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The "Unequivocally 'Not' Good" Reality Of Lower Oil Prices & Jobs
Via ConvergEx's Nick Colas,
The drop in oil prices is certain to cause some incremental unemployment in the U.S. energy industry; the question is simply how much and what that means for the American economy as a whole.
To begin the search for answer, you have to go to the wellhead and consider how many individuals work in American oilfields, as well as those workers that directly support those activities. The answer here, courtesy of the Bureau of Labor Statistics, is 812,000 as of March 2014 (the most current data available). That may not sound like a lot, but at average annual wages of $99,854/worker, this small group receives $81 billion in estimated annual compensation. How bad can things get if oil prices stay low?
We actually have a recent case study in the 2008 experience, the last great crash in oil prices. The answer is a 20% headcount reduction from October 2008 to January 2010. The great wildcard for U.S. GDP is the “Multiplier” effect of these jobs. The damage could be slight (at 3x just 0.3% of GDP) or large (at 10x, a full 1% cut in 2015).
Offsetting benefits will have to surmount that hurdle to make themselves useful.
You may not know the author Robert E. Howard, but you have certainly heard of his most famous character: Conan the Barbarian. The original stories predate the famous movies of the 1980s by several decades, first published in a pulp fiction magazine called “Weird Tales” in 1932. If you enjoy “Game of Thrones” or any sword-and-sorcery drama, you have Conan to thank, for Howard essentially created the genre and gave it its first hero.
As for the inspiration for the Conan character, a muscular loner with serious fighting skills, it helps to remember that Howard grew up central Texas in the early 1900s. His hometown of Cross Plains saw its share of the 1920s oil boom. In watching the men that worked these early finds he found the inspiration for the tough and independent Conan. Howard’s famous barbarian is really just a Texas roustabout with a loincloth and a sword.
Fast forward to today, and the fate of Conan’s progenitors is of great interest in economic circles. The drop in oil prices from $106 in June to yesterday’s $56 close cannot, after all, be good for employment in the oil fields of Texas, North Dakota or Colorado. Yes, we all know commodity prices swing around like a weathervane in a hurricane, but this drop seems different. It does not come with a financial crisis like 2008 or on the heels of Fed-designed recessions in the late 1970s/early 1980s. Rather, it seems to start in the OPEC meeting room and emanate outwards towards the oilfields of Russia and American northern Midwest. So what will the harvest be if crude oil’s price drop lingers into 2015 and beyond?
To answer that question we started with industry data from the Bureau of Labor Statistics for employment and wages...
Here’s a summary of what these charts show:
We are focusing for now on “Direct” employment at or near the wellhead – where the product comes out of the ground. The categories we chose were employment related to: Oil and Gas Extraction, Support Activities for Oil and Gas Operations, Oil and Gas Pipeline Construction, Oil and Gas Field Machinery and Equipment, and Drilling Oil and Gas wells.
The total current employment for these 5 classifications is 811,552 as of March 2014 (lastest data available). This represents 0.52% of the current civilian workforce. The largest segment is “Support Activities” at 38% of the total, followed by “Extraction” at 24% and “Pipeline Construction” at 16%.
At just over half a percent of the workforce, this may not seem like a lot of people but they are paid exceedingly well. The average annual income here is $99,854 according to the BLS data, up from $64,642/year at the beginning of 2003 (the first year of this data series). That is a 54% increase in the last 11 years during a time when national household incomes remained largely flat.
Since 2001, the first year of the employment data, the oilfield employment levels relative to the civilian workforce have risen steadily, starting at 0.29% and climbing to just over 0.40% in 2008. From there they decline along with oil prices as the Great Recession pushed crude prices down from $140 to the low $30s. Then, starting in January 2010 they began to climb again as commodity prices recovered. The takeaway: yes, employment in the oil fields correlates directly with oil prices. In percentage terms, employment here dropped by 20% in a little over a year before it bottomed with crude prices in the 2008-2010 downcycle.
With that data in hand, we can begin to consider what will happen to oilfield employment if oil prices do not begin to snap back in 2015. A few thoughts:
If employment levels track the 2008-2010 experience, we can expect a 20% decline in employment. That amounts to 162,400 jobs based on current employment. How quickly they come off the rolls is another issue. The largest losses during the last recession came in month 3 and month 6 after the peak.
Remember that these are high-paying jobs on average, so that 162,400 job loss will feel more like +300,000 to the real economy. Assuming that average annual pay of $99,854 we mentioned earlier, this would take $16.2 billion out of the U.S. economy or 0.1% of GDP in 2015.
