Don’t count on the recovery going on in the energy patch.
I’m not saying that because I think the oil industry is going to dry up again in the U.S. It’s that the recovery in the energy sector is going to look a lot like it has across the rest of the U.S. economy since the financial meltdown.
Once the worst of the collapse was over, it allowed large corporations to completely reevaluate their growth strategy moving forward. By this point, technology had progressed rapidly on a number of fronts and automation was coming into its own.
Many companies saw the opportunity to invest in technology, rather than simply rehire the workforce that it cut when times got tough. This led to an enormous number of displaced workers.
America’s labor force participation rate — which measures the share of Americans at least 16 years old who are either employed or actively looking for work — sits near a 38-year low, an uninspiring 62.7 percent. There are nearly 100 million people in the U.S. either unemployed or not looking for work.
And they’re not all taking government money and living on government-surplus food. Many of them represent the new “gig economy.” It’s about freelance marketers and programmers, Uber drivers and any one of scores of job websites that farm out a short-term gig instead of a full-time job.
This is the dislocation that happens as new technology supplants old, and the old worker base is no longer equipped to participate in the new economy. We saw it after the Great Depression. We saw it after WWII. And we’re living through it again now.
And the energy sector is a classic case in point. According to Bloomberg Businessweek, the global oil industry lost 440,000 jobs in the downturn. One third to one half of those jobs may never return because rigs and fields are becoming increasingly automated.
For example, a new machine from National Oilwell Varco can connect sections of drill pipe — a dangerous job usually performed by well-paid roustabouts — for underwater drilling. The new equipment will mean a roustabout crew of three will be cut to two.
Over time, Nabors, the world’s largest onshore driller, expects to cut its well site labor force from 20 person crews to five person crew.
For good or for bad, tech will chew up these jobs, just like it has in the coal industry, banking, food service, retail, you name it. A factory in Dongguan, China, recently replaced 590 of its workers with robots and kept only 60 workers. Who all only maintain the machines. Productivity is up 250 percent, and product defects have decreased from 25 percent to just 5 percent.
If you take the long view, we are living in a period of significant disruption. Last month, Pennsylvania announced energy jobs were off 30 percent year over year. Once this all shakes out, we will have another generation or two under the next system.
But we have to look at the markets now, not what they will look like in 40 years. And right now, energy is still in transition.
While Saudi Arabia has stayed true to its word on supply (for now), there has been no accounting for all the U.S. production coming back online. U.S. exploration and production firms have to get pumping, simply to start chipping away at the debt they owe on their lines of credit and loans.
This basically puts pressure on oil prices, since whatever supply has been cut by OPEC is getting picked up by other producers. For now, oil prices have stabilized in the 50s.
But even the International Energy Agency is warning that volatility will increase substantially in 2017. And many are predicting prices will go lower before they go significantly higher.
That said, the major beneficiaries at this point are the pipeline companies. They are the toll takers in the great domestic energy game. It doesn’t matter what it costs, they get paid to send it through their pipes. This business is sure to grow in 2017 and beyond.
NGL Energy Partners (6.4 percent dividend), Williams Companies (2.1 percent), Enterprise Products Partner (5.8 percent) and Energy Transfer Partners (10.8 percent — that’s not a typo), as we talk about in the exclusive report How to Invest in the Two Hottest Trends in America’s New 21st Century Economy, are good choices for now.
— GS Early