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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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The 150,000 Oil Jobs That May Never Come Back

Shale oil well

The political discourse last year has largely been dominated by the absence of jobs and wage growth in the blue collar space. For many blue collar workers, the energy sector offered one of the few respites from an otherwise sloppy job market. The oil price collapse has changed that reality.

Since oil prices started falling a couple of years ago, energy firms have automated many repetitive, dangerous, and expensive tasks, which in turn has meant fewer blue collar jobs in the space. Products such as those from National Oilwell Varco automate the process of doing tasks like connecting hundreds of segments of drill pipe as they are shoved through miles of ocean water and oil-bearing rocks.

Bloomberg estimates that the oil price collapse eliminated 440,000 jobs, and anywhere from one-third to one-half of those jobs may never come back. The world’s biggest oil services companies – Schlumberger, Haliburton, and Baker Hughes chief among them – spent $3.1B on severance costs in 2015 and 2016. The downturn made those costs particularly heavy burdens for the firms in the space, and now with prices and business on the mend, none of the services firms seem eager to repeat their mistakes by taking on too many people.

Nabors Industries, the world’s largest onshore driller, says that over the long-term it will one day be able to operate a well site with about 5 workers versus the 20 workers required at present. That kind of commentary has UBS estimating that the US oil industry will only need about half as many workers to suck the same amount of oil out of the ground post-2017 versus pre-2015.

None of this is good news for oil rig workers, and the future may require an evolution on their part. A great example of that type of evolution can be seen at the macro-level in the case of Texas. Related: Saudis Raise March Crude Prices For All Customers

Texas’ economy has long been thought of as being oil driven. During the last serious oil price downturn in the 1980’s, Texas suffered significantly. Since that time though, Texas has become far less dependent on O&G. Oil and gas extraction and refining is about half as important to the State today as it was in the 80’s according to some experts largely because other sectors of Texas’ economy have grown so strongly.

At present, while half of the publicly traded companies in Houston for instance are in oil and gas related sectors, the state overall has become much more diversified in its economy. Texas created almost 200,000 new jobs over the 12 months between mid-2015 and mid-2016 - a period which includes the last and most severe leg of the oil price downturn.

Overall only 2.5% of Texas’ employment and about 12% of its total output is related to natural resource extraction. These figures highlight a sometimes forgotten truth that lies at the heart of the Natural Resources Curse – while oil, natural gas, and other resources offer enormous opportunities for wealth and a lot of output for an economy, they actually create relatively few jobs. While 2.5% of total Texas employment amounts to a lot of jobs and those jobs do pay well, it’s clear that oil is not the labor intensive industry that say the services sector is. Related: Why 100% Renewable Energy Is Just A Dream

Houston is certainly hurting from the hammer of the oil price collapse, but Austin and Dallas are thriving with job growth rates of 4.3% and 4.2% respectively. Neither city is closely levered to oil prices, and both are seen as economic hotspots across the country. Texas’ state finances are being hampered by a fall in the revenues received from the oil and gas industry, but with the state’s credit overall in fine condition that is a comparatively minor issue overall.

None of this makes the pain less palpable for those in the O&G industry who have lost their jobs and cannot find new ones that pay as well. Nonetheless, the industry as a whole is adapting, the economy is adapting, and workers will have to adapt as well. Realistically there is no alternative.

By Michael McDonald of Oilprice.com

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