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Downturn In Oil Demand--Just How Much Worries Investors

Sell on the news. Oil services giant Schlumberger, which reported earnings in line with expectations, down 10 percent this morning to a 3-year low, taking the whole oil services industry down.

What's the problem? 2009. We are at peak earnings now. The concern is that the global recession will dramatically reduce demand for oil services. Indeed, with some firms talking about $35-$50 oil next year, it's little wonder that investors are bracing for a downturn in demand.

Demand will turn down, but how much? Over 70 percent of their revenue is international. Analysts have noted that much of that is tied to offshore rig contracts that are unlikely to be terminated.

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Other parts are more problematic, however. Schlumbergerhas a unit that provides seismic services (Western Geco). They make a lot of money: while they are only perhaps 15 percent of revenue, they have margins of 35-40 percent.

These Western Geco guys are the advance guard of the oil services business: they're hired to prospect for oil. And it's this end of the business that could see the biggest turndown.

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