Commuters across the United States have reason to celebrate as gas prices have fallen below $2.00 per gallon. Low oil prices can be great for the consumer—lowering the price of transportation as well as a number of consumer packaged goods (CPG) products manufactured downstream of the petrochemical industry.
However, not all Americans celebrated. At the end of 2019, oil and gas extraction, petroleum products and pipeline transportation employed more than 323,000 people in the United States. With an average oil price of $56.98 across 2019, the sector supported $30.2 billion of salaries. These jobs support hundreds of thousands of families in oil-producing states, not to mention their outsized impact on the regional economies.
Jobs have been returning to the sector after hitting a low of 303,000 at the end of 2017, when the sector was still struggling with $30 oil in 2016. Within two years since 2017, oil prices had increased by almost $10/bbl. and the sector had added 20,000 jobs (+7 percent). We are still far away from the record-high employment seen in 2014, where years of oil prices above $90/bbl. had led to more than 360,000 employed.
In the past five years (2014-2019), the oil and gas sector has seen employment swing by more than 15 percent, causing 60,000 people (primarily in oil and gas extraction) to lose, regain and then lose their jobs again due to oil price volatility—prices that are neither controlled nor marginally affected by U.S. producers, but have a devastating effect on our economy and American workers. Families cannot anticipate or budget for oil price volatility and they continue to be the victims in a geopolitical struggle.
The Dallas Federal Energy survey estimates that the average breakeven oil price (WTI) in the United States is between $48-$54/bbl. Today, WTI has sunk below $20 to levels unseen since 2002. Once producers’ hedges roll off, more than half of the wells in the United States will be uneconomic.
We are already seeing E&P and oil field service companies announce revised budgets, cuts to capital expenditures and further belt tightening. In the first quarter of 2020, the Dallas Federal Energy survey revealed the aggregate employment index across both E&P and Oil Field Services declined quarter-over-quarter from a previous position of -10.0 to -24.0 and aggregate employee hours worked fell from -7.7 to -32.1. All indices reflect job contraction in the first quarter and companies expect further contraction through 2020. Unfortunately, it is inevitable that American workers will be the victims yet again.
American workers are not only affected by job losses associated with decreased oil and gas activity, but they are hit a second time by the dent lower oil prices have on state funding. For example, in 2016, the state of Mississippi received $26.5 million in tax revenue from oil and gas—unfortunately, they had budgeted for more than $70 million. That year, the Mississippi Legislature had to make mid-year budget cuts, partially due to the lagging estimates for oil and gas severance tax.
This year, the state of Louisiana assumed oil prices would average $59 per barrel when they original compiled the state’s revenue forecast. The oil price today, less than half of what the state forecasted, would slash their anticipated minerals revenue. Greg Albrecht, the chief economist for the Louisiana Legislative Fiscal Office, said for every $1 drop in the price of oil (averaged over the year), Louisiana loses $11 – $12 million in direct tax revenue. An unanticipated drop in state revenue may lead to budget cuts, which would have an adverse impact on the people living and working the state.
Oil price fluctuations are inevitable and, until the country has significantly bolstered its energy security, our workers and their livelihoods will be the victims of geopolitics. We cannot disregard the front line workers who are fueling, quite literally, the U.S. economy. The energy transition will not happen merely by providing investment incentives but by re-training and empowering our hard-working, STEM-educated workforce to be an integral part of the evolution to a more sustainable and secure future.
The views expressed in this article are the author’s own, and may not be shared by The Fuse.