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Page added on December 18, 2014
The “Unequivocally ‘Not’ Good” Reality Of Lower Oil Prices & Jobs
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 (seehttp://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…
25 Comments on "The “Unequivocally ‘Not’ Good” Reality Of Lower Oil Prices & Jobs"
Apneaman on Thu, 18th Dec 2014 3:55 pm
The zerohedge libertarians have enlightened us once again with their tunnel vision worldview. Soon they will be begging for big Gov intervention (Geo-engineering) along with most everyone else.
Firmly Locked Within the Complexity Trap
“Man-made climate change is the number one driver of the 6th mass extinction currently unfolding. Without bees, the grocery shelves look rather bare. Without coral reefs, the oceans are devoid of most life. Perhaps the greatest blind spot of humans is their inability to imagine that earth does not need them. The myopic, anthropocentric worldview that humans “own the earth” is emblematic of our economic system and its principles, and this belief that everything can be valued in dollars and cents will prove to be our undoing.”
http://collapseofindustrialcivilization.com/2014/12/18/firmly-locked-within-the-complexity-trap/
Nony on Thu, 18th Dec 2014 4:00 pm
cheaper gasoline is better. Yummy yummy light sweet maple flavored crude oil!
MSN Fanboy on Thu, 18th Dec 2014 5:15 pm
Yes and No Nony, Yes and No 🙂
GregT on Thu, 18th Dec 2014 6:48 pm
Two completely different world views;
1: The myopic, anthropocentric worldview that humans “own the earth” is emblematic of our economic system and its principles, and this belief that everything can be valued in dollars and cents will prove to be our undoing.”
2: cheaper gasoline is better. Yummy yummy light sweet maple flavored crude oil!
One of them is a tad more intelligent and mature, than the other.
Apneaman on Thu, 18th Dec 2014 6:57 pm
GregT
Primitive Defense Mechanisms
1. Denial
Denial is the refusal to accept reality or fact, acting as if a painful event, thought or feeling did not exist. It is considered one of the most primitive of the defense mechanisms because it is characteristic of early childhood development. Many people use denial in their everyday lives to avoid dealing with painful feelings or areas of their life they don’t wish to admit. For instance, a person who is a functioning alcoholic will often simply deny they have a drinking problem, pointing to how well they function in their job and relationships.
2. Regression
Regression is the reversion to an earlier stage of development in the face of unacceptable thoughts or impulses. For an example an adolescent who is overwhelmed with fear, anger and growing sexual impulses might become clingy and start exhibiting earlier childhood behaviors he has long since overcome, such as bedwetting. An adult may regress when under a great deal of stress, refusing to leave their bed and engage in normal, everyday activities.
3. Acting Out
Acting Out is performing an extreme behavior in order to express thoughts or feelings the person feels incapable of otherwise expressing. Instead of saying, “I’m angry with you,” a person who acts out may instead throw a book at the person, or punch a hole through a wall. When a person acts out, it can act as a pressure release, and often helps the individual feel calmer and peaceful once again. For instance, a child’s temper tantrum is a form of acting out when he or she doesn’t get his or her way with a parent. Self-injury may also be a form of acting-out, expressing in physical pain what one cannot stand to feel emotionally.
Perk Earl on Thu, 18th Dec 2014 8:20 pm
As we move forward towards even worse situations arising due to diminishing returns, I’d expect a whole lot more denial, regression and acting out to take place. What is now a dangerous zoo will turn into an insane asylum during the coming collapse plateau. I’m sure people will do all sorts of random acts to one another, in a similar vein to mice biting each other when starving.
Davy on Thu, 18th Dec 2014 8:44 pm
Perk, it will be interesting when all those prisons open up from lack of resources to support them. That is a mix of dangerous zoo animals with an insane asylum. The US has bred a special species of animal in these places vicious and evil smart. We can consider these places equivalent in danger to the NUK ponds that will heat up and spread a warm fog downwind to the decaying cities. Man, this doom talk is addictive it is ashame its reality is possible and possibly close at hand.
GregT on Thu, 18th Dec 2014 9:32 pm
‘The US has bred a special species of animal in these places vicious and evil smart.”
We’re getting a bit tired already of all the US bashing here Davy. How about some balance.
Russia has prisons too you know. 🙂
Davy on Thu, 18th Dec 2014 10:05 pm
Good point, Greg, I must be subconsciously bashing my country to prove I am being objective and balanced. Wow, kind of Shakespearean maybe Hamlet.
Perk Earl on Thu, 18th Dec 2014 10:07 pm
Davy, yeah at some point they will out of lack of funds to guard them, simply open up the prisons and release them on the populace who will already be going berzerk. But we won’t know they are cons because they’ll be wearing civilian clothing. Oh my, I hope we are some ways from that happening.
Until collapse actually gets more under way enjoy leveraging the last of the oil age. Remember we’re only theorizing what doom may be like. When it does ensue that’s when it really gets doomerish.
