OPEC's Unhealthy Development

OPEC is apparently considering putting caps on oil production in Libya and Nigeria. These two countries were excused from the supply cuts announced last November because civil unrest has already savaged their output so much that they need every barrel they can get.

So news of potential caps confirms one thing at least: OPEC's plan is working so well, it may summon the invalids to help.
Part of the problem is that Nigeria and Libya have been a bit more sprightly in the past six months, putting more barrels on the market even as other OPEC members take them off.
Still, both countries could easily lapse again, as those zigzagging lines show.
The more structural problem -- which is actually exacerbated by any support OPEC lends to oil prices -- is the resurgence of drilling in America's shale basins. On that front, the latest U.S. payroll numbers present another problem for Saudi Arabia & Co.

Full jobs data for oil and gas extraction and support workers come with a one-month lag, so the latest numbers, reported last Friday, are for May. These largely continued the trend of recovery -- albeit with one or two important differences.

Overall, the oil and gas sector added 6,700 jobs in May, the third-highest month on record. After a savage downturn, the workforce is growing, year over year:

Beneath the headline numbers, though, there are clues to how the exploration and production business is pulling every lever it can to maintain output in the face of sub-$50 oil prices.

All the gains in headcount in May came from lower-paid support workers, while higher-paid roles -- classified as "extraction" workers by the Bureau of Labor Statistics -- have been essentially flat since February. Moreover, growth in hourly earnings has screeched to a halt, or even gone into reverse:

The average work week has also largely stopped lengthening. Taken altogether, this has left the industry's implied monthly wage bill of $2.65 billion 1  -- flat with where it was last May, despite another 14,000 or so workers being on the books.

That helped ease the pain of the drop in average oil prices in May. Using public data on U.S. oil and gas production and prices for oil and gas, it is possible to calculate a crude estimate of the industry's wage bill as a proportion of revenue. This doesn't take account of hedging or regional price differences, but it gives a sense of how high the wage burden is over time:

OPEC may yet interpret some or all of this in a hopeful way. Yes, shale drillers are still hiring, but the slowdown in wages and average hours may be signs of strain. Moreover, the average oil price dropped to $45.17 a barrel in June, its lowest since August, and gas slipped back below $3 per million BTUs. So this time next month, when industry payrolls data for June come in, it's possible that momentum stalled.

Still, it is a slim hope. The U.S. oil-rig count resumed climbing last week after a one-week hiatus. Meanwhile, even a big drop in oil inventories couldn't revive the market, which focused instead on continuing increases in U.S. output and exports.

With all those able bodies hard at work in Texas, perhaps it's no wonder OPEC's calling up the B-team.

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