The U.S. has been dealing with sustainably low oil prices since the start of 2015. In late 2014, oil prices fell from more than $100.00 per barrel to around $50.00 per barrel. Since 2016, oil prices have been on a roller coaster ride, swinging between $27.00 and $55.00 per barrel; that’s a quarter of the 2008 peak crude price of $145.00.
These low oil prices have shaken up the energy sector and broader U.S. economy. Low oil prices have resulted in research and development budget cuts, shelved expansion plans, serious cost-cutting measures, and production cutbacks. Despite these efforts, the U.S. oil industry has sustained major job losses, bankruptcies, and oil and gas companies shuttering their doors.
In late 2017, oil was trading at around $50.00 per barrel; in 2018, U.S. oil prices are expected to trade under $60.00 per barrel. Even that could be a little optimistic; Mexico has locked in an average price of $46.00 per barrel for 2018. The Mexican oil hedge is considered to be the biggest hedging bet on Wall Street.
It does not look like the current low oil price environment is going to be followed by an oil boom. Instead, it appears as though low prices are the new norm, which will have a huge impact on oil and gas companies, the U.S. economy, and every country that depends on it.
Reasons Why Oil Prices Are Low
Just before the financial crisis in 2007, oil prices hovered around $140.00 per barrel, with many analysts predicting that oil prices would hit $200.00 per barrel by the end of the year. That didn’t happen. By 2009, oil prices had plunged more than 70% to a five-year low of $35.00 per barrel as the world dealt with the biggest economic slowdown since the Great Depression.
Oil prices rebounded though, along with the broader market, as the U.S. economy bounced back; by June 2014, oil was trading, once again, at more than $100.00 per barrel. Those sky-high oil prices could not be sustained though.
Thanks to increased U.S. shale production, sustained output from the Organization of the Petroleum Exporting Countries (OPEC), weak global economic data, and growing crude oil inventories, oil prices started to slide. In fact, the International Energy Agency (IEA) warned that unless global oil producers cut production, oil prices would continue to fall through the first two quarters of 2015.
Instead of thinking about long-term oil prices, OPEC surprised the world in November 2014 when it announced its members were not going to reduce output. OPEC wanted oil prices to fall in the hopes that non-OPEC nations, like U.S. shale producers, could not remain profitable and shut down. The near-term result was higher oil prices. At the time, Saudi Arabia blamed falling oil prices on speculators—not weak demand and record global supplies.
Certain of its ability to control the world’s oil prices, Saudi Oil Minister Ali al-Naimi said if other non-OPEC countries want to cut production, they could go ahead. But Saudi Arabia was never going to cut production. “That position, we will hold forever, not just 2015.”
By January 2015, oil prices had plunged to around $43.00 per barrel; one year later, oil prices had fallen even further, to $26.00 per barrel. Where OPEC saw glutting the market as a way to eliminate competition from U.S. oil and gas producers, the North American industry used that time to reduce share production costs, become more efficient, and profitable. As a result, shale oil soared from around 10% of total U.S. oil production to about 50%.
Even though global demand for crude oil continued at a healthy rate, it wasn’t enough to absorb the surge in production from U.S. shale producers and continued pumping from OPEC. The world became saturated with a product it didn’t need.
Cash-strapped OPEC decided “never” was too long and in November 2016, implemented a number of production cuts. Over the following weeks, oil prices rebounded by 25%, climbing from around $43.00 per barrel to $54.00 per barrel.
But drilling in the U.S and stockpiles of crude continued to climb, undermining any production cuts. Moreover, slowing growth in emerging markets, especially China, helped keep oil and other commodity prices low.
In 2018, several factors will keep a lid on oil prices. Huge oil inventories will keep a tight rein on oil prices as crude supplies build and U.S. oil production remains high. Continued output from U.S. oil producers will also nullify the impact of any further OPEC production cuts.
This brings up an interesting scenario. If OPEC cuts don’t have the desired effects, the cartel might need to make additional cuts, or go back to what it did in 2014: defend its market share and ramp up production. The former will have little lasting effect on oil prices while the latter could send oil prices tumbling to under $30.00 per barrel.
Speculation about the rise of renewable energy (wind and solar) and the rise of electric vehicles could also see oil prices slide in 2018 and especially over the next decade.
It’s already happening with the coal industry; renewable energy is cheaper and plentiful, and more and more energy companies are shutting down coal-fired plants and/or refitting them. Since 2010, more than half of all U.S. coal-fired plants have shut down or announced their retirements.
The same thing will happen to oil prices over the coming years.
