Times are tough in the oil patch.
Times are tough in the oil patch.
For years, America’s oil and gas industry sprinted while the rest of the economy crawled. After the Great Recession, energy was one of the few American industries generating substantial employment and output growth. Fueled by hydraulic fracturing and horizontal drilling in shale plays, the U.S. doubled its production of oil between 2008 and 2015.
But starting in mid-2014, the industry became a victim of its own success. As the U.S., and the world, became flooded with an excess supply of oil, its price collapsed from over $100 per barrel in early 2014 to under $30 by January 2016.
Most experts expect prices to remain low for at least the next couple of years, due to persistent oversupply, OPEC’s refusal to cut production, sluggish economic growth in mature markets like Japan and Europe, and slowing demand growth in China and other emerging markets. As a result, nearly $400 billion in energy-related capital spending has been deferred worldwide since the price of crude began to decline.
The Baker Hughes U.S. active rig count, a leading indicator of demand for products used in drilling, completing, producing, and processing hydrocarbons, has declined by 61% over the past year. In 2015, U.S. investment in mining exploration, wells, and shafts fell 35%, the largest drop since 1986. The energy sector of the S&P 500 ended 2015 down 24%, and fourth quarter earnings for companies in the sector are expected to decline nearly 70% year over year, according to S&P Capital IQ.
Firms across the energy industry, from service provider Halliburton to integrated super-major Chevron, have announced layoffs in a mad scramble to cut costs. Globally, more than 258,000 energy workers lost their job in 2015, according to industry consultant Graves & Co. In Texas, America’s top producer of oil and gas, exploration and production companies have cut 60,000 jobs, or about one-fifth of their workforce.
The current U.S. unemployment rate for the oil, gas, and mining sector is 8.5%, compared to the overall jobless rate of 5%. Mineral royalty owners nationwide have seen their monthly checks cut in half. Restaurant and retail stores in boomtowns like Midland, Texas have seen customers vanish. States and municipalities that thrived for years on revenue from energy-related severance and property taxes have seen the proverbial well run dry.
However, all hope is not lost, especially for the companies with the financial flexibility to be patient. Those who have worked in the energy industry for decades know of its painfully cyclical nature. Fundamentally, it seems assured that the world will continue to consume oil and gas for decades to come. In its 2016 annual energy outlook, ExxonMobil predicts that oil and gas will supply the world with 60% of its energy in the year 2040. What is more, total global energy demand will grow by 25% between 2014 and 2040 as the emerging middle class in countries like India, China, Nigeria, and Thailand begins to buy cars, refrigerators, and electronics.
Even with oil and gas prices at their lowest level in more than a decade, it is an especially exciting time for the North American energy industry. All three countries contain abundant resources of oil, gas, and renewable energy. Thanks to the shale boom, North America has become far less dependent upon imported energy, with the U.S. reducing foreign oil imports by nearly 60% over the past seven years.
Mexico’s recent energy reforms have finally opened the country to private investment, which should reduce electricity costs, improve the competitiveness of the manufacturing sector, and reverse the country’s decade-long decline in hydrocarbon production. The recently passed repeal of the U.S. crude export ban will eliminate unnecessary bottlenecks and allow American producers to capture the full value of their oil on the world marketplace. By 2020, ExxonMobil expects that North America will become a net oil exporter.
Now is not the time to forget about the revolutionary success of the North American energy industry. Instead, North America should continue to integrate its energy transportation and transmission networks, share best practices amongst the three countries, and ensure that its energy workforce is educated, credentialed, and mobile across the continent.
