Things Are Bad for the Oil Industry and They're Going to Get Worse

Well, it was nice while it lasted.
Well, it was nice while it lasted.
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The U.S. oil industry has been struggling for more than a year now, and if the price of oil doesn't go up a bit or at least stabilize, the whole situation will likely go from bad to worse.

That's pretty much the only thing that industry analysts are certain of at this point. 

Last week, Goodrich Petroleum joined the growing number of oil companies that have been forced to declare bankruptcy since oil prices started dropping from about $100 a barrel back in June 2014 to the present prices hovering around $30 to $40 dollars per barrel. 

Initially, when oil prices first began to sink back in the summer of 2014, Bill Gilmer, director of the Institute for Regional Forecasting in the University of Houston's Bauer College of Business, and many other industry forecasters were optimistic about the outlook for the industry. Everyone believed that oil prices wouldn't fall any lower, that things would turn around and that the industry would stabilize next week or next month or before the end of the year. But now Gilmer has joined the chorus who say there's no telling how things will play out or when the oil industry will turn around. 

"I've joined everybody else now in terms of saying I really don't know what's going to happen next," Gilmer says. "I don't think anybody ever thought that this was going to be like 1986 all over again for oil, but you know, we're not that far from it now."

There are two crucial measurements to look at when you're trying to see how the oil industry is doing — the rig count and capital expenditures. Last week the U.S. rig count sank to 450 rigs in the field, the lowest number the rig count has been at since the industry started tracking the number of rigs in 1944, Gilmer says. At the same time capital expenditures have taken a nosedive as of the first business quarter of the year. "The capital expenditures and the rig count are the lifeblood of the industry, so these declines are really more signs that this is an industry in trouble."

Back in 1982, when the 1980s oil boom was at its peak, capital expenditures were about $87 billion that year in the industry, adjusting for inflation, Gilmer says, and they fell to about $12.7 billion by the end of the oil industry decline in 1987. This time around, when the shale-driven U.S. oil renaissance reached its height, capital expenditures clocked in at more than $240 billion. And while the oil bust of the 1980s was stretched out over a five-year decline, the current bust has taken place only over the past year and a half.

However, the capital expenditures have already been slashed by $97 billion. That's only a 59 percent cut, but it's still more money than was ever even invested by the oil industry during the 1980s boom, Gilmer points out. "In this boom, three times the amount of money was being spent, and we've already lost more than was ever even invested back then," he says.

Back at the start of the downturn, a lot of oil companies announced that they weren't going to do any layoffs, that they were keeping their workforce and their infrastructure and cutting corners in other ways until oil prices went back up. Many opted to cut the number of rigs in the field and the capital expenditures instead.

However, by the end of last year, it stopped being a question of whether companies kept their teams together and became a matter of whether companies themselves would survive. Over the course of the oil bust, more than 250,000 people in the oil industry have been laid off. "As you take these crews apart, the ones who helped make this oil boom possible, and let these people go, most of them will never come back to the industry, so even if prices soared back up tomorrow, it would be very difficult to restart the industry and get production back where it was. It won't be the way it was before the downturn," he says. 

Right now, things are so bad in the oil industry that a lot of companies are probably just focused on figuring out how to restructure and survive.  Now that the first quarter has passed and the outlook for the oil industry has only gotten more bleak, the banks who lend to oil companies are going to start looking over companies with an even more wary eye, as we've reported before. So far this year, more than 50 oil companies have filed for bankruptcy, according to Reuters.  

Those numbers are likely to increase in the coming weeks as banks review the companies they've loaned money to. "The banks can either decide it's still a bankable deal, can move it off the books to a subsidiary because they think it will ultimately survive and they'll get their money back, or they can euthanize the company right on the spot. If a bank does that and calls the loan, that's it, the company is gone," Gilmer says. "The reserves go to auction; the equipment goes to auction. All of the institutional knowledge disappears and you can't get it back." 


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