Davy on Thu, 18th Dec 2014 10:26 pm
Perk, I do not want to appear grandiose or special but could we be the pioneers of doom? Someday when the world is one big doomstead could we be looked back on as the prophets of doom. I wonder what percentage of the population are doomers. I imagine many people don’t realize there are corns and dooms. Don’t forget dumbs they live in bliss in the moment. Sounds heavenly!
Apneaman on Thu, 18th Dec 2014 11:10 pm
True Doomers are a tiny sliver of a minuscule fraction of the population. I have concluded that one major factor is simply how your brain is wired, so to speak. I don’t think you could make yourself a doomer. No matter what happens or how bad things get, some people will simply refuse to believe they are living during the collapse of industrial civilization. I have heard more than one highly intelligent, well read doomer say they still don’t believe (feel) it is happening even though they can see everything coming apart at the seams on a daily basis. Optimism bias, Normalcy bias, etc, etc. Brain wiring. Doomers is freaks 😉
COMSTOCK RESOURCES, INC. ANNOUNCES
2015 EXPLORATION AND DEVELOPMENT BUDGET
” In response to low oil prices, the Company plans to suspend its oil directed drilling activity in its Eagle Ford shale properties in South and East Texas and in the Tuscaloosa Marine shale in Mississippi. Comstock has released its rig in the Tuscaloosa Marine shale and will postpone its drilling activity there until oil prices improve.”
http://phx.corporate-ir.net/phoenix.zhtml?c=101568&p=irol-newsArticle&ID=2000699
Makati1 on Thu, 18th Dec 2014 11:30 pm
“The Good, the bad, and the ugly”. A great movie a long time ago in a different world. I find it on YouTube sometimes and escape from the real world for a few hours. The title also pretty much describes the world today, but you have to look harder to find the good. The bad and ugly is everywhere, if your eyes are open.
Northwest Resident on Fri, 19th Dec 2014 12:51 am
Davy said: “…could we be the pioneers of doom?”
The prophets of Peak Oil Doom today are simply the ones who are able to step outside of the bubble reality that most people live in, to evaluate large amounts of financial, economic, political and oil industry data logically while also having an uncanny ability to see through the hype and differentiate between bullshit and likely fact.
They are the people who seek out facts that tend to dispel the Grand Illusion being portrayed on every TV screen and through every mass media channel non-stop, every day.
Something about us makes us different.
Some of us were living the illusion, but feeling something wasn’t right, and we went seeking for answers. Those answers led us to enter the Prophets of Peak Oil Doom cult, where we now worship truth and facts, and where the evil we wrestle with is a dreadful future brought on by the sins and repeated transgressions of a greedy, shortsighted and self-interested power elite, and in equal measure by the witless masses who followed wherever they were lead.
Northwest Resident on Fri, 19th Dec 2014 12:54 am
I should have ended that previous post with:
We are the Few, the Proud, the Prophets of Peak Oil Doom!
ooo-rahh!
Makati1 on Fri, 19th Dec 2014 2:14 am
NWR, I think we are just the remnants of what people were like before lies replaced facts and fantasy replaced news. Before the 600 channels of goo and the mind sapping internet fluff and sex. At least, I think we were. Maybe the BS was just less obvious then?
Perk Earl on Fri, 19th Dec 2014 2:18 am
“Perk, I do not want to appear grandiose or special but could we be the pioneers of doom? Someday when the world is one big doomstead could we be looked back on as the prophets of doom.”
That’s an interesting idea, Davy. I can hear a future archeologist filing a report, saying;
“The oil age was a fascinating time of excesses and wild behavior, but what we found just recently is really quite amazing. On their early version of computer connectivity, or what they called the internet, there was a website in which a small group of people openly discussed the winding down the oil age. Keep in mind this was not in the mainstream news, but rather a fringe group of what were termed ‘doomers’. People prophesizing doomerish extrapolations based on the idea of that a finite resource, oil, their primary transportation energy, was in a net energy decline, and therefore growth would cease, followed by economic collapse.
Now of course in hindsight we know now that was to take place, ending the oil in age in the year 2—. But what is so very interesting is they only represented a tiny portion of the population. The rest of the people went on as if that level of energy use could be perpetually increased to drive exponential growth, apparently without a care, ignoring simple physics.
Of course those lessons have been learned and we now extrapolate all forms of resource usage on a recurring basis to confirm sustainability is assured.”
Davy on Fri, 19th Dec 2014 6:48 am
Guys, I am a modest person so I don’t like feeling special except with my family and friends. Maybe it is because I have a basic egalitarian nature stuck in a hybrid world of rich and poor. Sometimes the modesty is an attempt to justify the excesses in my life and the people I live with. It is not easy being in a HNW family but living an alternative lifestyle. Many of the people I live and work with are poor. It is like having two closets with cloths for different seasons.
