The price of crude oil plunged below $42 per barrel Friday, threatening thousands of Houston-area jobs if the price languishes there for several months, an economist says.
OPEC and its allies meeting in Vienna on Friday failed to reach a deal with Russia to cut production amid a global supply glut worsened by the economic effects of the coronavirus pandemic.
Oil plummeted on the news, with the U.S. benchmark down nearly 10 percent to $41.28 and the international benchmark, Brent, settling down about 9 percent at $45.86, well below the price many companies in the U.S. shale industry need to break even.
If the price of West Texas Intermediate rests at $40 per barrel for two or more quarters, the Houston area could shed about 14,000 oil and gas jobs, says Bill Gilmer, an economist with the University of Houston. The oil and gas industry employs more than 265,000 people in the region. Job losses in the industry could rise to 19,000 when including layoffs already caused by the price of crude stuck between $50 and $60 for almost all of last year.
“Oil employment moves very slowly in Houston,” Gilmer explained. “For the whole process to work out, it takes four, five or even six quarters.”
Though there is almost no drilling for oil in the Houston area, all the technical expertise, office jobs and many of the equipment manufacturing jobs can be found in Houston and surrounding communities. Metal shops, fabricators and equipment manufacturers will be the sector to watch, Gilmer said
“That’s where jobs will be lost first,” he added.
Unfortunately, $40 per barrel may not be oil’s low point. In one doomsday scenario, the price could go as low as $26 per barrel if OPEC and Russia don’t cut production, said Bob McNally, president of Maryland consulting firm Rapidan Energy Group, in an interview with Bloomberg Television.
About 2 million barrels per day of crude needs to be removed from the global market during the second quarter to stabilize prices, Norwegian energy research firm Rystad Energy estimates.
The 14 OPEC countries sought to cut production by 1.5 million barrels a day, with nonmember allies like Russia absorbing 500,000 barrels of that cut. Russia, however, refused and OPEC officials said Friday that the meeting had been adjourned.
The failure of OPEC and Russia to agree to production cuts combined with the slumping global demand caused by the coronavirus outbreak is a “double whammy” for the industry, Ann-Louise Hittle, of energy reserach firm Wood Mackenzie, said. But the effects would be more pronounced for the U.S. shale industry, which had already squeezed 2020 drilling and completion budgets, she said.
“A sustained bout of low oil prices will further reduce cash flow and investment into the U.S. oil patch, causing further hits to Lower 48 production growth later this year,” Hittle said in a statement. “It takes at least six to nine months for reductions in spend to lead to lower oil production in the U.S. Lower 48.”
This article first appeared on the Houston Chronicle – an Energy Voice content partner. For more from the Houston Chronicle click here.