Cheering Big Oil's Slump

Forbes.com ^ | 8/1/02 | Mark Lewis

[GeneD]

NEW YORK - As a former Midland oilman, President George W. Bush must find it unnatural to root for a decline in the price of West Texas Intermediate crude. But a spike in oil prices could push the economy back into a double-dip recession, which is why today's weak earnings report from Exxon Mobil contained some good news for Bush--and for the rest of us.

Exxon Mobil cited lower crude prices as one reason its second-quarter financial results fell short of the year-ago numbers. West Texas Intermediate (WTI) is the U.S. benchmark, and it averaged a bit more than $26 per barrel during the quarter--not low by historic standards, but at least lower than the $28 it averaged during the second quarter of 2001.

This week the WTI stands at a touch over $27, amid fears that the festering Israeli-Palestinian conflict and possible U.S. action against Iraq might create disruptions that would push the benchmark past $30 again. That would be bad news for the fragile U.S. economy, which grew only 1.1% during the second quarter.

Even at a relatively robust $26, the price of crude did not translate into impressive second-quarter earnings for the majors. Today's Exxon Mobil report disappointed investors, who bid the Dow Jones Industrial Average component lower after learning that the company earned $2.64 billion on revenue of $50.9 billion. That compared unfavorably to year-ago earnings of $4.46 billion on revenue of $56.2 billion.

Royal Dutch/Shell also reported weaker-than-expected earnings today. BP, the third member of oil's Big Three, delivered similarly disappointing tidings earlier this week, as did ChevronTexaco.

Shell today said global refining overcapacity contributed to its earnings shortfall by cutting into margins. "The company is very dependent upon crude oil prices, refinery margins and the U.S. dollar, and all three worked against them in the second quarter," Lex Wekheim of Amsterdam's Eureffect brokerage told Reuters.

Exxon Mobil sounded the same note in its earnings release, citing lower crude and natural-gas prices, unfavorable foreign-exchange trends and "significantly weaker refining margins" as contributors to its subpar quarter. "Refining margins dropped in most areas worldwide, with the sharpest declines in the U.S. and Europe," Exxon Chairman Lee Raymond said in a statement. Raymond's downstream earnings for the U.S. came in at an anemic $234 million, down $610 million from a year ago.

The major oil firms traded lower this morning and dragged the broader market down with them. But investors looking for a silver lining might seize on the fact that at least West Texas Intermediate crude remained below its year-ago levels. That hurt the oil firms' year-over-year comparisons, but it's good for the overall economy.

[Dog Gone]

Low oil prices help the economy, at least arguably. On the other hand, oil prices were much higher than this before without much noticeable impact.

People gripe when gasoline goes up 20 cents a gallon, and it makes for big political news. But it may mean far less than their rising property tax bill, which is never mentioned.

[Dialup Llama]

I am always reading how high oil prices is very destructive to the economy, acting like a tax. Those journalists never take the next step and ask how taxes effect the economy.

[Dog Gone]

Unlike taxes, oil prices actually go down.

[Libertarianize the GOP]

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