Many Americans may be happy that “prices at the pump” are much lower than they were a year ago, but there is always another side to the story.
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Energy companies and their workforces are feeling the pain as the U.S. has been experiencing significant declines in oil prices, which have triggered extreme cost-cutting measures and delays or cancellations of spending on multi-billion dollar projects.
“The industrywide austerity encompasses reductions in capital spending as well as corporate costs. Both of these types of cuts tend to include some layoffs,” Raymond James Analyst Pavel Molchanov said. “Until a more durable recovery in oil prices, oil and gas producers have to do what they can to reduce their cost structure. They are acting to protect their balance sheet, as well as dividends,” he noted.
To give some perspective, FOXBusiness.com reported that during the first six months of 2015, U.S.-based energy firms cut more than 60,000 jobs.
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A major contributor to the U.S. layoff count has been Schlumberger (SLB), one of the world’s largest oil services firms. This provider of drilling technology and equipment to oil and gas companies has really given its workforce a buzz as it cut 9,000 jobs in January and lumped on another 11,000 in April. Chief Executive Paal Kibsgaard cited the abruptness of the fall in activity, particularly in North America, which required the company to lower its workforce by about 15% compared to its peak level in 3Q 2014.
Adding to the deluge of cuts in 2015, Royal Dutch Shell (RDS.A) announced Thursday that it is set to cut 6,500 jobs and step up spending cuts, as the energy firm is reacting to this decline in crude. Shell reported that the drop in crude also contributed to a profit decline of nearly 40% for 2Q and said it expects a prolonged drop in oil prices, which could point to further capex cuts, project delays and layoffs for some of its peers.
And this past Tuesday, Chevron (CVX) said it plans to cut 1,500 jobs in order to save $1 billion in costs, in light of the current market environment.
Meanwhile, GDP for the second quarter rose 2.3%, light of the 2.6% consensus growth forecast.
“Today’s GDP report was weaker than expected, both due to the lean 2Q rise and heavy skewing of 2Q growth toward inventories – which includes the ongoing massive build of petroleum inventories,” Mike Englund, Principal Director and Chief Economist at Action Economics said.
“GDP will face growth headwinds into mid-year as inventories need to drop-back, and this headwind will be greater for the oil sector as current inventory accumulation rates in this sector are clearly unsustainable,” Englund stated.
He also believes “the lower growth trend suggests less growth in petroleum demand going forward, to the extent that we can extrapolate lower trend growth into lower expected growth into 2016.”
Many interested parties will be waiting to hear from ExxonMobil (XOM) and Chevron as they are slated to release 2Q earnings results on Friday.