It was Andrew Swiger, the chief financial officer at Exxon Mobil Corp., who summarized the attitude of the whole industry after Big Oil ended reporting another dismal set of quarterly earnings: “Prices will have to rise.” After months of low oil and gas prices driven by weak demand, the world’s largest international oil companies have largely exhausted their financial defenses, leaving little room to maneuver if they’re dealt further blows. Exxon Mobil Corp.Chevron Corp.Royal Dutch Shell PlcTotal SE and BP Plc have already reduced 2021 spending probably to as much as they can.

With the exception of perhaps Chevron and Total, which entered the downturn with the strongest balance sheets, leverage is approaching uncomfortable levels. Put together, Big Oil is now completely at the mercy of a worldwide rout in fuel demand that, absent a Covid-19 vaccine, shows no signs of abating, as well as OPEC+ leaders Saudi Arabia and Russia.

Debt Dilemma

Big Oil has borrowed heavily to cope with the Covid-19 pandemic

Source: Bloomberg Intelligence

Note: Data set is for 22 global oil producers tracked by BI

Brent crude closed this week below $38 a barrel, bringing the year’s decline to 43%. At such levels, the industry is underinvesting in supply to such an extent that shortages are inevitable in the future, which means higher prices, Exxon’s Swiger argued. But a price recovery relies on two other things: higher demand and OPEC+ holding the line on production curbs, underpinned by the often uncomfortable alliance between Russia and Saudi Arabia.

With U.S. Covid-19 cases hitting a record this week and new lockdowns looming across Europe, the virus and its impact on petroleum demand show no sign of abating. And for all the brainstorming of executives from Dallas to Paris, the oil supermajors account for less than 15% of pre-pandemic global oil demand. If supply discipline is to succeed, the heavyweight national oil producers will have to work together, and Crown Prince Mohammed bin Salman and President Vladimir Putin must continue to get along.

Big Oil CEOs can do little to foster geopolitical cooperation, but for the last six months they have been pulling all the levers they can to stop the bleeding of cash. Or in corporate jargon, they have focused on self-help: Curtailing unprofitable production, reducing spending and future investment, and firing tens of thousands of employees.

Exxon is paradigmatic of the trouble the supermajors are in. A year ago, the Texas-based company was targeting 2021 capital expenditure of as much as $35 billion; now, it’s planning to spend half that. It announced this week it will reduce its staff and contractors by 15%, or 14,000 people, by 2022. Even then, Exxon is spending more than it’s earning, with capital and dividend outlays consuming all its cash from operations.

Many in the market think the situation is unsustainable, and if prices don’t rise, Exxon will have to cave and cut the dividend for the first time in more than four decades. “The message is clear: Equity needs the protection of higher oil prices,” said Alastair Syme, a London-based analyst at Citigroup Inc.

Shell and BP cut their dividends earlier this year but are still weighed down by high debt levels. Shell outlined an intention to increase the payout this week. Still, that would need higher oil prices, and take decades of small hikes to reach prior levels.

Cost cutting appeared to bear fruit in the third quarter, with four of the five large Western majors posting profits on an adjusted basis. But they can only cut so far.