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Could Sustainable Wages Be The Solution To The Oil Slump Pain?

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In an industry where the bulk of operating costs are spent on labor, employees are first on the chopping block when prices drop

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The plunge in commodity prices has rocked oil-dependent economies around the globe. And Alberta is no exception. Crime and suicide rates are up. Food bank shelves are empty, and animal shelters are full of pets strayed by owners who could no longer take care of them. As anyone living in a cyclical, resource-based economy knows, when the economic wheel turns, the spinoff is either a windfall or a face full of mud. There is little in between. But while resource industries can’t always control the trajectory of their commodity prices, there are levers and buffers at their disposal to control the speed and proximity at which they follow them. All of which is to say that the degree to which many companies – and yes, many governments – are getting hammered right now by low oil prices is a direct indicator of how seriously they heeded the lessons of previous boom-and-bust cycles. But what if the industry could hedge against those cycles altogether – not just by taking a position in the oil futures market, but by orienting itself towards long-term corporate sustainability?

In an industry like energy, where the bulk of day-to-day operating costs are spent on labor, employees at all points along the production, refining, distribution and finance chain can command very healthy paychecks and bonuses for loyalty to a company when times are good. But their necks are first on the chopping block when the cycle turns again. The number of unemployed Albertans on government assistance rose to 61,300 in November 2015, more than twice the number of recipients just 12 months earlier, according to Statistics Canada. The province, and its financial fate’s attachment to the falling oil price, accounted for fully two-thirds of the national increase in new Employment Insurance claims last year. Alberta leads the nation in levels of household debt, and the $16-billion dollar hole in the province’s coffers that RBC is projecting over the next two years, dwarfs the red ink projected for the other provinces, and even surpasses Canada’s total federal debt projections over the same time period. That’s all due to the falling price of crude. And it comes after years of growth in an oil market in which the prevailing narrative was one of resource scarcity and limitless demand from emerging economies. Today, that narrative has been flipped on its head, giving way to anxiety over oil’s abundance. If anything, the new era of abundance has led to more volatility in the market, not less.
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Todd Hirsch, chief economist for ATB Financial, says a better way is possible. But, smoothing out those feast-to-famine curves comes with a catch: Companies have to co-operate. “Are companies really going to say, ‘No, we’re only going to pay our engineer $80,000,’ when the guy across the street is going to pay them $100,000?” Hirsch says. “No, they’re going to lose them all. It would only work if all of the companies agreed to do it, and you’re just not going to get that level of agreement.” Trying to teach discipline and moderation to a global commodities market populated by competing interests is, of course, impossible. Likewise, preaching those same virtues to any industry predicated on that market. But chasing corporate longevity over simple growth-for-growth’s-sake could be the proverbial bird-in-hand for those companies now finding themselves overextended and out of reach of the bush. “It’s hard to do if you’re the only one, but energy companies should discipline themselves,” Hirsch says.

One option worth exploring for those companies that are looking to retain talent in a downturn is to set aside a dedicated labor retention fund that can be tapped during down times; the money used to send staff for training or to pay partial salaries for extended leaves. “In most other industries it’s not an issue because their commodities don’t swing as wildly as oil prices do,” Hirsch says. “Even the industry would agree that labor cost escalation has been the big problem; roughly 70 percent of the industry’s operating costs are labor. Break-even points shouldn’t be at $70 or $80 a barrel.”

It’s not just unemployed workers who are feeling the pain of the industry’s manic-depressive cycles. Those who remain out in the field and in the increasingly empty office towers of Calgary and Edmonton are feeling it too. Roughly three-quarters of Canadian oil and gas workers are now experiencing “moderate to extreme workplace pressure due to the lack of employees and skills present,” according to a 2016 salary guide published by global recruitment firm Hays Canada. And despite the growing skills shortage, the same report found that nearly two-thirds of resource and mining companies are not currently hiring new graduates due to the economic uncertainty.

That’s bad news for the long-term sustainability of the industry and for the wider economy that depends on it. It also dulls Canada’s competitive edge in the energy sector globally. A January report from global energy recruitment firm Petroplan found that while workers’ loyalty to the energy sector is still high all over the world, with more than 60 percent of survey respondents “very or extremely likely to recommend a career in the oil and gas industry” despite low oil prices and mass layoffs, the same survey found that most workers’ loyalty to their particular employer is at an all-time low. Of the 1,500 survey respondents from 107 countries, the vast majority – 88 percent – said they are actively looking for new jobs, while more than half of those who said they are not on the lookout for a new opportunity said they would still consider a job elsewhere under the right circumstances.

“There needs to be a major shift in employer attitudes to retention and talent management,” says Petroplan CEO Andrew Speers. “Although we have a committed workforce, people are weary of the ups and downs of the sector. Companies have to balance the risks and rewards of job cuts with retaining key people and skills shortages. While it might seem like a strange time to talk about loyalty and talent retention, we must. The industry has to take a longer-term view to investing in, retaining and developing its people. It’s the only way that we can slow down the rollercoaster of boom and bust.”

To illustrate the point, ATB Financial’s Todd Hirsch draws a contrast between Canada’s energy and agricultural commodities. “I keep reminding people that oil is only at a 12-year low, and in the grand scheme of commodities that’s really not very unusual,” Hirsch says. “Farmers in Alberta today still seem to get by with the price of wheat being the same as it was in 1976. It’s just that, over the decades, they’ve constantly become more efficient. But the energy sector has a harder time recalibrating as quickly now that oil prices are back where they were just 12 years ago in 2004. But, remember, 2004 was not a recession; it was a pretty good year.”

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