Despite the many reactive measures being taken by companies in the oil and gas industry, unemployment in the upstream portion of the industry is consistently rising in Texas. The Texas Alliance of Energy Producers has recently released information that indicates the total amount of jobs lost in Texas is worse than what was initially suspected.
One preliminary estimate stated that the potential job loss would be around 40,000-50,000, which has been surpassed by the most recent, more realistic estimate of 56,000. However, FuelFix reports that one petroleum economist at the Texas Alliance, Karr Ingham, suspects that even this newest figure of 56,000 is lower than the actual amount of unemployment due to the drop in oil prices. Oil and gas companies realize that the necessary conditions for employment growth, or even for sustained employment, will be absent as long as the oil price stays at its recessed state. There is only so much a firm can do to prevent downsizing when the price of oil has dropped so steeply, and with both sales and profits falling, last resort measures such as layoffs are inevitable.
The high level of unemployment is not only linked to the current price of oil, but it also represents future expectations for the price of oil. For instance, many analysts expect that the price of oil will stay at its current level for most of 2016. The initial drop in the oil price was enough to convince companies that they must lay off employees in order to stay afloat. However, because the oil price is expected to remain at this level for a while into the future, companies must account and adjust for this as well, which leads to further reductions in headcount. Texas, more specifically Houston, being the energy capital of the United States and arguably the world, is clearly taking some of the heaviest blows. As previously stated, most of the jobs lost are in the upstream division of the O&G industry. This is mostly because companies are not doing as much exploration as they have in the past and are not investing as much in new drilling projects. The market for oil is already heavily saturated. Consequently, companies find little to no incentive to take risks such as investing in the development of new drilling locations during turbulent times such as these. This is especially true for smaller companies, which already face issues with acquiring the capital for growth projects such as exploration.
Although most of the headline stories concerning layoffs focus on big companies with massive downsizing, smaller companies that are being forced to downsize, or even declare bankruptcy, are contributing to the total amount of unemployment as well. Many would argue that this was the desire of OPEC when the group made the decision to oversupply the world market: to root out the smaller competition and weaken the bigger, more durable companies. However, even some of the countries that make up OPEC cannot sustain profitable business at $40 a barrel. It is, in a way, somewhat fortunate that the current conditions are not just a burden on American companies; it is a strain on the entire world market. No company in the upstream O&G business, American or abroad, will have an easy time remaining profitable for the foreseeable future.
Article written by HEI contributor Timothy McNally.