A sudden collapse in the price of crude oil is forcing energy companies to slash budgets and reduce exploration and oilfield development programmes.

The cutbacks in spending are expected to hit the American oil industry hard, according to a survey by Barclays Capital, which is forecasting that upstream budgets in the US oil and gas industry will be reduced by a quarter in 2009. Overall, global spending on exploration and the production of hydrocarbons is expected to shrink by $54 billion (£36 billion) to $400 billion, Barclays Capital said in its survey of 357 oil and gas companies worldwide.

“Budgets are being cut in response to the significant decline in commodity prices, constrained cashflow and the tight credit markets,” the investment bank said.

The speed of the collapse in the oil price, which has lost three quarters of its value since it peaked at $147 per barrel in July, has caught oil companies by surprise; Chevron has postponed a decision on its 2009 capital spending budget to January. The price collapse is hurting national oil producers, too. Even companies such as Saudi Aramco are cutting budgets. The world's biggest oil company has cancelled redevelopment of the Dammam oilfield, an ageing resource where Aramco had hoped to raise output with new investment. Meanwhile, the company has asked contractors to look again at the $10 billion budget to develop Manifa, an offshore oilfield that could add almost one million barrels per day to the Kingdom's output.

For the West's oil multinationals, the sudden shrinkage in cashflows from sales of crude oil represents a potential threat to their ability to maintain their massive dividend payouts.

Colin Smith, a Dresdner Kleinwort analyst, reckons that the balance sheets of the oil majors can sustain oil prices at $50 per barrel without damage to the dividend. However, the damage caused by investment drought in 1998 when crude hit $10 per barrel has changed industry mindsets. Mr Smith thinks that managements would probably be quicker to sacrifice the dividend today.

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