Low Oil Prices Will Hurt U.S. Economy
In 2014, oil was trading for above $100.00 per barrel, in early 2017, crude was trading at around $55.00 per barrel. In the summer, it was trading at $42.00 per barrel. It now looks as though low oil prices are going to be the norm. The big question is, are lower oil prices good or bad for the U.S. economy?
Countries like the U.S. both produce and consume large volumes of oil. As a result, sustained low oil prices would be a mixed bag, with some impacts being felt immediately and others taking longer to manifest.
Case in point, low oil prices can reduce the cost of living and boost the U.S. economy by allowing consumers and businesses to spend their money on things other than soaring energy costs.
Low oil prices are also a positive because it means lower prices at the gas pumps and lower costs for businesses that rely on oil, like manufacturing and the transportation industry.
Others argue that the damage to the oil sector far outweighs any positives.
Yes, low oil prices bring down the cost of production and increase disposable income, but the overall effect of lower oil prices on the broader U.S. economy is negligible.
How? If businesses have struggled or are struggling, there is no guarantee that they are all of a sudden going to pass on these cost savings to consumers at the pump. Lower oil prices, then, do not always mean lower gas prices.
If gas prices do go down a few cents, there is no guarantee that drivers are going to spend that windfall on consumer goods; they could just as easily use it to pay off mounting debts or sock it away.
When it comes to cutting manufacturing costs, energy costs are pretty small relative to other costs in production. This does not hold true for industries that use crude oil as feedstock (gas refineries) but it is true for the vast majority of other industries, which goes to show that low oil prices do not lead to huge savings for manufacturers.
When looking at the broader U.S. economy, any economic stimulus that comes from lower oil prices gets canceled out by the damage done to the oil sector. Oil continues to play a major role in the U.S. economy; 28% of domestic energy is used for transportation, as is 71% of the oil consumed in the U.S. on a daily basis. As a result, the U.S. economy is vulnerable to volatile oil prices.
Low Oil Prices Kill U.S. Jobs
Low oil prices certainly don’t help those who work in oil-dependent states like Texas, North Dakota, Alaska, California, New Mexico, and Louisiana. When oil prices fall, geographic areas that rely on the oil and gas industry will suffer as companies cut back on investments and expansions, and idle production, which leads to massive layoffs.
Years of low oil prices have meant deep cuts for oil and gas companies worldwide, resulting in massive layoffs.
According to the latest data, the total number of oil and gas layoffs around the world is more than 441,000. Of the more than 440,000 layoffs, 178,466 (40%) are in the United States and 46,000 (10%) are in Canada.
These estimates are on the conservative side because private companies play a huge role in the oil and gas industry and generally do not announce layoffs. These layoffs do not include those businesses that rely on the oil and gas industry for sales, or businesses where oil and gas workers spend their money, including housing, cars, food, and entertainment.
Should oil prices remain low in 2018, there will be a lot more jobs in the balance. According to the U.S. Energy and Employment Report, the Traditional Energy and Energy Efficiency sectors employ approximately 6.4 million Americans. In 2016, these sectors added over 300,000 net jobs, or roughly 14% of all those created in the U.S. that year.
Electric Power Generation and Fuels technologies directly employ more than 1.9 million workers. In 2016, 55%, or 1.1 million, of these employees worked in traditional coal, oil, and gas.
Meanwhile, the Motor Vehicles and Component Parts industry employs just over 2.4 million workers. And about 2.3 million people work in Transmission, Distribution, and Storage, with approximately 982,000 working in retail trade (gasoline stations and fuel dealers) and another 830,000 working across utilities and construction.
Unfortunately, growth in the fuels sector is not looking good. In 2017, the fuels sector experienced an eight-percent year-over-year decline in employment. Most of those lost jobs were driven by declines in oil, gas, and coal employment.
Those are small numbers, though, when you consider that more than 10 million U.S. jobs are tied to the nation’s oil and gas industry.
Low Oil Prices Will Lead to More Layoffs in 2018 and Over the Next 10 Years
As bad as low oil prices have been for the U.S. economy and American jobs, the worst may be yet to come. Around 66% of U.S. oil and gas executives expect oil prices to trade between $40.00 and $50.00 per barrel in 2018.
The pessimism is growing too. Just two percent think oil prices will climb higher than $60.00 per barrel in 2018. A whopping 55% said the same thing last year.
Meanwhile, oil and gas executives think job losses will continue to mount in 2018, with 41% expecting a further reduction in headcount.
Depending on where oil prices go in 2018, 2020, 2025, and beyond, layoffs in the oil and gas industry will continue to mount. Forecasts on exactly where oil prices are heading vary wildly, but the overall outlook for crude oil is bearish.
