British Petroleum (BP) reported a 40 percent drop in profits for the third quarter. The oil company is suffering from both incredibly low oil prices and the continued fallout from the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. This combined effect on the company’s bottom line is seriously hurting its ability to compete in a highly saturated market.

 

Both WTI and Brent crude oil are trading at below $50 a barrel, and BP, along with its competitors, has struggled to adjust its business model to fit the current market conditions. Although the company has changed its forecasts to account for low prices for the long term, BP is still overly optimistic. It plans on oil selling at $60 a barrel by 2017 and reaching the $70 to $80 range by the 2020s. Prices will most likely rise into the $50 per barrel range as the industry adjusts and weaker competitors are pushed out of business, but there is such a surplus of supply that it could take years to see any kind of significant pricing increase.

 

Falling profits are leading to the oil giant cutting jobs on a global scale. By the end of December, BP plans to have cut its workforce by approximately 4,000 for the calendar year.

 

 

BP has also been involved in a five year long legal battle over the penalties it will face for 2010’s disastrous oil spill. The company will have to shell out approximately $20 billion as punishment on top of the approximately $44 billion already spent on environmental cleanup and legal fees. The penalty includes settlements with the United States federal government; the states of Alabama, Florida, Louisiana, Mississippi, and Texas; and numerous municipalities on the Gulf Coast. BP will also have to pay to restore damages to any natural resources caused by the spill. This means that BP is still on the hook for an undetermined amount of money as oil and tar are still on the ocean floor killing wildlife and adversely affecting the Gulf’s ecosystem.

 

BP is going to need a huge buildup of reserve funds in order to handle its legal obligations, and this comes at the most difficult period in recent history for oil companies. Efforts to downgrade and restructure its business to remain profitable mean that BP will be hard pressed to compete with its rivals moving forward.

 

If profits continue to decline will BP be forced to exit the international oil business? Are the monetary penalties imposed on BP appropriate or too severe for the Deepwater oil spill? Feel free to leave a comment or find me on Twitter @Andrew_Morse4