Oil sector cuts 70,000 jobs, despite low prices

Despite oil dropped to lowest prices since 2009, 2015 wasn't a good year for American oil and gas workers. Oil sector shed 70,000 jobs from its employment peak in October 2014 for a drop of roughly 14.5 percent, according to a quarterly energy update from researchers at the Federal Reserve Bank of Dallas.
In the fourth quarter alone, at least nine oil and gas companies – together accounting for more than $2 billion in debt – have filed for bankruptcy, and quarterly bankruptcies overall have risen to a level not seen since the Great Recession, the researchers said.
http://www.usnews.com/news/blogs/da.../oil-sector-sheds-70-000-jobs-amid-low-prices

How this would affect future of oil industry and oil prices?

 

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It will, and it has dramatically affected the oil industry. Oil prices will remain low for years. Later this year Iran is expected to dump millions of barrels a day onto the oil markets. That will have a dramatic negative effect as well. OPEC as we have known it is dead. The ongoing Shia-Sunni assures it will remain dead.

US oil inventories are reaching full capacity. Republicans, who control the US Congress, have recently lifted the US ban on oil exports. So it is just a matter of time before the US begins exporting US oil. And my guess is the US will begin exporting oil to Europe in the not too distant future. US companies will continue to produce oil as long as the marginal revenue exceeds marginal costs. Once oil wells are sunk it doesn't cost much to pump it out of the ground. Oil producers are trying to compensate for lower oil prices by producing more oil and that just makes the price problem even worse. Global oil producers are locked into a death spiral.

As you noted some American oil companies have gone bankrupt and more will, but the problem isn't limited to US companies. There are a number of companies in South America who are deeply in trouble as well. So I would expect oil producer bankruptcies not just in the US but in South America and elsewhere. There is fear in some circles these bankruptcies will cause another global economic crisis. As I have said before, I doubt it. I don't think it likely. The debt is much smaller. I've seen estimates of 200-300 billion dollars in the US, and that just isn't enough to cause a global banking crisis. If every US oil company defaulted on every dollar of its debt, it just isn't enough to cause another banking crisis. And we know that every oil company isn't going to default on every dollar of debt.

On the good side for oil producers, lower oil prices empowers consumers and empowered consumers fuel economic activity which will eventually provide increased demand for oil.

 

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There us a glut of oil . so what could be expected . So you cut the personnel

 

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Ancillary:
Ethanol:
When oil/gas is cheap: How does this impact the price of ethanol?
level of correlation?
With the federal volume/weight mandates, is ethanol pricing more stable?
Or, with mandated levels seemingly at the whim of politicians, is ethanol pricing more volatile?

confusedly yours:
rod

 

Agree with most of your analysis, though I am not sure what exactly you mean by "global oil producers are locked into a death spiral". I certainly agree it looks as if Saudi Arabia and Iran may find their oil income per bbl is far below historical levels, and that a lot of US shale oil operations may be mothballed and some of the companies involved may cease to exist. But presumably there will be a balance at some point. Personally I suspect Venezuela is the first candidate for political upheaval. It is an interesting question whether Saudi Arabia will be able to manage the decline in income without it. Also Russia........ As for Iran, I suspect they have had to do without much access to oil markets for so long that they may be happy with a low price.

I have the feeling the West should change sides in the Middle East now and get closer to Iran and more distant from Saudi Arabia. IS and muslim fanaticism are largely the Saudis' fault and they are just a bunch of Bedouin tribesmen living on easy money really, whereas Iran is an industrial state that stands on its own feet. Obama is on the right track in this respect, in my view. But I realise this is somewhat controversial

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.

 

By death spiral, I meant they produce more oil to offset price reductions in the market and in doing so exacerbate the over supply and drive prices even lower.

At some point the market will find an equilibrium. But I think it's much lower. Goldman Sachs has predicted 20 dollar oil. We're not too far from that today. I wouldn't be surprised to see oil in the teens this year.

 

Correction to your headline - Oil sector cuts 70,000 jobs DUE to low prices

 

As we discovered in 2008, it doesn't much matter what the actual physical debt is - what matters is the derivative market operations and financial paper and banking obligations sold on it, still unregulated and unchecked as they are.

We have to hope the guys who made billions out of the last bubble and bust have seen the light and decided to forego another big payday like that in the interests of the common welfare.

 

Is that what you discovered? For some perspective, the US mortgage business was nearly 15 trillion dollars in 2008.

 

So? It was already down 600 billion in subprime business from 2006, and midcrash.

I agree that the coming shakeout shock in the oil business is unlikely to take the big banks down - but that's because there was no financial house of cards of appropriate scale built on the oil business. Not because the oil business is too small to support one.

 

I agree. It is normal to get some fairly wild short-term excursions in the spot price during the process of market correction. But I certainly would not use an oil price in the teens as a business planning assumption, as I think the excursions will be short-lived, i.e. < 6 months or so.

