Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 February 6, 2016 - 9:27 PM EST
Print Email Article Font Down Font Up
Why the oil industry couldbe a stain on economic recovery in US

Early Friday afternoon, Barack Obama took the stage at the White House briefing room to announce that the US unemployment rate had dropped below 5% for the first time since February 2008.

Under the president’s tenure unemployment has more than halved. But there’s a growing stain on the labor market and the latest jobs report by the US Department of Labor may contain evidence it is growing – huge numbers of jobs are being lost as low oil prices lead to layoffs across the energy sector and the communities that rely upon it.

The oil industry seems to be a blemish on otherwise mostly impressive recovery. With prices of oil plunging below $30, the energy industry has made significant job cuts. Overall the energy industry – gas, oil, coal – has seen employment drop by 6.6% over the last year. Some 104,514 jobs were lost in oil last year, up from 4,137 in 2014.

According to Keith Philips, assistant vice president and senior economist at the

San Antonio
branch of Federal Reserve Bank of Dallas, six states saw negative annualized job growth. Even as national unemployment rate inched down, the rates in these “energy” states –
Oklahoma
,
Alaska
,
Louisiana
,
Wyoming
,
West Virginia
and
North Dakota
- rose months at the time.
Texas
, which ranked third in job growth in 2014, dropped to 32nd place in 2015.
North Dakota
went from first to the very last.

“Texas is a much more diversified than the other energy states,” explained Philips. “It is possible that jobs will decline in

Texas
if oil prices average between $20 and $30 per barrel this year. Much of the weakening will take place in
Houston
– with the metro areas declining by up to one percent. Under this scenario
Dallas
,
Austin
and
San Antonio
would slow from their strong pace of growth in 2015 but still see positive job growth.”‘Most companies have cut back their exploration’

BP and Shell were among the energy firms to announce layoffs in the recent weeks. BP will cut 4,000 jobs from its exploration arm and 3,000 jobs from “downstream” refining, many of which are in

Houston
. And a merger between Royal Dutch Shell and BG Group will eliminate 10,000 jobs in 2015-2016, according to Shell’s chief executive, Ben Van Beurden.

Even though the oil industry is used to up and downs in its prices, there is “no way for companies to get completely in front of those changes”, said John Challenger, CEO of Challenger, Gray Christmas, a global outplacement company that keeps track of layoffs. In January the energy sector planned to cut 20,246 jobs, up from 1,682 in December.

“Most companies have cut back their exploration. They are cutting back on their operations that are not as profitable but are more expensive to get energy out of the ground. Energy companies are realistic that there could be more supply coming on the market, that demand is still down,” explained Challenger.

The problem facing the oil industry right now is the oversupply of oil. As oil flooded the market, demand went down and as a result, oil prices have fallen below $30 a barrel. At the moment, it is not profitable for companies to continue producing oil at the rate that they have been – as their current supply has dropped in value.

Since 2008, US production of oil has gone up by 90%. The US currently has almost 503m barrels of commercial crude oil, according to the Energy Information Administration. That’s the highest level of oil supply for this time of the year in at least 80 years.

As oil companies cut back on their production, they are not just cutting staff in the field.

“It’s going to be everyone from administrative assistants, to engineers, geologists and geophysicists – everyone you need to run an oil company,” John Grave, president of Graves & Co, told the Houston Chronicle. “If you want to stay in your profession, it makes life very difficult.”

That might depend on your skill set, Challenger said. According to him, companies are likely to try and hold onto engineers and highly skilled niche workers, “because those people are hard to find when times are good”. And while layoffs in the energy sector have also affected the white-collar workers such as accountants and IT people, they should have an easier time finding a job.

“They are coming into a very favorable labor market where they can change industries to area that are doing well and be ok,” Challenger said. “People who lose their jobs in a very strong labor economy are in a much better shape than when the unemployment is very high.”

It is, however, rare that laid off energy sector employees enter into such a strong labor market.

“This is an unusual even with the US economy growing strongly and a big drop in drilling. Normally US or global recession pulls down oil prices, and there is a double blow,” said Robert Gilmer, director of Bauer Institute for Regional Forecasting at University of Houston. “We went through 2015 with the best year for job growth since the late 1990s for the US, even with the oil employment turning down.”

Oil tax

On Thursday, the White House announced that in the budget proposal sent to Congress on Tuesday it included a $10 fee per barrel of oil imported into the US. US-produced oil would not be subject to that kind of a fee, creating what Obama administration considers to be a level playing field for American producers.

Such a proposal is dead on arrival in a Republican-held Congress, yet it can help convey a message to the energy sector: focus on innovation in clean energy and produce less oil.

“Gas prices are expected to be low for a while, for a foreseeable future,” Obama said on Friday. “That overall can be a good thing for the economy, but what is also important is that we use this period when gas prices are low to accelerate transition to a cleaner energy economy because we know that’s not going to last.”

Obama’s administration conceded that if the tax were enacted, some companies might pass some of the costs onto the consumers.

“The White House thinks Americans are not paying enough for gasoline,” said Jack Gerard, president and CEO of the American Petroleum Institute, clearly implying that such a proposal would drive up prices for the consumers.

Over the past few months, the Obama administration repeatedly told the Guardian that it is monitoring the job losses in the energy sector caused by low oil prices. On the other hand the US secretary of labor, Tom Perez, said cheap oil prices act like a tax cut for consumers, putting money back in their pocket.

“Energy prices have such a complicated effect on US economy, because energy prices for many consumers act like a tax,” agreed Challenger, adding that consumers have more cash in their wallet. “It’s good for the companies that don’t have to spend much on their energy bills, but obviously it hits the energy sector hard. There are losses as well.”

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Source: Equities.com News (February 6, 2016 - 9:27 PM EST)

News by QuoteMedia
www.quotemedia.com