The steep drop in crude oil prices from the July, 2008 highs of $147 has punctured the revenues and earnings for every major oil company. The companies are still making money, just not on the scale they did in 2008.
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Estimates of revenues for Exxon Mobil (XOM) for 2009 are about $271 billion, compared with 2008 actual revenues of $477 billion. Analysts expect Exxon’s earnings for 2009 to reach an EPS of $3.93, compared with $8.47 in 2008.
For the first ten and a half months of 2009, crude prices have risen slightly more than 60%. Gold has risen more than 30%, and copper is up nearly 90%.
The rise in crude prices can partially be blamed on the depreciation of the U.S. dollar. However, the dollar has weakened by just 12% to the euro. The full story goes deeper than just a weak dollar.
Another factor is the resurgence in economic growth outside the U.S., particularly in China. That growth drives up commodity prices, including crude, and puts additional downward pressure on the U.S. dollar.
A third factor in rising crude prices is the increasing use of commodities in general, and gold and crude oil in particular, as investments. Crude oil offers foreign investors a hedge against dollar depreciation at the same time that the investment drives up the price of oil and could depress U.S. economic growth. Near-zero interest rates also feed the tendency to hoard gold and oil.
Hoarding oil is tricky, because at some point physical barrels are involved. For most of this year, U.S. crude inventories have been well above historical averages. There are millions of barrels of oil in floating storage on the world’s oceans. That situation should drive the cost of oil down, not up.
That the reverse is happening strengthens the story that investing in crude is a hedge against inflation. There is little chance that there will be any change in that investment pattern in the near term.
What happens to crude prices in 2010 depends on what happens in the U.S. economy. If GDP grows, crude prices will rise, dampening the effect of growth. If GDP stagnates or falls, crude prices will remain steady or rise slightly, because demand for crude from developing countries will rise, and demand for crude as an inflation hedge will grow.
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