Low oil prices make the industry lean & mean
Oil-producing countries are having a difficult time, and their heavy investments in new energy projects remain unprofitable. Measures should be taken to compensate for the losses, and this often involves painful solutions, but we will be better off (read, more efficient). Or, as Nietzsche would say: ‘That which doesn’t kill you, makes you stronger.’
The historically low oil price is no longer news but a fact. We are now at $39 per barrel of American oil. Last year at this time, that was another $103. For now, I see no recovery in sight. There are several reasons for this. The Middle East wants to uphold its production to protect its market price. The Americans continue to produce shale oil and gas, whereby, on the one hand, they contribute to overproduction and, on the other hand, to the reduced demand for oil. The Chinese economy is growing more slowly than before, which tempers consumption and, therefore, needs. Additionally, if the US embargo on trade with Iran fails, I expect oil prices to tumble to a shocking $20 per barrel.
The positive side to the job losses
The impact of falling oil prices on the economy is becoming more evident. Last month, Shell announced big austerity plans. The company anticipates no recovery in the oil price and says it must take measures to maintain profitability. Therefore, the company will significantly cut costs by selling assets and cutting 6,500 jobs. And it is not the only player in this market taking action. In total, 70,000 jobs disappeared worldwide in the oil industry.
Despite how sad it is for those concerned, I also see positive aspects of this development. Or rather, it announces a revolution in the industry. In my opinion, one should have taken place earlier, but that was not crucial enough until now. For years, oil and gas production was a very profitable business. Therefore, the producing companies felt little urgency to optimize their processes and free up innovation funds. Efficiency at these companies was not high on the agenda. Now that the oil price has fallen to a record low, the time has come to further the efficiency battle, which we could have previously done, and still can do.
Hiring and outsourcing
This shift to a more profitable business is making oil companies future-proof. In addition, it provides advantages for service providers, think of Emerson, Fluor, or Samsung. But it also applies to my own business, Hint. The demand for our services and experts is rising, and I see also that the contractors are adapting their offerings. The ‘stock shifters’ have become solution providers as demand increases. Solution providers deliver total solutions that support the ponderous and energy-producing multinationals with much-needed optimization in their workplaces.
Many disappearing jobs are support functions and are not part of the ‘core.’ These employees are not crucial to a lean and mean business. Technicians often remain since the personnel strategy is rooted in technical progress. The main driver for efficiency is technology. More specifically, automation ensures that more can be done with fewer people. Whatever else is required in terms of people and knowledge can be hired when needed. And, as much as possible, activities are outsourced to specialist service providers. This flexibility makes it possible to reduce fixed costs. It is a proven recipe for a more efficient business operation.
It will take some time, but oil prices will once again creep up and increase the profits of the oil companies. Because the market is inherently cyclical, the savings will pay off over time. However, there will be one significant advantage: the industry will be considerably more efficient than before.
Wouter Last, president Hint