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Housing's Labor Pains Spread to the Oil Patch

Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
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A labor-intensive sector -- housing -- went through an epic bust just a few years ago. Companies shed a significant number of jobs from 2007 to 2009 in an effort to right-size their businesses for a new, slower reality. The widespread belief was that the sector's recovery would be long and gradual. And now the energy sector appears to be falling victim to the same malaise.

How could this be happening in energy already? Employment in mining and logging is down 25 percent from its 2014; while it is no longer falling, it hasn't yet risen on a year-over-year basis. Though crude oil fell below $30 per barrel a year ago, prices have recovered somewhat to around $50 per barrel and have stabilized in recent weeks. U.S. production is rising once more and producers are looking to expand.

This expansion is revealing the industry’s new dynamics. Many smaller oil-services firms went bankrupt in last year’s bust, giving the survivors more leverage in negotiations with producers. The new reality will also force companies to focus on profitability and normalizing their rates, rather than maintaining the survival mentality they kept in the downturn.

And then there’s the labor aspect. Over the past 15 years, the housing and energy cycles managed to offset themselves somewhat: As the housing boom was peaking in 2006, the energy boom was just beginning, with crude oil at around $60 per barrel on the way to its peak of $145 per barrel in July 2008. As housing cratered -- and as construction employment fell by 2 million from 2007 to 2010 -- the energy boom took off, and laid-off construction workers found jobs in that industry. Now, with energy in a slump, the housing-labor market has tightened back to levels last seen at its peak, creating opportunities for energy-industry workers to bring their skills to the construction sector.

But now both sectors may start trying to expand, especially as the potential rises for a federal infrastructure bill. Over the past year, the unemployment rate in the mining and oil and gas extraction industries has fallen to 3.7 percent from 11.2 percent. Employers are going to be fighting over workers, something they haven’t had to do in decades. Just as the price increases in housing have been driven by supply shortages and construction costs -- rather than the speculation and demand growth we saw in the mid-2000s -- we could see hikes in the price of oil and natural gas thanks to increases in production costs.

One counterargument is the fact that in the oil downturn, a lot of capacity was taken offline when it became unprofitable to produce. If the price of oil rises, that production can be turned back online relatively cheaply. These "drilled but completed" wells exist, just as the housing supply remained elevated for a few years after the housing bust due to foreclosures and other unsold homes. But eventually that supply slack was worked off, and the next cycle of production ended up being much more expensive due to labor shortages. So it might be with oil.

A combination of labor issues and politics has created a conundrum: President Donald Trump has promised jobs to the largely white, male working-class voters who elected him, but we have reports of labor shortages in the housing and construction sectors, as well as trucking and, perhaps soon, the energy sector. These seem like the kind of jobs that would be appealing to many Trump voters. So what's going on?

One clue might be found in the number of oilpatch workers in Canada who are reluctant to go back. Burned by the downturn, they're hesitant to commit to an industry they see as too risky. They'd rather have jobs in industries that don't boom and bust. The same fears hamstrung the housing sector after the financial crisis.

How do we give potential workers in boom-and-bust industries the job security they desire while filling the current number of job openings that exist? We may need an answer to resolve our labor-shortage woes.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Conor Sen at csen9@bloomberg.net

To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net