Thursday, January 8, 2015

Careers in the Era of Cheap Oil

One of the biggest trends in the American economy right now is the low price of oil. As the price per barrel approaches and sometimes dips below $50, you can expect some changes in the job outlook for various occupations. But these are not necessarily easy to predict, and it is important to remember that the price of oil has a long history of ups and downs. The boom in domestic production was triggered by the development of fracking technology, but the continuing plunge in prices owes a large share to the decisions of Saudi Arabia, which often are based on political rather than market considerations.

The obvious first place to look for career consequences is the oil industry itself. The total number of operating rigs in the United States stands at 1,811, down 6 percent from its peak in the autumn of 2014. According to The New York Times, “Each rig represents about 100 jobs, from roughneck field hands to maintenance workers.” The Times article quotes one analyst as saying, “Exploration and production budgets are down anywhere from 30 to 40 percent and the cuts are happening faster than we thought.” He also predicts that the big three drilling companies are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ.”

The author of the article notes that “large-scale layoffs across the industry are not expected, at least not immediately. Producers contract their rigs for as long as three to four years, and many companies have hedges that lock in higher prices than the going market rates. In addition, producers often need to drill simply to retain their leases or keep their revenue up.” The more highly skilled workers have the most security, because drilling companies anticipate that prices will rebound as global demand increases in coming years. For that reason, I expect the long-term job outlook to remain excellent for petroleum engineers, who commanded the highest salaries among college graduates in last year’s survey by the National Association of Colleges and Employers. The short-term prospects for newly minted petroleum engineers may not be quite as rosy, however.

Industries that are heavy consumers of energy can be expected to be the next place where career effects are felt. However, understand that bulk energy purchasers also use a hedging strategy to lock in stable prices over several years, so they do not benefit from oil price dips as quickly as you and I do at our local filling station. For example, this is true for the highly competitive airline industry. Manufacturing is feeling mixed impacts. Low prices at the gas pumps are helping automobile manufacturers to sell more of their highly profitable SUVs. The steel industry, on the other hand, is experiencing cutbacks in pipe and tube sales as demand from oil drillers slackens. Domestic steel is also being crowded out by imports, lured here by the current strength of the dollar. Manufacturers who depend on exports are finding that the strong dollar makes their products less attractive overseas.

The shift to green energy does not seem likely to be slowed much by cheap energy, so prospects are still good for job openings for engineers and technicians specializing in solar and wind energy production. The main drivers for this shift are improving technologies and continuing tax credits. An analysis by Deutsche Bank predicts that solar electricity will be competitive with grid-based prices in 47 states in 2016, assuming that the 30 percent tax credit continues. Even if the tax credit drops to 10 percent when the current law expires that year, solar electricity will be competitive in 36 states.

The darkest cloud on the horizon is the question of the economies of Europe and China. The low price of oil is partly the result of lack of increasing demand from these quarters. If Europe goes into a third round of recession and Chinese growth continues to cool, diminished world trade is likely to have an adverse effect across our economy. We can be proud of our strong dollar when we shop on the Champs Élysées, but eventually a stagnant world economy will hurt us, too.

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