 

(all is a guess)
Sooner or later, heavy oil users will begin to hedge by buying futures to lock in low prices.
They may well be the mechanism for setting a bottom in oil prices.
Meanwhile many of the margined dakota fracking producers(who cannot afford to mothball their wells) will be selling off stripper wells, and some will go bankrupt. (If you've the $ and stomach for it, you might be able to pick up some of these wells cheap)

meanwhile:

Iran has @158 billion barrels of oil reserves.(10% of global reserves-13% of opec).

Many years ago, I read about a man who was buying up stripper wells(some of which only produced 10 bbls/day) when crude stood at $10/bbl. He spent his days in oil soaked coveralls driving around in a ratty old truck(why buy a new truck when you can buy another well?) maintaining his pumps. And then, he became wealthy, seemingly an overnight success. (overnight = years of struggle, exhaustion and worry--and-hard work with little current reward)........In retrospect, he seemed to be a man of vision.

...............................
oh, edit:
Anyone have any insight of the question posed in #4 above?

 

Well. we will see. The US Department of Energy is predicting a 500,000 barrel per day decline in global oil production, and it looks to me like that is based mostly on production declines in the US. In my mind the wild card will be Iran. I think Iran is overly optimistic about its ability to increase oil production, and I think the US Department of Energy my be over estimating the decline in US oil production. Shale wells, which is the bulk new US oil production, play out rather quickly. So I think we will have to wait and see how this plays out. But I think oil prices will remain low for some time.

 

Actually, the crash began in 2007 and ended in 2009. So 2008 is midcrash.

Isn't that the point? Isn't that what I wrote?

Well, that's a bit of a straw man. The discussion was about oil industry debt, and in particular, the debt of oil producers as they are most at risk. It wasn't about the size of the oil business.

 

they do this already(since the beginning of the oil industry)-- oil supplies are bought 3, 6(months) or even a year ahead of time.
this is what sets their profit margins in later times.(up stream and down stream)

 

ethanol comes from grains.

 

of course it is
well
almost
ethanol can be, and is being made from many different plant sugars and starches(eg sugar beets, sugar cane, switch grass, etc. ...)
which
doesn't answer my question
as re comparative fuel pricing.
(Ethanol futures are down over 14% in last 70 days.) Compare this to unleaded futures.

 

because it only correlates to grains(commodities) has nothing to do with RB

 

So we agree, 2008 was midcrash.

Nope. You wrote that we were safe from a downturn in the oil business crashing the banks, because the debt in the oil business was too low to crash the banks even if it all defaulted. My point was that the debt in the oil business was not the central issue in such threat, but rather the status of whatever financial product had been built on it in the still unregulated and uncontrolled financial markets - the central factor in the crisis of 2008.

Oil is a commodity - direct debt in the oil business is more or less regulated, and probably cannot crash the banks regardless of its amount. But the Commodity Futures and Modernization Act of 2000, which removed oil industry based derivatives and associated financial sector products and liabilities from oversight as a commodity-based debt, central to the mess that crashed the banks in 2008, is still largely in force.

 

I have reported your post for intellectual dishonesty. So let's see what the Sciforums staff does. You are once again mixing your posts and mine and attributing them all to me. Then you follow-up with a dishonest/revised comment. If that isn't intellectually dishonest, I don't know what is.

Actually, this is what I wrote, "There is fear in some circles these bankruptcies will cause another global economic crisis. As I have said before, I doubt it. I don't think it likely. The debt is much smaller. I've seen estimates of 200-300 billion dollars in the US, and that just isn't enough to cause a global banking crisis. If every US oil company defaulted on every dollar of its debt, it just isn't enough to cause another banking crisis. And we know that every oil company isn't going to default on every dollar of debt."

And after you disputed that I wrote, "For some perspective, the US mortgage business was nearly 15 trillion dollars in 2008.". The fact is the banking crisis was several orders of magnitude greater than oil company debt. And it's not like we didn't have derivative trading in 2008. We did, and we had banks placing large bets in derivative trades, bets they would not have been allowed to make if Glass-Steagall had not been repealed. So the oil debt crisis isn't another 2008.

Except oil industry debt isn't regulated. It isn't a systemic risk. It has never been a systemic risk. Oil derivative trading is regulated and banks are regulated. What you are missing is Dodd-Frank which re-regulated the banks. In the years following 2008, banks have been recapitalized and are subject to annual stress tests; and the Federal Reserve has been charged with monitoring and managing systematic risks to the banking system. You are missing the fact that remedies to the Commodity Modernization Act of 2000 and the repeal of Glass-Steagall have been enacted to prevent another 2008. And you are missing the fact that the primal cause for the banking crisis of 2008 wasn't The Commodities Futures Modernization Act but the repeal of Glass-Stegal. This isn't 2008.