Perk/NR, I like your thoughts on the doom brigade. We are different and we are prophets. We are no different than the prophets of old except we have science and complexity with knowledge and technology to get far closer to the truth than in past ages. What is more important to me is our impact on our locals. I could care less about popular at the level society admires today.
I was never popular except by close friends and family. My personality is not part of society’s meme of optimism and growth. Locally is where we will shine Perk/NR. Our friends, family, and neighbors will admire us someday because they will see eventually what we saw. This is important because currently we are considered “out there”, loons, and doomers. We are not considered part of the popular and admired in the greater sense. We don’t have friends and family bragging on their doomer dudes (us). The news media is not knocking at our door with interviews. We are considered different with a hint of mental illness. We are considered in the cult category.
I feel we will be the heroes at the family and clan level especially those of us who have prepped. Our attitudes, lifestyles, and prepping will be emulated and be a light shining in an otherwise darkness of a period of descent. I care about the local level. I have no interest in the larger society in the sense of making a difference. Our basic human nature is tribe, clan, and family with globalism being the byproduct of the entropic blow off of globalism and hydrocarbon utilization. Much of our mental illness and social ills are a product of our current unnatural global arrangement. The doomer illness that people feel towards us is part of the tension society is in with its unnatural global condition.
Kenz300 on Fri, 19th Dec 2014 9:15 am
If we are to have any hope of dealing with Climate Change the world needs to reduce its reliance on fossil fuels and transition to safer, cleaner and cheaper alternative energy sources.
We can deal with the cause of climate change or we will deal with the impact of climate change……
The fossil fuel industry will do all they can to try to reduce competition from alternative energy sources and maintain their profits. They will not be successful despite all the efforts of the oil companies and the Koch brothers.
——————-
Asia Pushes Hard for Clean Energy
http://www.nytimes.com/2014/11/19/business/energy-environment/asia-pushes-hard-for-clean-energy.html?action=click&contentCollection=Asia Pacific®ion=Footer&module=MoreInSection&pgtype=article
Apneaman on Fri, 19th Dec 2014 11:52 am
Davy
“It is no measure of health to be well adjusted to a profoundly sick society.” – Jiddu Krishnamurti
It is my contention that a majority of people on anti depressants/anxiety meds and many others suffering addictions to substances and activities are victims of our sick culture. Their suffering is real but the cause is not biological. The response manifests itself biologically; parts of the brain actually shrinks. It will not surprise me one bit if many folks do better in a less material more local/community based life. As long as they are eating. I look forward to seeing how these individual “self made” libertarian heroes make out in the new world that is almost here. We will see who the real producers are then.
Davy on Fri, 19th Dec 2014 1:05 pm
Yea, AP, now if we can get from here to there and skip the horrible. The only good complexity is simple complexity. That is a incongruous juxtaposition that points to what nature offers. Nature is simplistic complexity. We have to get back to simplicity before we will find ourselves. We are lost in the fog of deception. Nature is the answer and always has been. Why can’t we see something so simple and complete?
Rebel on Fri, 19th Dec 2014 1:17 pm
I’ve been eavesdropping on you doomers for some time without getting involved.
Very interested in the concept that lonely prophetic doomers are scattered in isolated spots around the world waiting for the inevitable.
I live a middle class existence in the west of Ireland with my family.
I prep away quietly on my own, chickens , fruit and nut trees,veg beds on my 1.5 very rural acres etc but dare I try and raise the subject that the party may end.
Should I be consoled by the fact that some futuristic archeologist might find me “amazing”.
It’s good to know that there are some like minded thinkers out there but when does the penny start to drop with these people.
steve on Fri, 19th Dec 2014 2:13 pm
I have been to a place where people use gas powered blowers to push their leaves into the street and then a bunch of trucks come by and pick them up and take them away as if they were trash….then in the spring they have to buy synthetic fertilizer to feed their grass! How is that for understanding nature!?
J-Gav on Fri, 19th Dec 2014 5:05 pm
Nice one, Apnea.
Perk Earl on Fri, 19th Dec 2014 5:36 pm
“It is my contention that a majority of people on anti depressants/anxiety meds and many others suffering addictions to substances and activities are victims of our sick culture.”
Absolutely true, Ap. I saw a documentary (sorry can’t remember the name of it) but they said doctors use to refer people to psychologists when they were depressed, and that dr. would try to find out the root cause of it and help the person to move past it. Then pharmaceutical companies came up with drugs to treat the symptoms and regular nose eye and throat dr’s started doling out prescriptions. Many of those pharm drugs are just as addictive as heroin. We have an acquaintance that got hooked on Klonopin and after just a short period of time taking it she could not ever get off of it again. She tried and went so haywire in just one day she says she was forced to continue taking them. Now it’s a lifetime permanent need.
How many people post oil age unable to renew their prescriptions handle it? Most will probably be part of the population that does not make it through the bottleneck.