Oil bosses aren’t hiring, but they’re glad you are


Last Friday’s blowout jobs numbers provided a welcome shot in the arm for oil prices. Up 4% as of writing this, West Texas Intermediate (WTI) topped…US$49 (RM202.86) a barrel — only a fifth lower than where it was a year ago.

It’s an apt backdrop to the oil and gas (O&G) payrolls data, much of which comes with a one-month lag to the headline figures. While the past few months have felt like dog years in the oil market, November was when October’s decline turned to a rout, with WTI dropping from US$65 to about US$50 a barrel.

On cue, sector headcount dropped by 2,300 that month, only the second decline in more than two years and the biggest since August 2016 (when oil averaged US$45). Yet, November also saw record US oil production, if weekly estimates hold.

Those layoffs portend a wobbly end to an otherwise solid year. (The sector added an estimated 300 O&G extraction workers in December. Extraction workers account for just over a third of the industry workforce, according to Bureau of Labour Statistics classifications. Data for the more numerous support workers lag by one month, hence the focus on November’s data.)

The industry’s ranks swelled by almost 50,000, or about 13%, in the 12 months ending November; they’re now back to where they were in late 2015. Production of crude oil and natural gas, however, is up by a quarter over the same time. This has been a productivity story.

The peak, however, was December 2017, and worker productivity seems to have plateaued (although I expect a new peak once December 2018’s data are in). Still, that wasn’t a problem for much of 2018 given the jump in oil prices, with WTI hitting a peak of more than US$76 a barrel in early October.

I use monthly production data and payrolls figures to construct a very rough estimate of industry revenue and the proportion of it going to wages (this ignores regional price differences and hedging effects, among other things, so bear that in mind).

On this basis, wages dropped below 10% of revenue last year for the first time since the summer of 2014, when crude oil still traded north of US$100 a barrel: With productivity gains having topped out, though, prices rule.

Plug in current O&G spot prices, and November’s implied wage bill would have been 12.4% of revenue — summer 2017 levels — rather than 9.6%. (It’s worth noting that natural gas prices were exceptionally strong in November, averaging more than US$4 per million British thermal units for the first time in more than four years.)

This helps explain November’s slowdown in hiring and also wage inflation, which fell toward 2%, roughly half the rate of a year before.

The payrolls data provide another marker indicating the late-2018 drop in oil prices will force exploration and production companies to make good on pledges of spending discipline sprinkled throughout the latest set of earnings calls.

WTI at less than US$50 a barrel — closer to US$40 in the Permian shale heartland — is priced for supply constraint, especially as production per worker suggests productivity gains, impressive as they have been, are slowing.

Yet, it’s also worth noting that a US$10 swing in the oil price makes a big difference to the wage burden on revenues. The wildcards affecting them this year range from OPEC discipline to White House indiscipline, pulling either way. Demand, especially, is more of a worry than in recent years.

On that score, while oil sector employers didn’t do much for payrolls at the end of 2018, they can only be glad that so many others did. — Bloomberg

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