesn’t look any brighter, as Iran is expected to return to the global oil market next year, thanks to an agreement with six world powers over limiting its nuclear program.

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The job losses probably should come as no surprise. Two weeks ago, van Beurden said that “prices could stay low for longer” unless energy companies produce less. He wasn’t more specific, but Andy Brown, Shell’s director of oil and gas production outside America, said he expects only a gradual recovery over the next five years, not only because of the oil glut but also lower demand in China.

And Bob Dudley, the CEO of BP, also says he expects oil prices to stay “lower for longer.” His chief financial officer, Brian Gilvary, used the same words on July 28, the day their company reported the second-quarter loss of $6.27 billion. Much of that loss was due to the company’s spending to remedy the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, but clearly BP’s leadership doesn’t expect to make it up by selling oil at rock-bottom prices.

By Andy Tully of Oilprice.com

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