I know some of the engineering/design firms in Houston that serve the upstream and midstream oil industry have had lay-offs up to 50% of the company already.
Not all of them, but several at least.
“midstream oil industry have had lay-offs up to 50% of the company already.”
I didn’t mean to gloss over that it is going to be painful to adjust to these lower prices - it will be.
When a bubble bursts, a lot of bets are going to go bad - some significant number of companies are going to fold completely, and the others will have to layoff and cut corners. As we discussed separately, US Steel recently had big layoffs for folks who make tube steel for the oil industry. Lots of individuals and small businesses will see their property prices drop and local business fall off. So the whole supply chain and community will have to adjust to a hard drop.
The Saudis are trying to bankrupt the competition, so they can raise prices later. They can produce cheaper than about anyone on Earth due to their geology, and their existing infrastructure. They can borrow money cheap, and are sitting on a big cash cushion, so they have a strong ability to survive a long period of low prices.
Even so, they need money to keep their population subdued and to meet their growing security needs. A good bit of their decision not to restrict production, is that they need the money now as well. They learned before that the rest of OPEC rides free on their cutbacks, and they want to choke other competitors like Iran and Russia, as well as Americans.
Iran may have its sanctions lifted soon, and has very large capacity. Everybody in the world is eager to pump, and OPEC has significantly lost its power to restrict supply (largely due to American producers). So prices will increasingly be set by the price at which American producers can survive and meet demand.
That is the encouraging note that I really wanted to add during this hard adjustment - there is a strong underlying business case for the US industry long term. The technological/productivity improvements that Americans have developed have changed the global hydrocarbon market for good. Even if we aren’t experiencing rapid growth, we will continue to produce at a higher level than we have just a few years ago.
A big key will be how resilient companies can be in scaling down costs to ride out low prices, and quickly scaling up production to meet higher prices. So far, the industry is surprising analysts (including Saudis) in being efficient at this.
And natural gas production has a strong case for growth regardless, due to the opening of export.
A couple years ago I was investigating retooling my machine shop to manufacture oil drilling equipment. I’m glad I didn’t. Too cyclical for my taste. Good money for certain but investing in $500,000 in new machines that (now) would be sitting idle would have killed my business.