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Oil companies are coming to terms with the prospect that oil prices could stay low for years. Today, Royal Dutch Shell announced it's laying off 1,600 workers. NPR's John Ydstie reports.
JOHN YDSTIE, BYLINE: Oil prices made a partial recovery in the spring, but recently, they've experienced another downward leg. Today's price for U.S. crude is about 48-and-a-half dollars a barrel. A little more than a year ago, it was over a hundred dollars a barrel. Fadel Gheit, senior oil analyst with Oppenheimer and Company, says some oil executives have been living in a dream world, expecting a quick return to high prices. But Gheit says prices are likely to recover slowly to a new normal of just 65 to $70 a barrel.
FADEL GHEIT: This is basic a shock. And a lot of these companies still have wishful thinking, but I think it's waning now.
YDSTIE: Shell CEO Ben Van Buerden acknowledged the difficult situation in a message for shareholders today.
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BEN VAN BUERDEN: Overall, these are challenging times for the industry, and we are responding with urgency and determination.
YDSTIE: And the job cuts reflect that urgency. Fadel Gheit says the layoffs stem mostly from Shell's recent purchase of BG, formerly British Gas. He says mergers are one way oil companies can cope with a low-price environment.
GHEIT: This is something that they can do themselves. They're going to have to wait for high oil prices to impact their bottom line.
YDSTIE: Gheit calls it self-help. Merged companies can continue to be profitable by combining their operations and laying off redundant staff.
GHEIT: We're going to see a lot of mergers and acquisition, and that is healthy thing because the surviving companies would be much more resilient to lower oil prices than to existing companies.
YDSTIE: Even as Shell spent money to absorb BG, it managed to turn in solid second-quarter earnings. Its profits did fall by a third, but it still made $3.4 billion, mostly from its refining business. Fadel Gheit says that global oversupply will keep oil prices in check in the coming years. That oversupply is being driven by the shale oil boom in the United States which is adding 4.5 million barrels a day to global production. And, Gheit says, if the Iranian sanctions are lifted, even more oil will flood the market. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.