Low Prices Lead to Layoffs in the Oil Patch
Crude oil is set to close out a shocking year with a fresh five-year price low in the final days of 2014, falling more than 50% from their June highs.
The decline continues to bedevil the markets. Sensing a rally was in order, speculators had dumped money into energy stocks throughout the month of December, hoping to buy up positions at basement prices. But Bloomberg reports that long positions in West Texas Intermediate declined by the most since August for the week ending on December 23, an indication that the markets have lost confidence in a swift rebound for oil prices.
This portends a longer period of low oil prices, and with that, a cutback in drilling and job losses in the U.S. oil patch. Baker Hughes reported that the rig count took another significant hit in the week ending on December 29, falling by 35 to a total of 1,840 oil and gas rigs in operation. Across the country, exploration companies are slashing their capital expenditures for the coming year to reflect the poor price environment.
That is going to have an impact on employment. In a recent example, American Eagle Energy, a small oil producer in North Dakota, decided to call off drilling entirely until oil prices rebound.
Less drilling will not only lead to a loss of jobs for oil workers, but the services that pop up around drilling sites – restaurants, bars, construction, and more – are feeling the slowdown as well.
In one example recently reported by Bloomberg, a private club in Williston, N.D., has been shuttered because it failed to pay rent. “The Bakken Club,” which offered exclusive services including fine dining, airport shuttling, and corporate events, was a place where “like-minded individuals can further their business relationships.” Memberships ranged from $5000 to $25,000. Unfortunately for The Bakken Club, such lavish living becomes harder to maintain when oil prices crash.
But it won’t just be the profligate who feel the brunt of a depressed oil market. Civeo, a Houston-based company that builds lodging for oil workers, announced on December 29 that it would cut its workforce by 45% because of lower demand for “man camp” trailers.
According to an assessment from the Federal Reserve Bank of Dallas, an estimated 250,000 jobs across eight U.S. states could be lost in 2015 if oil prices don’t rise. More than 50% of those job losses would occur in Texas, which leads the nation in oil production.
There are some early signs that a slowdown in drilling could spread to the manufacturing sector in Texas. Companies have sprung up during the shale boom to build metal, machinery, pipes, electrical equipment, chemicals, and other support services. But with the drilling climate taking a turn for the worse, manufactures are starting to feel the chill as well.
The Dallas Fed reported a decline in new orders in a key manufacturing survey. One executive at a metal manufacturing company said in the survey, “the drop in crude oil prices is going to make things ugly… quickly.” Another company that manufactures machinery told the Dallas Fed, “Low oil prices will drive reductions in U.S. drilling rigs, which will in turn reduce the market for our products.”
The sentiment was similar for a chemical manufacturer, who said “lower oil prices will adversely impact margins. Energy volatility will cause our customers to keep inventories tight.”
States like Texas, North Dakota, Oklahoma, and Louisiana have seen their economies boom over the last few years as oil production surged. But the sector is now deflating, leaving gashes in employment rolls and state budgets.
With such extensive dependence on oil for prosperity in these states, the pain will mount if oil prices stay low.
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.