The job losses could be greater – or less harmful – depending on how employers see the recent price drop for crude. There is also the issue of break-even levels to consider. No one seems to have a good handle on actual break-evens for domestic oil production, so this is the “Known unknown” in the calculus.
Then there is the subject of economic multipliers – how many other jobs do these oilfield and related jobs actually support? Take the home office of a medium sized exploration and production company, for example: how many layoffs will occur there as prices drop? Then there is all the economic infrastructure around the fields themselves – homebuilders, service industry staff, car dealerships, etcetera. How will those sectors respond to a deteriorating local economy? Three quick thoughts on this:
Since consumption is the first variable in the classic equation for Gross Domestic Product, we are assuming that reduced personal income has a direct effect on national output. We are ignoring potential positives to lower oil prices, such as increased consumer spending in other areas from the money saved at the pump. That benefit would have to come in the form of higher multipliers than the ones we consider here that are related to the energy sector and its economic adjacencies. A dollar spent on gasoline looks just like a dollar spent at the local organic food market, until you chase it upstream and see what else it touches.
At the lower end, consider a 3x multiplier on the 0.1% of GDP we calculated previously. That would amount to 0.3% in 2015. What’s the magic behind that number? Simply that it is a common starting point for the economic multiplier related to a high wage job. It is, for example, the most common assumption used by auto industry economists – a sector I used to follow quite actively – to translate a lost assembly plant job in terms of its effect on a local economy.
At the higher end, try a 10x multiplier. The math behind this comes from the energy industry itself, which estimates total direct employment at 9.8 million (see http://www.energytomorrow.org/economy ) , or just over 10x our oilfield/related employment number. That doesn’t even include the impact on local economies, but it is a decent starting point. By that multiple, a loss of $16 billion in income at the oil field would amp up to $160 billion, or 1% of GDP.
If you are a glass half empty kind of person, you simply need to believe that the economic benefits of lower energy prices will outrace the math we present here. Can we get more than 0.3-1.0% GDP growth from the tailwinds of lower oil prices in 2015? If the answer is yes, then these are surmountable hurdles.
And if, like Conan, you tend towards darker thoughts, then the math we present here is just the tip of the iceberg. Or the sword...
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Good news Oldwood ~ It looks like you can finally retire!
This is bad. My staycations will save me less money now.
looks like you & Captain Obvious 'WON'T BE NEEDING' hotels.com tonight
You know what we should do right now?
You got it.....AMNESTYTM!!!
It's OK.....I'm Obama will throw the the brothers a little loot from.....his stash.
Since 2001, the first year of the employment data, the oilfield employment levels relative to the civilian workforce have risen steadily, starting at 0.29% and climbing to just over 0.40% in 2008.
If employment levels track the 2008-2010 experience, we can expect a 20% decline in employment. That amounts to 162,400 jobs based on current employment.
OMG how will the economy survive without this massive boost??
Back in the day, a situation similar to this happened, and was seen as an act of war, which resulted in an attack in direct response.
gas is cheap but you lost your job
funding the axis of evil or higher unemployment...i'll take higher unemployment pls.
"Get to da' chobber!"
Brilliant!
OIL will find a temporary bottom here shortly, but the long term outlook does not bode well for anybody...
http://www.globaldeflationnews.com/oil-light-sweet-crudeelliott-wave-upd...
Let me help you with that "picture" on oil prices and jobs!
It's rigged, and the only players that matter are taking their chips off the table and closing the Casino "doors"!
Janet Yellen, Stan himey Fischer and the Lord(s) of Douche Blankfein and Dimon to the Russian Federation...
Last one to start the last war is a rotten egg!
the first thing that is going to happen is that rig operators will reduce their rates and rig hands will keep their jobs. What everyone needs to understand is that unemployment in the oilfield sector right now is 0% and if it could be negative it would be. There should be idle rigs laying around waiting to be put to use but the older stuff that had been stacked was brought out earlier this year because they went so deep into the pile of older equipment. A boom means things go beyond normal, that is where we are. What is going on now is bemoaning going back to normal as though that is a collapse. What a bunch of nonsensical hysteria.
Here in Texas we've been through this before and know how to deal with it, North Dakota et al are now in the learning curve. Welcome to the oil patch where your balls better clank when you walk.
Ah yes! Seems like only yesterday...
For those of us old enough to remember the pedophile-in-chief right after "Red Adair" did their magic in Iraq putting out all those oil fires... And to no ones surprise... Shortly thereafter... Many oil companies in Oklahoma and Texas started "cappin"... And lots of chemical engineers at Rice and University of Houston with a bright future in Big Oil had to come up with plan b out of school!
