Extended slump in oil takes toll on US economy

New York—As drivers, shippers and airlines continue to enjoy lower fuel prices, the oil industry is responding to much lower profits with sharp cuts in spending and employment that are hurting economic growth.

Low oil and gas prices are good for the overall economy because they reduce costs for consumers and business. US economic growth was higher in the second quarter, and economists say that was partly fueled by consumers spending some of their savings on gasoline at stores and restaurants.

But with oil prices down about 50 percent from last year, major oil companies are cutting back, offsetting some of this good news. For instance, Exxon Mobil said last Friday it cut spending by $1.54 billion in the second quarter, while Chevron announced it is laying off 1,500 workers. Until about six months ago, booming US oil and gas production was helping the country’s economy grow during a time of economic sluggishness.

David Kelly, chief global strategist at J.P. Morgan Asset Management, said last week that a $29 billion decline in oil exploration and mining activity in the US cut economic growth by 0.7 percent in the second quarter, a sizable chunk for an economy that grew 2.3 percent.

Investors also feel the pain. Lower oil profits have an outsized effect on stock markets because the companies are so enormous. Analysts at RBC Capital Markets wrote that when oil prices drop by 10 percent, earnings for the overall S&P 500 fall by 1 percent.

Industry layoffs seem to be accelerating. Royal Dutch Shell, while announcing Thursday that profits fell 25 percent in the second quarter, said it would cut its global workforce by 6,500. Chevron’s quarterly profit fell 90 percent and CEO John Watson said the company is reducing its workforce “to reflect lower activity levels going forward.”

Layoffs at three of the big oil and gas service companies are near 60,000 after two of them, Halliburton and Baker Hughes, revealed further layoffs in quarterly filings last week.

BP CFO Brian Gilvary told investors last Thursday that the company has been cutting workers “and I think you’ll see more of that before we get to the end of the year.” BP’s oil and gas profit dropped 64 percent from April through June. AP