Is the oil business in terminal decline? Definitely not. The modern world would grind to a halt and we would all starve without crude oil and refined fuels. Our transportation system (upon which our food and our just-in-time system of everything depends) would collapse without oil.
But evidence is mounting that business is getting tougher. The oil price crash has made it much harder for the big firms to plan long term. What will the oil price be in five years? Ten years? Fifty years?
Big firms have to plan years out. They have to find more oil to replace annual production. Exploration is expensive. But production is even more so. Integrated oil companies (upstream and downstream) spend hundreds of billions on capital investment. Uncertainty about the long-term oil price makes the return on that capex less predictable.
Hence credit ratings agency Standard & Poor’s downgrading US energy giant ExxonMobil from its AAA credit rating. Microsoft and Johnson & Johnson are the only US companies with the highest credit rating. Software and consumer non-cyclicals, you could say, are the only businesses in the world relatively immune from structural challenges (for the time being).
Exxon’s downgrade shows that, “the corporate market is not immune from secular industry changes and deep cyclical troughs that materially impact the immediate-term credit outlook,” according to Brian Gibbons at CreditSights.
What he said!
It’s a double edged sword, isn’t it? A globalised and competitive world tends to bring us more innovation, more products, more services and lower prices. But it puts a natural pressure on corporate profits. And as investors, that affects our returns. The globalisation of the labour market and the advent of robots and automation puts pressure on wages.
Income, wages, returns… all of it’s under pressure! About the only good news is that, other than UK house prices, there is disinflation or deflation in most other global consumer goods. Does that add up to a net improvement in your quality of life?
Category: Market updates