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Low oil prices make the industry lean & mean

Blog Low oil prices make the industry lean & mean

Oil producing countries are having a difficult time and their heavy investments in new energy projects remain unprofitable. Measures should be taken to compensate for the losses. This often involves painful solutions, but in the long term we will be better off (read, more efficient). Or, as Nietzsche would say: ‘That which doesn’t kill you, makes you stronger.’

The historically low oil price is no longer news, but a fact. We are now at $39 per barrel of American oil. Last year at this time, that was another $103. For now I see no recovery in sight. There are a number of reasons for this. The Middle East wants to uphold its production to protect its market price. The Americans continue to produce shale oil and gas, whereby, on the one hand they contribute to overproduction and on the other hand, to the reduced demand for oil. The Chinese economy is growing more slowly than before, which tempers consumption and therefore, demand. Additionally, if the US embargo on trade with Iran fails, I expect oil prices to tumble to a shocking $20 per barrel.

Positive side to the job losses

The impact of falling oil prices on the economy are becoming clearer. Last month, Shell announced considerable austerity plans. The company anticipates no recovery in the oil price and says it must take measures to maintain profitability. Therefore, the company will significantly cut costs by selling assets and cutting 6,500 jobs. And it is not the only player in this market taking action. In total, 70,000 jobs disappeared, worldwide, in the oil industry.

Despite how sad it is for those workers concerned, I also see positive aspects to this development. Or rather, it announces a revolution in the industry. One that in my opinion should have taken place earlier, but that was not crucial enough until now. For years, oil and gas production was a very profitable business. Therefore, the producing companies felt little urgency to optimize their processes and to free up funds for innovation. Efficiency at these companies was not high on the agenda. Now that the oil price has fallen to a record low, the time has come to further the efficiency battle, which we could have previously done, and still can do.

Hiring and outsourcing

This shift to a more profitable business is making oil companies future proof. In addition, it provides advantages for service providers, think of Emerson, Fluor or Samsung. But it also applies to my own business, Hint. The demand for our services and experts is rising. I see also that the contractors are adapting their offerings. The ‘stock shifters’ have become solution providers, as demand increases for them. Solution providers deliver total solutions that support the ponderous and energy-producing multinationals with much needed optimization in their workplaces.

Many jobs that are disappearing are support functions and are not part of the ‘core’. These are employees who are not crucial to a lean and mean business. Technicians often remain since the personnel strategy is rooted in technical progress. The main driver for efficiency is technology. To be even more specific: automation ensures that more can be done with fewer people. Whatever else is required in terms of people and knowledge can be hired in when needed. And, as much as possible, activities are outsourced to specialist service providers. This flexibility makes it possible to reduce fixed costs. It is a proven recipe towards a more efficient business operation.

It will take some time, but oil prices will once again creep up and increase the profits of the oil companies. Because the market is inherently cyclical, the savings will pay off over time. However, then there will be one big advantage: the industry will be greatly more efficient than before.

Wouter Last, president Hint