Why the US should worry about oil sector jobs

Saturday, May 2nd 2015 - 07:09 UTC

Full article 5 comments

There is little doubt that as oil prices fall, some people working in that sector will lose their jobs, but what will the impact be on other sectors of the economy.

If the average oil producing metro area has 3% of workers in the energy sector and a third of them lose their jobs that implies an extra 1% unemployment.

Outside of individual's holding oil stocks, damage to the economy from the fall in oil has been pretty minimal so far. Indeed, the price cut in home heating oil and gasoline has probably outweighed the damage from lower oil prices… so far. Unfortunately, this situation may not last.

Analysts are starting to look beyond the boost to the economy from low oil prices and see the damage that is being done by worker layoffs, slowing business, and falling home prices in oil producing states. Indeed, one recent estimate suggested that up to four jobs could ultimately disappear for every one job lost in the oil sector.

There is little doubt that as oil prices fall, some people working in that sector will lose their jobs. What is less clear is the impact those job losses will have on other sectors of the economy. Since one person's spending is another person's income, as people lose their jobs in the oil patch, that should mean less spending at the local grocery store, restaurants, etc. Now of course, this fall in spending is partially offset by a rise in incomes from the fall of gas prices. But that gas price benefit is spread out all across the country, whereas the damage from the fall in oil prices is localized to certain areas with a lot of oil. Overall then, it's not clear how large the damage will be from oil's price collapse. But we do have a model to look to in this case: Australia.

Australia went through a mining boom over the last fifteen years that created a large new upper middle class. People working in Australian mines worked hard, but earned excellent wages and spent that money liberally. Stories of blue collar people with high school educations earning $200,000 a year and spending the money like water were common. The same thing has started to happen here in the US. Vice President Joe Biden recently extolled the virtues of new middle class jobs that could be created in the energy industry, especially around updating the country's infrastructure. Over time, if a lot of these types of jobs are created it can have a dramatic effect on an area, as Australia demonstrates.

Now though, that cycle is working in reverse. As oil prices have fallen, so too have the profits for oil companies and all the other companies in the oil supply chain. The process has been so fast that the economic damage probably has not been felt yet – almost like being injured and not realizing it due to adrenaline. Here again, Australia provides an economic model, and it looks like the damage in oil producing states could end up being widespread and long-lasting.

If the average oil producing metro area has 3% of workers employed in the energy sector and a third of these folks lose their jobs, then that implies an extra 1% of unemployment. That is not bad, but if that 1% of workers are supporting an additional 4% of workers (using the 1:4 rule analysts found), then that would mean a total of 5% in additional unemployment. This could easily lead to 10% unemployment up from a normal 5% rate. That level of unemployment would have a severe long-term effect on house prices, sales tax receipts, economic growth in the area, etc. This is exactly what Australia is experiencing right now. So while the short-term impacts of oil's decline have not been too bad, it certainly looks like there is more pain to come.

Unfortunately, as helpful as the energy sector was in buoying the county during the Recession of 2008, the energy sector may now hold down the economic expansion just as the economy is starting to pick up steam.

By Michael McDonald of Oilprice.com

Categories: Economy, Energy & Oil, United States.

Tags: Oilprice.com, United States.

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Oilprice keeps trotting out these articles trying to create a feeling of crisis.

Any economy will have winners and losers for any boom.

Plenty of posters on here (along with news articles) were quick to point out how well Western Australia was doing and how it might even leave Australia because it didn't need the rest of us dragging it down.

Well now Western Australia is in trouble and it is the rest of Australia that needs provide the money to help it. Stevie and Nostrils waxed lyrical about how bad my state was because car manufacturing was departing Australia for cheaper and less educated countries (such as Argentina).

Resource prices go up and down and manufacturing ebbs and flows but a modern developed economy is more than just one sector such as iron ore or oil.
May 02nd, 2015 - 07:25 am 0
Conqueror
@1. I take your points. Of course, every area or region has its own peculiarities. I am thinking of Scotland and last year's independence referendum. Whatever the Scottish National Party or its supporters are saying now, the fact is that 'it was all about the oil'. According to the SNP and its leader, an independent Scotland would be amongst richest countries in Europe, if not the richest. The glee with which scots pushed this was akin to the 'It's Scotland's Oil' slogan in the 70s. Two amusing facts were the drop in oil prices and the new SNP leader's immediate demand that the UK government support the UK oil industry. Including the minor fact that it suddenly changed from the Scottish oil industry.

What people always forget is that there are other factors. I wasn't aware that Western Australia had been contemplating leaving Australia, but it strikes me as comparable. The problem is that one sector cannot support everything. The SNP started to see businesses in Scotland getting ready to leave. After all, Scotland couldn't join the EU for at least 2 years. Not least because it would be required to join ERM II for that period. The UK rejected currency union, so Scotland would have required its own currency. So, Scotland would be non-EU while the rest of the UK might be in the EU. Therefore border controls. Therefore taxes on goods crossing the border, under EU rules. Scotland stood to lose the majority of its defence industry. Particularly ship-building. Scots were also keen to mention how they paid more tax to the UK exchequer. Since income tax rates are the same across the UK, that could only be down to oil revenue. So 'Scotland' had only paid more in taxation since the mid-70s. For some reason no account was taken of the other 267 years.

It just goes to show that the single-minded have no idea about how the world works. That may explain Kirchner & co. The US shouldn't be too bothered.
May 02nd, 2015 - 10:19 am 0
Voice
2
Do you feel better for that...?

FYI the price of oil drops...the price of oil rises...
You appear to be living in the moment...
That's probably because you don't have much of a future old timer...do you...?
Have you got a plot lined up yet....? ..think about it...
May 02nd, 2015 - 11:09 pm 0

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