The Oil Industry’s Losses and Gains Amidst the Pandemic

The COVID-19 pandemic has arguably affected every industry under the sun. Think about the manufacturing, tourism, travel, entertainment, healthcare, commerce, finance, government, real estate, telecommunications, and education sectors. It’s only the degree of losses and gains that varies.

Similarly, the oil industry has seen its worst in decades and centuries. Consider that oil prices fell to an unbelievable low of negative USD$40 per barrel. That’s the lowest price ever recorded from the time the New York Exchange started trading oil futures in 1983.

Read on below for more insight into the oil industry’s losses and gains brought about by the COVID-19 pandemic:

1. Job Losses

By the end of 2020, more than 100,000 Americans working in the oilfield services sector had lost their jobs. And the numbers are even more alarming when you look at statistics from other top oil producers like Russia, Saudi Arabia, Canada, Iraq, China, and the United Arab Emirates.

What happened is that the demand for oil fell sharply as governments across the world imposed mandatory travel restrictions to curb the spread of the contagious virus. With most non-essential service providers confined to their homes, there was no need to fuel cars. Likewise, the aviation industry, which is the second-biggest consumer of oil after road transportation, came to a grinding halt as most international flights were suspended.

This resulted in heavy losses for oilfield service firms as well as oil and gas vendors. Some had to even file for bankruptcy. They had no option but to fire their employees in the thousands. Other employees also succumbed to the virus.

2. Renewed Hope

However, when the number of coronavirus infections and deaths started decreasing, governments reopened their economies by easing travel restrictions. The demand for oil gradually started increasing and is set to continue the upward trend in coming years. Therefore, it follows that oil-producing firms have to fill vacant positions for their many high paying jobs like drilling consultants, rig managers, petroleum engineers, geologists, well testers, and chemical engineers.

You may want to try your luck by applying for such positions whenever they’re advertised. You stand a chance of getting employed since the oil industry has a dire need of workers to get their production rolling once again.

3. Operational Challenges

Governments across the world agree that oil and gas operations are essential services. Because of this, they were largely spared from lockdowns as the COVID-19 pandemic raged on. But even so, some of the workers got infected by the virus and had to stay away from work in order to protect their colleagues from infections. Other employees died as a result of the coronavirus, leaving their positions vacant. In addition to that, the implementation of social-distancing rules greatly hampered production efforts.

This meant that oil firms had to grapple with a shortage of workforce. You could argue that such a shortage of oil workers could be easily solved by shutting down oil rigs and sealing off the wells. However, such a move is accompanied by the risk of permanently losing the asset.

And when they decide to resume the drilling, it will require a humongous capital investment to bring back the abandoned rigs to operation. Thus, firms which took this route are likely to lose their competitive advantage over their competitors for quite a long time.

Luckily, some of the more understanding governments saved oil drillers from such economic annihilation by offering to fund their expenses until demand picks up. That’s obviously operating on a loss, but it’s necessary given the prevailing circumstances.

4. The Force Majeure Clause

This refers to unpredictable events that hinder an entity from fulfilling a contract. Oil drilling contractors usually sign contracts with oil companies and governments. Their mandate is to hire and supervise workers, plan projects, maintain site safety, and ensure that they meet production targets set by their clients.

The COVID-19 pandemic made it practically impossible for these contractors to fulfill their contract requirements. As such, most of them invoked the force majeure provisions to excuse their poor performance. While this seems a straightforward process, note that not all contracts have such provisions.

And for contracts with these guidelines, there might still arise misunderstandings between a contractor and their client regarding the circumstances that justify the use of the force majeure clause.

Inconsiderate clients usually demand that contractual obligations must be fulfilled no matter the prevailing circumstances. The result is conflict between the different stakeholders, as well as blame-games, fault-finding, and confusion. It’s the hope of many that the pandemic will come to a stop so that the oil industry is restored to a reasonable state.

5. Increased Calls For Diversification

Some developing countries like Iran, Algeria, Libya, and Iraq are disproportionately commodity-dependent. Oil and gas sales make up more than 60 percent of their export income. For this reason, these countries are extremely vulnerable to the volatility of oil prices. When oil prices plummet, their earnings decrease sharply and destabilize their economies.

There have been calls for many years by the United Nations Conference on Trade and Development (UNCTAD) and other global trade experts for these countries to diversify their revenue streams to other sectors like tourism, agriculture, and manufactured goods. Though the calls seemed to have fallen on deaf ears at first, the Coronavirus pandemic rejuvenated these campaigns. It’s greatly hoped that these countries will learn from the pandemic and branch into other income-generating sectors.

6. Campaign For Cleaner Energy

Climate campaigners say the coronavirus pandemic provided the perfect time for global leaders to restructure oil-related environmental policies. Since the oil industry faced losses amounting to billions of dollars, it’s unlikely that major players will soon get back on their feet. 

Investors are actually scared of putting more money into the oil industry. If they could only pump money into alternatives like wind and solar power, their carbon footprint will greatly reduce in the coming years.

Conclusion

The COVID-19 pandemic brought operational challenges and huge losses to the oil industry—especially because travel restrictions are the government’s main solution to curb the spread of the virus. However, this also gave oil-dependent economies the chance to reexamine the sustainability of the sector. Stakeholders and global leaders also took the economic ‘lull’ to explore cleaner energy sources.