The IEA believes the demand for oil will accelerate faster than anticipated this year, for oil prices to recover by the end of 2017, and for oil prices to rise over the coming years—though not significantly.
The World Bank, meanwhile, predicts that crude oil prices will touch $55.00 a barrel with oil prices increasing further in 2018. The average price of West Texas Intermediate crude will continue to rise after 2020, reaching $80.00 per barrel by 2030.
According to the U.S. Energy Information Administration Short-Term Energy Outlook, crude will average $52.00 per barrel in 2017 and $54.00 per barrel in 2018.
Credit Suisse Group AG (ADR) (NYSE:CS) believes oil prices will remain below $60.00 per barrel until at least 2020. The investment bank lowered its U.S. West Texas Intermediate crude forecast by $5.00 per barrel to $57.50 in 2020. Credit Suisse said it doesn’t think the oil market will rebalance until 2019.
Improving technology for shale production could put a ceiling on the crude prices over the next few years. Morgan Stanley (NYSE:MS) downgraded its outlook for crude in 2020 to just $60.00 (from $70.00-$75.00 per barrel).
Some analysts say crude will never break above $50.00 per barrel again. At the other end of the scale, others predict that electric vehicles and alternative energy fuels could send oil prices crashing to just $10.00 per barrel by 2025. Again, this is not an entirely unlikely scenario: about 70% of oil is used for transportation.
No matter how you look at it, there doesn’t appear to be any serious bullish sentiment when it comes to the future price movements of U.S. crude prices. This is bad news for the U.S. oil and gas industry and will inevitably lead to additional job losses in 2018 and over the next decade.
Can Renewable Energy Replace Oil Industry Job Losses?
Nothing lasts forever. Especially non-renewable resources. The world runs on oil but it hasn’t always been that way. The fact is, 120 years ago, oil wasn’t the economic driver that it is today. That too shall pass, and by all accounts, the baton will be passed to alternative energy.
Most of the oil comes from the Middle East and the U.S. does not want to rely on oil from a politically unstable regime. Oil is also associated with pollution, global warming, and geopolitical tensions. So the notion that renewable energy could replace crude oil in developed and developing economies is no longer a far-fetched idea.
Crude oil may be at an inflection point. And, like all good ideas, there comes a time when the alternative no longer makes sense. We saw the benefits and adopted the car over the horse, smartphones over wall phones, and computers over pens and typewriters.
The writing is on the wall, not for the entire crude oil industry (jets will continue to have difficulty using solar power to fly), but for the automotive industry. The 2020s could be the decade when the electric car grabs hold of the global consciousness. With 70% of oil being used for transportation, there is a good chance that oil prices will stay low or start to tumble in the coming years.
Battery prices are down and power is up. All new cars in Europe will be electric within two decades and battery-powered vehicles will account for 100% of registrations in 2035.
By 2040, it is thought that 35% of all new cars will be electric with long-range electric cars costing less than $22,000 in today’s dollars. Capturing 35% of the market would reduce oil demand by 13 million barrels per day.
The National Grid, which runs the U.K.’s national transmission network for electricity and gas, said it expects 90% of new cars in Britain to be electric by 2050.
Even in the near term, automakers are turning their backs on the combustible engine. Swedish firm Volvo said that it would only launch hybrid, plug-in hybrid, or 100% electric cars starting in 2019.
What will this mean to all those who work in the oil sector and affiliated or associated industries? It’s not going to happen overnight, so millions of Americans are not going to be looking for work at all once.
Chances are good that the move to renewable energy like wind and solar, and the adoption of electric vehicles will be measured. Where will those who do lose their jobs work? Thanks to the rapid development of technology, 85% of jobs that will exist in 2030 haven’t been created yet.
Think about it. There are millions of Americans working in the automotive industry; jobs that did not exist 100 years ago. There are millions of people around the world working in IT; none of those jobs existed 25 years ago. 30 years ago, manufacturing accounted for 80% of unskilled jobs; today, it’s 12%.
Can renewable energy replace all of the lost jobs associated with the oil and gas industry? Absolutely not. Because of varying economics, the loss of jobs in the oil and gas industry does not mean they will be absorbed by the one taking its place.
Moreover, our dependence on oil is monumental. And it’s doubtful we will completely free ourselves from oil anytime in the next 200 years.
That’s still quite a ways to go, though. For now, oil prices remain depressed and are expected to stay low well into the 2020s. Since 2014, hundreds of thousands of Americans have lost their jobs due to low oil prices. Because of sustained low oil prices, hundreds of thousands more will lose their jobs in the coming years. How it will hurt the American economy remains to be seen. For now, though, one thing seems certain: The benefits of low oil prices have yet to outweigh the damage they’ve created.
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