Why cheap oil could hurt the job market
Economists love to say there is no such thing as a free lunch. So as many cheer the decline in crude oil prices to less than $58 a barrel this week -- the lowest level since May of 2009 -- the negative effects of that plunge are also coming into focus.
It's worth stating up front that consumers are benefiting, with estimates by Credit Suisse suggesting that the average middle class family will bag an extra $1,000 or so in annual savings should gas prices stay low. That should help boost spending and, in turn, spur hiring to accommodate increasing economic demand.
Wholesale gasoline futures are down by nearly one-half from their high back in June, an incredible fall in just six months. Truck and SUV sales are already on the rise again as folks move back into gas guzzlers. Other companies that stand to benefit are consumer-oriented businesses, such as retailers, and transportation players.
But the rapid collapse is set to send shock waves through the energy industry, with investors already bailing out of the stocks and bonds of companies that are about to see their revenues come under pressure. Barclays Capital estimates that most of the U.S. shale oil industry needs crude oil near $80 a barrel to break even.
To be sure most Americans wouldn't shed a tear over a drop in oil industry profitability. But that ignores that the shale revolution -- fracking, horizontal drilling, flammable tap water and all that -- has been a major contributor to the post-recession rebound in jobs.
An analysis of data from the Bureau of Labor Statistics shows that since December 2007 the number of jobs created in shale-oriented states -- Colorado, North Dakota, Pennsylvania, Texas, West Virginia -- totals 1.36 million. By comparison, non-shale states have lost 424,000 jobs over that time. Job-creation has been more evenly distributed across the U.S. since 2009, when the recession ended.
Moreover, the Perryman Group estimates that the energy industry as a whole generates an economic stimulus of almost $1.2 trillion each year in gross domestic product, as well as providing more than 9.3 million permanent jobs across the U.S.
The industry is sounding the alarm. BP (BP) recently said it would slash hundreds of mid-level supervisor jobs (the company has about 10,000 employees based in the Houston area), while ConocoPhilips (COP) said it would slash its 2015 capital expenditures by 20 percent, or about $3 billion, as well as defer "significant investment" in less developed projects in Texas, Colorado and other states.
There also could be knock-on implications for financial markets. Deutsche Bank warned in November that crude oil at $60 a barrel could cause high-yield bonds to default, with roughly a third of non-investment grade energy sector borrowers at risk of non-payment.
The problem is that much of the recent boom in shale investment and hiring has been funded by debt financing, with investment spending coming in at 150 percent of operating income for the U.S. high-yield energy sector in recent years.
With the flow of cheap financing already being cut off (as evidenced by the drop in high-yield bond indices to levels not seen since November 2013) we could see a slowdown in hiring in the months to come -- proving, yet again, that there's always a catch.