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Oil Companies Report Reduced Profits

Publicly-traded oil and gas companies are announcing their second quarter earnings this week and next, with profits substantially lower than last year, when the price of oil was at record highs. Since then, the price of oil has fallen along with demand, and the U.S. Energy Information Administration reported this week that crude oil supplies are about 18 percent above last year's levels. But experts say the price of energy will likely rise again and oil companies might have trouble keeping up with increased demand.

In the coming days, most of the world's biggest private oil companies will report their latest earnings, as measured during the April through June period, or second quarter. The overall picture is somewhat dismal for the companies, given the drastic drop in petroleum prices since last year's peak of close to $147 a barrel. The average price for a barrel of crude oil during the second quarter of this year was a little more than $59.

Some companies have already reported big drops in earnings. On Wednesday, Houston-based ConocoPhillips reported a 76 percent drop in net income, but offset most of the blow to its bottom line by boosting production and cutting costs. On Tuesday, British energy giant BP reported that its profits were down 53 percent from last year. Other companies are expected to post similar declines during the next several days.

Most people who are not investors in these companies are unconcerned over this latest demonstration of a boom and bust cycle in the energy sector. But there could be consequences next year as the world economy starts to improve and demand for energy drives up prices again.

Brian Uhlmer, an analyst with Pritchard Capital Partners in Houston says lack of investment in production and refining capacity now could lead to an energy crunch as the economy rebounds.

"Sometime in late 2010 or early 2011 we could see major price spikes. The reason for that is financing and cash have been so constrained for the marginal producers that we have seen significant slowdowns in drilling and project delays for larger projects to bring new capacity online, as well as significant declines down in Mexico. Therefore we could see major supply reductions due to the lack of activity that has occurred in the last few months," he said.

In Washington, the Federal Commodity Futures Trading Commission began hearings Tuesday on whether to impose limits on energy futures contracts, through which investors can buy or sell oil at a price set months in advance.

Some lawmakers say that much of last year's run-up in prices was caused by speculation in the market, but Brian Uhlmer says hedging bets in the futures market is a legitimate way for companies to protect themselves from volatility. He says there is no evidence that anyone stockpiled oil to drive up the price and that, in the end, anyone who did would have had to sell that oil for less than the peak price.

"At $147 a barrel, there were still people who were buying it, buying the physical commodity. And the price of oil was not just influenced solely by traders, although that, to some extent, does help accelerate it," he said.

Uhlmer says oil prices will go up again for the same reason they did last year because demand from China and other fast-growing nations will increase, as will demand in the United States and other more developed nations. If the price goes back up to record levels, there might be politicians repeating the call for a tax on what they referred to last year as "Big Oil's excess profits".

But Uhlmer says that would be a bad idea. "Taxing the excess profits provides you a disincentive to produce more oil, so you end up driving the price up more," he said.

He says such a tax would only hurt private U.S. companies and have no effect on the national oil companies around the world that control most of the world's petroleum reserves.

Many of those companies, Uhlmer says, have used the same sort of hedge plays the private companies use to lock in low prices and maintain stability in their markets. He cites Mexico's state-owned oil company, Pemex, as an example.

"Pemex hedged almost all of its production for 2009 in the $75 a barrel range, which turned out to be brilliant. They will probably do so again in the future because they have massive capital-spending programs and they have to guarantee that they receive the capital from the sales of their product. If the price goes back down to $40, they can still sell their product [at $75]," said Uhlmer, an energy market analyst for the firm Pritchard Capital Partners.