Crude Economics
Adapting to the New Oil Reality

Weak global oil demand could keep the market fairly flooded—and prices at bargain levels—throughout the upcoming year, according to new analysis from the International Energy Agency (IEA). The analysis has the IEA cutting its demand forecast for 2016 by nearly 200,000 barrels per day, citing a weak global economy for the downgrade.

And on the supply side of things, new stores of Iranian crude unleashed by the impending lifting of Western sanctions are expected to buoy OPEC output, even as non-OPEC producers (like U.S. shale firms) struggle to keep production up in the face of shrinking profit margins. Strong supplies and weak demand, then, together suggest that the world is in for another year of cheap oil. While that will be welcome news for buyers, petrostates and shale producers will both have their work cut out for them trying to stay afloat in the prolonged bearish market.

To stay afloat in an oversupplied market and cope with low crude prices, oil companies are cutting employee costs. In Canada’s oil sands, relatively high production costs have made the sharp decline in oil prices over the past 15 months especially painful and led to the loss of thousands of jobs. But some firms recognize danger in large-scale layoffs: A dearth of skilled workers threatens not only day-to-day operations, but also a company’s ability to bounce back if prices were to tick up again. Therefore, to avoid layoffs, companies are cutting pay and benefits for their employees. The WSJ reports:

Louise Wilson, a Calgary-based partner in Deloitte’s Human Capital practice, said that “the undercurrent here—and companies are very careful how they talk about this—is chipping away at the entitlement mentality that has developed over time within the industry.”

Canadian Natural Resources, one of Canada’s biggest oil and gas producers with 7,600 employees, also has ruled out job cuts in favor of pay cuts…the company said it would cut wages for all salaried employees in tiers, trimming pay above 50,000 Canadian dollars ($37,000) a year by 5% and any pay above C$100,000 by 10%.

Holiday parties are being axed, as are four-day work weeks. “In times of fiscal prudence, it’s essential to see companies eliminating all unnecessary expenditures…This whole every second Friday off thing, that’s the most egregious example”, said Eric Nuttall, a portfolio manager. But while firms cancel golf trips, freeze (and even cut) salaries, and cap bonuses, the world’s petrostates—similarly affected by cheap prices—are facing down more serious repercussions. For many of those states, cutting state spending in an attempt to cut budget deficits could help destabilize their very regimes.

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