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Running head: EFFECT OF FALLING CRUDE OIL PRICES 1

Effect of Falling Prices in the Louisiana Crude Oil Industry

By

LAUREL LATTIMORE, MBA CANDIDATE

A paper submitted in partial fulfillment of the requirements for the degree of

Master of Business Administration

INDIANA WESLEYAN UNIVERSITY

June 2016

I have read and understand the plagiarism policy as outlined in the syllabus and the sections in

the Student Bulletin relating to the IWU Honesty/Cheating Policy. By affixing this statement to

the title page of my paper, I certify that I have not cheated or plagiarized in the process of

completing this assignment. If it is found that cheating and/or plagiarism did take place in the

writing of this paper, I understand the possible consequences of the act/s, which could include

expulsion from Indiana Wesleyan University.

EFFECT OF FALLING CRUDE OIL PRICES 2

Table of Contents

Executive Summary……………………………………………………………………………….3

Research Purpose……………………………………………………………………………….....4

The Problem…………………………………………………………………………….....4

Research Objectives…………………………………………………………………………...…..5

Limitations……………………………………………………………………………...…5

Significance of the Study………………………………………………………………………….6

Significance to Researcher………………………………………………………………...7

Significance to Oil Companies……………………………………………………………7

Significance to Employees………………………………………………………………...8

Broader Implications: Significance to U.S. Economy……………………………………8

Broader Implications: Significance to World Economy……………………………….…8

Industry Overview…………………………………………………………………………….…..9

Characteristics……………………………………………………………………………10

Identification and Discussion of Key Issues……………………………………………………..11

Key Issues……………………………………………………………………………..…11

Key Questions……………………………………………………………………………11

Methodology……………………………………………………………………………………..12

Information & Literature Review………………………………………………………………..13

Economic Review of Oil Prices………………………………………………………….14

Strategy and Policy of Louisiana’s Oil & Gas Market…………………………………..16

Ethics……………………….…………………………………………………………….18

Human Resources………………………………………………………………………..20

Applied Management Theory……………………………………………………………21

Accounting vs. Economic Implications of Labor………………………………………..22

Global Implication of Industry Threats…………………………………….……………22

Analysis of Key Issues…………………………………………………………………………..23

Economics of Review of Oil Prices......…………………………………………………23

Strategy & Policy Review……………………………………………………………….24

Ethics…………………………………………………………………………………….26

Recommendations & Conclusions………………………………………………………………28

Conclusion………………………………………………………………………….……30

References………………………………………………………………………………………..32

Figures……………………………………………………………………………………………35


Executive Summary

On 96.5 FM KPEL, Senator Ted Cruz stated, “Pulling back the EPA regulators…will

bring back the oil and gas industry” (NewsTalk, 2016). When asked what he would do as

president to revive jobs in the oil and gas industry for Louisiana, Senator Cruz responded, “And

I’ll tell you, when it comes to oil and gas, we are going to open up new federal lands and open up

new federal waters so that we can develop the incredible resources we have. And we are going

to stop the federal government from being a barrier to developing those resources” (NewsTalk,

2016).

Oil and gas (referred to as oil, oil and gas, gasoline, or crude oil hereafter) workers in the

state of Louisiana have lost jobs, in part because of the reduced price level of gasoline in the

United States. This paper seeks to identify if jobs were lost and to understand how much of the

unemployment in the oil and gas industry is attributable to the price of gasoline. In order to

understand the effect of a reduction in the price level of gas, understanding how the price of gas

is derived must first be understood. The research conducted will either prove that there is a

correlation between oil prices and employment in the industry or this paper will conclude that

there is no relationship between oil prices and the level of employment in the oil and gas

industry.

While exploring and uncovering this relationship, environmental factors will be

discussed. The global implications and factors related to the price level of gasoline will be

presented throughout this paper. Essentially, this paper will seek to identify a relationship

though the process of elimination. Exploring other possible causes of a reduced gas price must

also be taken into consideration to formulate an opinion about the effect of gas prices on

employment in the oil and gas industry.


Research Purpose

The purpose of conducting this study is to understand the real effects of falling gas prices

on an economy in the United States. The oil and gas sector represents a significant contribution

to the economy of Louisiana. The health of the economy in Louisiana could be negatively

impacted by a decrease in the price of oil. The purpose of this paper is to understand the factors

that determine oil prices and the implications of a decrease in the price level of oil, particularly

the negative impact on employment in the oil and gas industry.

