Exxon Mobil (XOM) CEO Rex Tillerson this morning said that the weak U.S. dollar is adding $20-$25 to the price of a barrel of oil. If Tillerson is right, that means a barrel of crude that is currently selling for around $80 should cost around $50. That’s about 37% less, and reflects the drop in the value of the dollar since 2001.
The collapse in crude prices that started late last year followed the severe hit to the global financial system. As the global economy slumped, demand and prices for oil fell.
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As the global economy began its recovery, crude prices started to rise again. But the recovery, such as it is, depends more on hope and a recovery in investment banking than it does on consumer spending.
For the U.S. economy to really recover, people need to start spending money again. As long as unemployment continues at double-digit rates, people won’t be buying gasoline to drive to work, and U.S. inventories will remain high.
To be sure, this keeps some downward pressure on crude prices, but the heaviest pressure on crude prices comes from the weakened dollar, which causes those prices to rise.
But if dollar-denominated crude prices are inflated as Tillerson suggests, and global inventories are bulging, what is the incentive for oil companies to explore for more crude or even to pump more from existing wells? Crude production was up slightly in the third quarter for virtually all the major oil companies, but new drilling has been curtailed.
The problem for oil companies is where to go. When crude was priced at $140/barrel, calls were rampant for drilling in the Alaska National Wildlife Refuge and offshore U.S. coasts. When’s the last time anyone heard about that?
And as Tillerson pointed out in his remarks, Exxon can’t compete with China for rights to drill offshore Africa and elsewhere around the world. That means pulling in somewhat on exploration, and that doesn’t bode well for oil services companies, like Schlumberger (SLB) and Halliburton (HAL), which are already suffering from a drop in day rates and a decline in new drilling.
A stronger dollar could help both the oil companies and the services companies, while lowering the price of gasoline for U.S. consumers. But a stronger dollar does not appear to be on the horizon for some time yet.
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