And Voila the cartel achieves it's price targets along with the lack of refining capacity to bump it a up just a lil' bit more!
Same shit different day. ... Only this go around the stakes are a just a bit higher!
This. The pay for oil workers varies depending on the company, but with large oil companies it's very high. See http://www.thefiscaltimes.com/Articles/2013/11/05/North-Dakota-Oil-Jobs-10-Highest-Paying-Positions for last year's six-digit average oil worker's salary in ND (entry-level was $66K, which is not bad, although living in ND must suck). There's room for companies to scale back while retaining employees: they're in boom mode, not long-term sustainability mode. Besides, the oil isn't going anywhere: if US oil production drops off for a bit now because markets won't bear the costs when foreign oil is cheap, then it will resume when oil prices rise again, and the profits and jobs will get pumped out of the ground in the future. Anyone hardworking and industrious enough to get into the oil sector probably won't be starving anyway, especially if he's some sort of real-life Conan the Barbarian.
That said, I have trouble feeling pity for Conan, per the author's little discursus on the literary history of Texan archetypes of rough-and-ready oilworkers. It seems to my poorly read and culturally underprivileged lack of critical literary appreciation that Conan wouldn't much want people fussing over the Barbarian sector's employment prospects, because he could take care of himself. Maybe someone with a degree in Barbarian Studies could enlighten me as to what I'm missing here.
somehow a duplicate post so I deleted it.
somehow a duplicate post so I deleted it.
Hey oil futures fracking troll...
You really need to delete the contents of the box above it and just leave the word duplicate post for both!
Who needs bad chart pr0n when you have old yeller in your pocket?
Keystone Pipeline no likey current price
You don't build it for the current price, you build it for the future price. Besides if the pipeline goes in it will make a giant hole in Warren Buffets profits which makes it worth doing all by itself.
More broken-window economic fallacy. Maybe we all should buy gasoline and set it on fire in our driveways. That should cause all manner of employment and economic stimulus according to Nick Colas.
Gas prices might dip for a little while, then A-hole gov will step right in and see it as an opportunity to stop their bleeding and just raise the tax on fuel.
i would worry about the real action being energy debt going belly up ... but thankfully we reined in leverage following the last financial crisis ...
Aint no humor like gallows humor.
PEAK OIL.......
In general, lower prices are good and higher prices are bad, in the grand scheme of things.
The worse part about this (early everyone will miss it though), is this a full fleged confirmation that the price of oil is arbitrary (as in rigged). Most here probably knew that anyway, but most Americans at least will completely miss this fact.
Bingo. I thought we were running out of oil, so based on supply and demand it should be going up in a 'real' market.
So much bullshit caused by malinvestment due to manipulations and politics.
"Rather, it seems to start in the OPEC meeting room and emanate outwards towards the oilfields of Russia and American northern Midwest."
Bullshit.
Other commodities that OPEC has nothing to do with are falling too. This is a demand issue.
In developed nations, energy is required by every individual and every business; cheap energy is good for every individual and every business (even unemployed energy sector workers).
The current meme "Oil is Too Cheap, The Sky is Falling" doesn't pass the smell test. I'll stick with history, cheap energy stimulates the economy, always has, always will.
Sorry you were long crude..
exactly. it's just comon sense.
So oil prices going down is bad because some people might end up unemployed? Fuck this bullshit with Janet Yellen's dick! I'm going to be drunk before noon today.
How much will it affect the US economy directly?
Not much.
These are Phoenix jobs...jobs that were burnt alive in the 1970s, again in the 1980's, that keep coming back.
Indirectly is another story.
Major European Banks and several US ones are heavily invested in high oil, whether or not it is related to US unconventional oil.
They include primary dealers. They include Fed owner banks.
And there is the general naivety descending from the historical now obsolete belief in regional economies vice global.
The hit to the global economy will roar into the US through the finance sector via CDS and contagion.
Check out this excellent post from the Archdruid Report, and the comment board.
http://thearchdruidreport.blogspot.com/2014/12/deja-vu-all-over-again.html
What if we took this very same issue and applied it to a different sector of the economy? What if the sector were college educations, for example?
Would we be bemoaning the loss of jobs?
The lower tuition fees?
The reduced investment in the ever expanding campus?
Would we be wishing for tuition to resume it's upward path to the benefit of those in that sector at the cost of those who buy the goods and services?
I do not think so.
What we have is what appears to be malinvestment in a sector that all the experts said was going "to the moon".
Face it, they F'd up.
And I do not think it's my responsibility to pay higher prices for their faulty forecasts.
Do you?