The Problem

Fox8 Live news, WGNO (ABC affiliate), WWL-TV (CBS affiliate), and WDSU (nbc

affiliate) have all purported that the drop in oil prices have caused a loss of jobs in the oil and gas

industry for the Gulf-states region of the country. The Gulf-states are comprised of Florida,

Alabama, Mississippi, Louisiana, and Texas. The media also portrays the idea that the fall in oil

prices are good for consumers and good for the economy because consumers have more

discretionary income. However, this extra discretionary income comes at a price: oil workers

lose jobs. A study aimed at understanding consumers spending changes once the subjects knew

a vehicle loan was going to be paid off in the near future concluded, “The analysis presented in

this paper shows a significant consumption response to the repayment of vehicle loans. The

estimates imply that a 10% predictable increase in discretionary income corresponds to a 2% to

3% increase in nondurable consumption” (Stephens, 2008, p. 242). Economists hope that an

increase in discretionary income will translate into economic stimulating effects.

Local broadcasting stations for the New Orleans, Louisiana metropolitan area assume that

workers in the oil and gas industry have lost jobs due to lower gas prices. This paper is designed

to quantify the number of jobs lost and to understand the amount of money consumers are saving


since the fall in oil prices began. Ethical implications must be explored to provide an

understanding of which group is better off; consumers nationwide or unemployed oil and gas

workers in Louisiana.

Research Objectives

In essence, this paper will uncover if the loss of jobs is justified by the economic

stimulating effect experienced within Louisiana and nationwide. There are many accounts

circulating about the depression of the oil industry caused, or at least purported to be caused by

falling oil prices. This paper will analyze the depression of the oil and gas industry and seeks to

understand the impact of falling gas prices on the economy and unemployment. To understand

the relationship between the price of oil and unemployment in oil and gas, the factors that

determine the price of crude oil will be examined. All of the research conducted throughout this

study was conducted to see if a direct relationship exists.

Limitations

The time and resources required to study the entire country is not available, therefore, the

focus of the study is limited to the state of Louisiana because the researcher lives in Louisiana,

more specifically in Southeastern Louisiana. The perspective of this study may come from the

viewpoint of Southeastern Louisiana residents, since many resources that will contribute to this

paper have been collected in this region of the state. However, statistics offered by the various

agencies and departments within and affiliated with the state of Louisiana’s government, will

cover the entire state.

Additional research should be conducted to understand the full economic effect of

decreased gas prices on the entire U.S. economy. The oil and gas industry in other oil producing

states could be examined. Research in this area would benefit organizations operating in the


industry and the organizations that are indirectly affected by decreases in gas prices.

Governments could benefit from research in this arena nationwide because they would be better

able to understand the financial impact as workers rely on unemployment wages and government

assistance.

Furthermore, this study was designed to understand if there is a direct relationship

between the fall in gas prices and a fall in employment in the industry but does not attempt to

analyze the relationship between an increase in gas prices and the number of workers employed

in the industry. One might assume such a relationship exists if the study proves a direct

relationship for the opposite. Many factors were used to formulate an opinion about the

relationship between falling gas prices and unemployment. These factors were analyzed

carefully before coming to a conclusion. In order to formulate a conclusion about a rise in

gasoline prices and employment in the oil and gas industry, extensive research would need to be

conducted. The economic conditions and ethical implications of an increased price level for gas

would have to be understood to formulate any opinion about whether or not a relationship exists.

Significance of the Study

The decrease in oil prices has many implications for organizations involved in the oil and

gas industry. An excerpt by Stephen Waguespack (2015) explains,

The volatility of this interconnected, global economy has become painfully

apparent in the past year for Louisiana’s oil and gas sector. As growth slowed in

countries like China, demand for oil and gas has fallen. At the same time, leaders

of the Organization of Petroleum Exporting Countries [OPEC] made a decision to

flood the oil market and maintain their market share, even though this drives


prices down everywhere. As of August 2015, the price of oil hovers around $50 a

barrel-half the price it was just one year ago. (Waguespack, 2015, p. 86)

The price of oil is felt nationwide because consumers save money. The price of gasoline is half

of what it was in 2013 and early 2014, a factor that likely influences consumers’ travel and

spending habits. The economic effects nationwide will be explained and examined later in this

paper with an emphasis on how ethical the current gas prices are. While exploring the ethicality

of decreased gas prices, the causes of the decrease must also be presented.

Significance to Researcher

This topic is important to the researcher because neighbors are affected. The topic is

relative because the researcher sees the depression fellow residents are in due to the economy.

The question remains in the minds of some: Is it fair for me to save at the pump when entire

families are suffering because the only way they’ve made income for generations is through the

oil and gas industry? Still, this thought has its own limitations. Like any other market, the oil

and gas industry in Louisiana and particularly Southeast Louisiana, because of its proximity to

the Gulf of Mexico, the condition is temporary. The price of oil will eventually rise.

Significance to Oil Companies

The implications for Shell, Exxon, Chevron, BP and other oil producing multinationals

(MNE’s) operating in Louisiana and it offshore regions is serious. Recommendations can be

made based on the causes identified. The purpose of this study is to understand if there is a

correlation between the falling gas prices and a loss of jobs in the Louisiana oil and gas industry.

The results of this study will help oil companies that operate in the Louisiana state territory to

prepare for economic downturns in the oil and gas industry. The crude oil reduced price level

speaks directly to the threats the MNEs are experiencing.


