Commodities and people

Modern business has turned oil and natural gas into commodities, subjecting their values to constant change. Industry managers should wonder whether they can afford to let crucial technical workers fall prey to such volatility. Last year, after a decade of layoffs, companies found themselves suddenly and desperately short of core professionals. This year, just as suddenly, many of the same companies have resumed layoffs. Earth scientists and engineers in high demand last year are again looking

Oct. 26, 1998

4 min read

Last year, after a decade of layoffs, companies found themselves suddenly and desperately short of core professionals. This year, just as suddenly, many of the same companies have resumed layoffs. Earth scientists and engineers in high demand last year are again looking for work.

Obvious explanation

The employment turnaround has an obvious and valid explanation: The petroleum market reversed course because of economic events beginning with financial collapses in Asia and Russia. No one yet can see the slide's bottom. No one yet knows how seriously the jolt will hurt demand for energy over time. Oil and gas prices have plunged. Profits of oil and gas companies and support firms have suffered. Conditions of latter-half 1998 fall well below the expectations on which companies based hiring decisions of 1997.

Less obvious but no less important to the upstream industry's fortunes are two forces now aggravating the pain of a price slump.

One force is an inevitable bounce in oil field costs. While innovation of organization and technology trimmed costs impressively in the 1990s, cut-rate services and supplies also played a role. They couldn't last forever-and didn't.

The second and related force is an increase in labor's relative importance to upstream productivity. Exploration and production will always be capital-intensive activities. But ideas and know-how have become more important than ever before. Ideas and know-how come from people.

Moreover, cost-slashing innovations of the 1990s didn't come from geniuses dreaming solo. They came from well-educated people from many disciplines managing physical and financial assets in teams.

An industry that once did much of its thinking with the drill bit now saves money by employing professional teams to think before drilling. The shift has cut the number of dollars required to find and produce a given amount of petroleum. But it has raised the number of brains needed to accomplish the tasks.

Professional headcount thus has become very sensitive to oil field activity. This is why companies so suddenly found themselves short of earth scientists and engineers after drilling activity rebounded in 1995. And it is how last year's personnel shortage so quickly became this year's apparent surplus.

In these market and economic terms, oil industry managers can justify the new round of layoffs that seems to be in the making. With generous severance benefits, they can ease the disruptions their actions create for departing workers. But justifications and generosity do not solve problems of recruitment and retention that a legacy of layoffs will create in the longer term. Layoffs cost more than the money spent on severance packages.

Justifications and generosity certainly do not answer a tough question that now must be rising among the scientists and engineers on whom oil industry profits increasingly depend. It's a question that also must be occurring to college students pondering careers: Have oil industry layoffs become automatic responses to swings of any duration below $15/bbl in the price of crude?

Choosing a strategy

Industry managers should address the question now. Then they should choose a strategy that fits their answer. They can find ways to immunize technical employment levels against price volatility. Or they can compensate key professionals for the disruptions that increasingly loom over careers in the modern petroleum business. Neither strategy comes without cost.

Oil and natural gas evolved comfortably into commodities. Any manager who expects professional workers to follow the same easy path has much to learn about people.