The oil and gas industry is laying off workers at an unprecedented pace to cope with a pandemic that crashed energy prices and raised doubts about the future of fossil fuels.
A staggering 107,000 jobs vanished from the US oil, gas and chemicals industry between March and August 2020, according to an analysis published this week by Deloitte. That’s the fastest rate of layoffs in the industry’s history – and it doesn’t even include the untold number of people on furlough or taking pay cuts.
The vast majority of those energy jobs are unlikely to return anytime soon.
Even if US oil prices stay at $45 a barrel until the end of 2021, 70% of the jobs lost during the pandemic in the oil, gas and chemicals industry may not come back by the end of next year, the Deloitte analysis found.
“Such large-scale layoffs,” the Deloitte report said, “are challenging the industry’s reputation as a reliable employer,” the Deloitte report said.
Part of the problem is that the fortunes of the notoriously boom-to-bust oil and gas industry have become even more closely tied to commodity prices than in the past.
A $1 change, up or down, in US oil prices can potentially impact 3,000 upstream and oilfield services jobs, compared with 1,500 jobs in the 1990s, Deloitte found. In other words, the link between jobs and prices is twice as powerful as it was then.
This shift reflects the rise of shale, which made the United States the world’s largest producer of oil and natural gas in 2012. Unlike traditional oil and gas projects, shale is considered short-term in nature because it can be ramped up or down based on swings in prices, fluctuations that impact hiring and firing decisions.
Sub-zero oil prices
Oil prices were hit particularly hard by the pandemic, which caused a record collapse in demand for jet fuel, diesel and gasoline.
The situation was exacerbated by extreme oversupply. Heading into the pandemic, the United States was producing near record amounts of crude oil. Then Saudi Arabia and Russia engaged in an epic price war that amplified the glut, causing the oil industry to nearly run out of room to store all the excess barrels.
That unthinkable one-two punch caused US oil to crash below zero for the first time in history. And while crude has since rebounded, oil companies have slammed the brakes on production and rapidly cut jobs.
Mass job cuts from Exxon, BP, Shell
Earlier this week, ExxonMobil said it plans to lay off up to 1,600 workers in Europe as part of an extensive global review. Exxon listed nearly 75,000 employees at the end of last year.
“Significant actions are needed at this time to improve cost competitiveness and ensure the company manages through these unprecedented market conditions,” Exxon said in a statement.
Exxon is losing money for the first time in decades and was recently kicked out of the Dow Jones Industrial Average, after being a component of the index since 1928. The company, once the most valuable in the world, has lost a stunning $300 billion in market value since peaking in mid-2014.
Last month, Shell (RDSA) announced plans to cut 9,000 jobs around the world as it shifts away from fossil fuels.
BP (BP), which plans to slash oil output by 40%, disclosed 10,000 layoffs.
Schlumberger (SLB), the world’s largest oilfield services firm, said in July it would shed 21,000 jobs.
“This has probably been the most challenging quarter in past decades,” Schlumberger CEO Olivier Le Peuch said in a statement in July.
Brain drain risk
Even the normally stable refining and chemicals sector of the industry shed up to 35,000 jobs, Deloitte said.
The risk is that these mass job cuts causes a brain drain where talented workers flock to technology, consulting and other industries that may have brighter futures.
The ability of the oil industry to rehire laid off workers will depend in large part on the trajectory of prices.
If US crude rebounds to $55 a barrel and stays there through 2021, Deloitte estimates that 76% of the jobs lost during the pandemic could return.
Then again, in a pessimistic scenario where oil stays at $35 through next year, just 3% of those jobs will return, the report said.
Collision with the climate crisis
But it’s not just about where prices go next. The other big X-factor is how the industry responds to the climate crisis and rise of socially-conscious investing.
“Covid-19 has abruptly fast-forwarded the specter of peak oil demand, degraded the investment climate and investors’ appetite for fossil fuels and reminded organizations to take the energy transition seriously,” Deloitte said.
It’s a big problem, reflected by the energy sector’s shrinking footprint in the stock market. While Tesla (TSLA) and other clean energy companies are booming, fossil fuels have fallen out of favor. In fact, last week Exxon was briefly surpassed in market valuation by NextEra Energy (NEE), a little-known wind and solar power company.
Worse, it’s becoming harder for fossil fuel companies to raise money.
The weighted average cost of capital now stands at 8% to 10% for oil and gas – twice as expensive as for renewables, the report said.
Deloitte urged oil and gas companies to embrace sustainability as a way of business and use the pandemic as a “wake-up call” to decarbonize their work.
“The transition won’t be easy,” the report said, because many oil, gas and chemical companies are “fighting for survival.”