Turbulent Commodity Prices and the Turmoil for Young Professionals
From June 2014 to January 2015, global crude oil prices dropped by almost 60%, from about USD 108/bbl to USD 46/bbl. There were many factors that drove these prices downward. Being an integral part of the industry, it is important that young professionals understand the governing principles and be able to connect them with facts.
The following are some of the prominent factors responsible for the drastic change in oil prices.
Supply and Demand. According to the December 2014 monthly update of the United States Energy Information Administration, the global supply of liquid fuels increased by 1.8 million B/D to 92 million B/D in 2014 while demand did not keep pace. Domestic oil production in the US increased to 8.8 million B/D last year, the highest level in 30 years, and US crude oil inventory levels have reached an 80-year high. Meanwhile, US demand for oil declined from what had been a 10-year high.
Economic. Strong economic growth translates into higher energy usage and can impact prices positively. But the converse is also true, in that weak economic indicators could represent lower energy consumption and, consequently, lower prices. The US, China, Japan, and India are the world’s top consumers of crude oil.
Europe consumes 22% of the world’s oil. Meanwhile, Europe’s largest producer of crude, the United Kingdom, became a net importer in 2013. Economic indicators for all these countries are intensely watched daily as traders attempt to determine the future direction of the price of oil and countries become intrinsically tied to a global economy—one that can be very fickle in nature.
Political. Energy will always be a controversial issue pitting producers against consumers and environmental groups. A recent example of this is the Keystone XL oil pipeline project in North America. The planned route from Canada’s Alberta province to Cushing, Oklahoma, has run into issues regarding a required international border permit, landowner rights, and environmental concerns over the process that produces the crude oil itself.
Geopolitical. There are probably far too many global events that can be perceived as having an impact on oil prices. Internal and cross-border conflicts in oil-producing countries and regions tend to cause fears of supply disruption in world energy markets.
Civil unrest in Nigeria and the South Sudan, the ongoing dispute between Israel and Hamas over Palestine, Iran’s nuclear status, Russia’s stance on Ukraine, Somali pirating of crude oil tankers in the Gulf of Aden, and the ISIS takeover of producing fields and other oil-related infrastructure in parts of Iraq are just some of the continuing events being monitored by energy markets. Not to mention that the actions of the Organization of the Petroleum Exporting Countries alone can cause earth-shattering shakeups in global oil markets.
Cross-Commodity Relationships. Supply and demand fluctuations in the many refined and distilled products derived from oil directly impact crude prices. Gasoline, diesel, jet fuel, and heating oil are among the major oil products that affect the price of crude.
Human Factor. Crude oil is traded globally in financial markets. These are transactions for the future purchase or sale of oil and most occur electronically. As such, traders look for any information that could influence price direction. For them, it is all about perception. They are human beings and they tend to react emotionally as we all do. Billions of dollars are at stake and so both greed and fear drive the market. As such, irrational decisions can be made without consideration for important facts that may be uncovered later. This is why some oil price movements may not make sense to the average observer. Add to this the more recent use of supercomputers, which use complex mathematical algorithms and execute large volumes of calculations in nanoseconds and you have an extremely volatile marketplace for energy commodities. When oil prices rise, producers, far too often, believe they will continue to rise and so don’t sell when they should.
How Oil Prices Influence Academic Enrollment
So, what does the current oil market environment mean for academic institutions and their students?
Unfortunately, the job market in the oil and gas industry will become tighter. But the industry has seen these cycles before. As recently as 2008, oil prices plummeted to about USD 32/bbl in December of that year after reaching a high of USD 145/bbl in July. In the early 1980s, a tremendous “bust” in oil prices had far-reaching consequences for the oil and gas business. Some of those who lost their jobs at that time never returned to the industry.
Two potential scenarios arise out of these situations. Firstly, as companies seek to cut costs, they may choose to scale back on tuition assistance for their employees, making it harder for them to continue to attend college, or for new students to enroll.
Secondly, and the more likely scenario, is that at times like these, people seek to diversify their knowledge and look for a form of retraining. Enrollment in graduate programs, in particular, tend to increase as people desire that “next level” degree that separates them from their peers. Others may wish to advance from their current positions and eventually move into a management role.
Many people who already possess a technical degree may wish to learn more about the business and leadership aspects of the industry as well. Merely being enrolled in an advanced program can be a positive signal to a current or future employer that the candidate is constantly striving to learn new skills that can add value to the company.
The Effect on Job Market
For soon-to-be graduating students, there should still be ample opportunities for employment in the oil and gas industry. Every time we experience a bust, such as the current one, companies take steps to reduce costs. And yes, some companies will put a freeze on hiring.
But what tends to happen is that companies will look for ways to reduce the current workforce, rather than stop recruitment altogether. This works to boost confidence in academic institutions and job seekers about the company’s position and ability to ride through tough times.
One way in which they can do this is by offering early retirement packages to their more senior employees. Another step is pruning the middle management by virtue of output optimization, so youngsters are always encouraged to step up their game and acquire skills fast.
Finally, there has been an age and experience gap in the oil and gas industry for quite some time now. Some of the previous price busts resulted in a brain drain because of experienced people finding employment in other industries. This has created the need to find good replacements and get them up to speed rather quickly. We are yet to fill this gap.
A key factor that can help in gaining employment is to differentiate oneself from others in the job market. A more diverse academic background and a cursory understanding of the business can go a long way in impressing a potential employer both on paper and in an interview setting. Being articulate in the terminology of the industry illustrates some basic understanding of what the job may entail as well.
Swaying With Commodity Prices Can Hurt Companies
There is a future market for crude oil, which provides an opportunity for producers to lock in a price down the road. With the recent fall in oil prices, it has become apparent that many companies failed to take advantage of this risk-reducing mechanism. They can now see the consequences of their inaction in the form of lower revenue and stock prices.
On the other hand, those companies with the foresight to take what the market gave them in terms of high prices last year will reap the benefits of their prudent decision making.
In my opinion, corporate executives have an obligation to their stakeholders. While this group encompasses the shareholders, stakeholders comprise several groups that are, or may be, impacted by the company’s success or failure. Employees, customers, suppliers, and the general business environment are all affected by the rise and fall of corporate earnings.
As such, it is key for companies to adopt a long-term approach that can guarantee an even-keeled revenue stream and business sustainability. This is to the benefit of all stakeholders and to the hope of the new generation that is on the brink of shaping the pathway to the future.
At the same time, young professionals need to do their part, too. Being swayed by the market’s rapidly changing numbers is not going to be helpful. Understand that you belong to a long-standing industry with immense power to drive the world. Other industries are growing too, and with collaboration and innovation, we can bring about improvements and advancements to get the economics of our commodities back on track.
Tom Seng is an assistant professor of energy business at the University of Tulsa working with course development and specializing in energy risk management, asset optimization, and energy commodity trading. He is also a consultant and teaches an online course on financial energy commodity trading that he developed for Pennsylvania State University. Before joining the academia, he worked for more than 30 years in the natural gas industry in roles such as director of risk control and manager of product marketing for several energy companies. He holds a BS in political science and history and an MBA in international oil and gas management from the Robert Gordon University.
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17 June 2019
18 June 2019