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3/19/2017 by mdc
Eric Tangumonkem opines what is the true cost of a barrel of crude oil? This is a simple question, but I suspect that the answer is complicated. When I started working for an operator in the oil and gas industry, an older gentleman who was mentoring me told me to start getting ready for layoffs by saving part of my salary. He said that when the times are good, they are good, and when they are bad, they are very bad. He reminded me that he had been through a couple of circles of booms and bursts. This has taught him that the oil industry is highly unpredictable and cyclical.

A couple of years after we had this conversation the recent slump in the oil prices hit and true to his prediction the massive layoffs followed. Groves and Co. report that by August of 2015 about 600,000 people in the oil and gas industry had lost their jobs. This is a huge number when you factor in the families represented by these hundreds of thousands.

Are layoffs part of the problem we are having this repeated cycles of booms and bursts? What if companies were unable to use layoffs as part of the solution when hard times hit? What will the true price of a barrel of oil be if all who are involved in exploring, exploiting and producing the oil were factored into the cost over the entire life of the field?

I am not in anyway suggesting, price control or job guarantees or discounting the role of demand and supply. The issue is that the oil and gas industry has a knee jerk reaction when the going gets tough and massive layoffs seem to be the expected solution. It is common to hear those in charge say that prices are low, and we cannot afford to keep a large workforce.

What is driving these low prices? Are oil and gas companies costing the barrel of oil at discovery in the right way? Do these companies factor in layoffs as part of the initial pricing? The actual cost of the price of a barrel of oil should include the cost of layoff the hundreds of thousands of workers who have been laid off.

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