Oil, Toil and Trouble

The collapse in the global price of oil is having a direct impact on people’s lives and many developing countries are suffering. Jobs are being lost in the oil and gas companies that operate in these countries. Jobs are being lost in the companies that service the oil and gas sector; and jobs are being lost in companies that rely on the wages of the people who work in the energy industry. Furthermore, public sector jobs are being lost due to the shortfall in government revenues as a result of the falling oil price.

But some countries are also benefitting from the price collapse, such as big oil importers like India and China. In these countries, the benefits of cheap oil flow in aggregate across wide swathes of the economy. This benefits consumers and will help preserve jobs in companies where energy is a large cost such as airlines.

The new oil price environment is an opportunity for oil exporters to rebalance their economies and help their people find alternative employment. “Many countries around the world are dependent on the oil and gas sector; in many cases this sector provides the best jobs in the country,” said David Robalino, Manager in the Jobs Group at the World Bank in Washington DC. “The fall in the price of oil is reducing earnings, constraining public expenditures, and indirectly harming the labor market in these countries. The current crisis should, I hope, provide incentives to policymakers and social partners to introduce reforms that are needed to diversify the economies with a focus on lagging regions and secondary towns.”

The Jobs Group at the World Bank has been closely involved in some of these programs over the past year. For instance, in March last year, the World Bank approved a US$100 million loan for the Skills and Jobs Project in Kazakhstan, a country that relies on crude oil for 55% of its export earnings. The aim of the project is to contribute to the national goal of diversifying the economy and increasing the productivity and earning capacity of the working age population. The Group has also been active in the formulation of a Country Economic Memorandum for Ecuador, which seeks to help the government find ways to reduce its reliance on the oil and gas sector and diversify jobs into other sectors.

Jobs losses

It is difficult to make an accurate guess at the number of people who have been so far affected. Back in November 2015, industry consultant Graves & Co has suggested that 250,000 people have already lost their jobs globally. Since the oil price has fallen farther, this number is now probably fewer than what the eventual tally will be.

In recent weeks, BP has announced further 4,000 job losses in its upstream division. This is the division which gets the oil and gas out of the ground in places such as Angola and Bolivia. Other oil producers have also announced similar cuts. Shell is to cut 2,800 jobs this year on top of the 6,500 it cut last year. Chevron has announced it will cut 10% of its worldwide work force.

The companies that serve the oil producers are also hurting badly. The three biggest oil field services companies in the world are Halliburton, Baker Hughes and Schlumberger. In October last year, Schlumberger announced that it was cutting 15% of its global work force - some 20,000 jobs.

Moving along the value chain, those companies that buy oil from the oil companies are also hurting, because the price for their products has also fallen. For instance, Sasol, South Africa’s leading petrochemical company has announced 1,500 jobs losses.

Local impact

The impact of these job losses on local communities can be devastating. There is a spatial concentration to these job losses that results in great social harm. In those developing countries that have large deposits of oil and gas, the industry is one of the main pillars of the economy. It provides revenues for the government, which in turns uses that to pay for nurses, teachers and civil administrators.

Russia, for instance, is dependent on the revenues generated by selling oil and gas to fund its government budget. According to Sberbank CIB – a local bank - in 2014 these revenues comprised half the government’s budget.  Last year that portion fell to 43% and this year it could fall to 35% if oil prices stay around $30 a barrel.

In the Gulf States, many of the workers in the oil and gas fields are migrants from South Asia. When these migrants lose their jobs, the pain is also felt in their home communities, to whom they remit much of their earnings. This happened before in the 1990s and could well happen again.

One further labor market outcome is a slowdown in the shift to sustainable energy sources. Cheap fossil fuels will make alternative sources of energy uncompetitive. And so the growth in new green jobs, is also likely to be delayed.

Negative outlook

The low prices are likely to persist for a long time to come, further emphasizing the need for countries to adopt new job policies. In the World Bank’s latest Commodity Markets Outlook report the forecast for crude oil prices in 2016 was lowered to $37 per barrel from $51 per barrel in its October projections.

The lower forecast reflects a number of supply and demand factors, including the weak growth prospects in major emerging market economies. The report further notes that the anticipated oil price recovery is forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986. The price outlook remains subject to considerable downside risks.

“Low prices for oil and commodities are likely to be with us for some time,” said John Baffes, Senior Economist and lead author of the Commodities Markets Outlook. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”

Given that oil prices are set to be lower for longer, countries with a high dependence on this revenue need to move fast. With the right policies in place, they can look to boost the number, quality and inclusion of jobs in sectors other than oil and gas. “There are many opportunities to develop value chains and enter in the production of new products,” said Robalino. “This will not only create new job opportunities but also increase the productivity and earnings of jobs that are already there.” Moreover, those countries that benefit from low oil prices, can use this time to improve the productivity of their industries, to help create better jobs throughout their economies.