When Will the Oil Price Drop Show Up in the Labor Market?

The private equity industry is, surprisingly, closely connected with movements in the oil market. Part of this certainly stems from macroeconomic forces and their effect of the private equity business as a whole. Another part stems from the massive involvement the private equity industry has in putting together deals for the oil and natural gas industry.

Given the importance of the oil and natural gas industry to the private equity industry, the question here is simple – when will the oil price drop show up in the labor market?

Background

The price of West Texas Intermediate Crude Oil peaked on June 20, 2014.

Since then, the world’s most influential commodity has been on a downward spiral, dropping over 50 percent in value, from $108 per barrel to under $50 per barrel.

Due to the volatility of crude oil, the drop initially had no immediate effect on the oil businesses – at least when measured by oil industry investment or rig count.

That began to change in October 2014, the month in which oil rig counts across the U.S. started to peak. The first graphic is a look at weekly oil rig counts across the U.S. from 1988 to the first week of 2015.

The next graphic is of oil rigs by state, with the first being all states excluding Texas and the second being just Texas. (Texas is broken out because of the size of the industry relative to every other state.) Businesses in most states started shutting down oil rigs around October 2014, with some a little before and some a little after.

Overall, there was around a three and a half month lag between when the price of oil started declining and when rigs started being taken off line.

Effect on Labor Market and Private Equity

What does this mean for the labor market and the private equity industry? Well, unsurprisingly, this means there’s greater downside risk to employment growth in the Natural Resources industry and dealmaking in the broader energy sector.

When will the currently “theoretical” effects of the oil price drop show up in the labor market? The simple answer is any day now.

Here’s a look at employment in the Natural Resources industry since 2010. The bars represent the month-over-month growth in employment.  The gray horizontal lines represent the average for the quarter. Interestingly, except for perhaps the most recent November estimate, the oil price decline is not showing up in the employment figures (this is shown by the drop in the gray horizontal line from the previous quarter). This might change quickly and is certainly something to watch for in the coming months if you’re looking for signals on the strength of the economy to withstand the drop in the price of oil.

Conclusion

Oil prices started dropping in June 2014.  In October 2014, rigs in the U.S. started falling off.  Early indications are not yet indicating much of an effect on Natural Resource employment from the oil price drop.  Given the lagged effect, that could change quickly in the coming months.