Significance to Employees

A major category of stakeholders are the employees of the above mentioned corporations,

particularly if hours are cut or workers are laid off. The loss of jobs is the central focus of the

paper. To put this study in context, United States represents only one country that has a

significant demand for gasoline. All of the industry conditions uncovered in this paper could

apply to other oil producing countries. Any recommendations provided later could also

potentially be put into practice in other parts of the world if the proposed solutions work.

Broader Implications: Significance to U.S. Economy

This paper is limited to one region of the United States. The Louisiana oil and gas

industry is part of the larger U.S. oil and gas industry. Any proceeds generated by the oil and gas

industry in the state of Louisiana will be counted toward total GDP for the U.S. Many aspects of

this paper could be applied to the larger industry but limitations are going to exists because each

state has its own level of contribution to the oil and gas production of the country as a whole.

The individual state contribution level could range from no oil or gas production, to very little, to

having the most oil in the country. Neighboring states of Louisiana also produce oil and gas.

Factors that do not exist in Louisiana could be in play in these states, therefore, it is not safe to

assume that what will work for Louisiana, will work for Texas for example.

Broader Implications: Significance to World Economy

Global factors are effecting the price of oil. Earlier, Waguespack (2015) alleged that the

oil producing export countries (OPEC) is responsible for the decrease in oil prices because the

OPEC participating countries flooded the market with extra supply to protect their own interests.

Such allegations will be examined later in detail to determine if what Waguespack claims is true.

One theme that transcends borders is the destruction of the environment in areas where oil


companies operate. Most of the literature available today about the oil and gas industry is aimed

at examining the stakeholders of oil and gas extraction. Land is lost, reserves are depleted, and

wildlife is negatively impacted in most cases caused by oil and natural gas spills. Louisiana has

been a victim of the Deepwater Horizon oil spill in the Gulf of Mexico that occurred in 2010.

Residents of the Amazon have fallen victim to crude oil spills in their backyards, another global

implication of oil drilling discussed later.

Industry Overview

Crude oil is the of this paper as crude oil is the substance used to make gasoline for

internal combustion engines in most cars driven today. Crude oil is derived from organic

material buried beneath the earth’s surface millions of years ago. Figure 1 defines some useful

terms related to the production of crude oil and will be helpful to understand terms that will be

used throughout this paper (See Figure 1, p. 36). Crude oil is made up of organic materials that

are complex in composition.

In Louisiana, there are many residents that are employed in the production of oil and oil

related products such as petrochemicals and plastics. This paper focuses on gasoline prices

therefore the production of crude oil will be explained in this section. Gasoline according to the

U.S. Energy Information Administration (EIA) is a petroleum based product and 19 gallons of

gasoline are produced from every 42-gallon barrel refined (2015, para. 1). The oil production

and refining process is particularly important to the content of this paper because the central

focus is on the price of gasoline. The state of Louisiana represents a significant portion of the oil

industry in terms of extraction and refining. Louisiana represents a major portion of crude oil

extraction because of its location. Situated on the Gulf of Mexico, Louisiana is engaged in off-


shore drilling. Off-shore drilling also contributes to the amount of crude oil extracted for the

state.

Louisiana’s shoreline and natural hurricane barriers have been impacted by decisions the

U.S. Army Corp of Engineers (UACE) has made to create levees. Oil companies created

passage ways through wetlands to build oil platforms. While researching Louisiana oil and gas,

one will find a plethora of information related to the destruction of marshes in Southern

Louisiana, which will be explored further in a later section of this paper. Depletion of natural

resources will cause some level of damage, so Louisiana is not unique in this respect.

Characteristics

Hallmark characteristics of the oil industry includes an ever-increasing demand for oil to

heat homes, fuel cars, create plastics, and others uses. The “MarketLine” report for Exxon Mobil

helps to identify the industry. Exxon Mobil produces fuels for cars, watercraft, aircraft, fluids,

lubricants, plastics, and many other products. Exxon engages in exploration, extraction, refining,

storage, and the marketing of oil and natural gas (“MarketLine,” n.d., p. 4). Oil and gas

companies operate all over the world in many instances. Whether this is due to the need to

explore all over the world or sell products all over the world, oil companies are usually

multinational, large, and operating in an oligopolistic market.

The findings of this paper will be useful to managers and leaders in the oil and gas

community because indicators that signal economic downturn will be uncovered. The possibility

of a correlation between gas prices and the level of employment in the industry will help

managers understand more about how employment will be affected. There will at least be a case

study available to account for the current conditions of the oil and gas market. One can use this

study to identify similarities that could help predict the severity of another downturn in the oil


industry. Furthermore, this study will prove useful to managers in Louisiana since the study

focuses on this state and its environmental characteristics.

Identification and Discussion of Key Issues

Key Issues

The ethicality of lower gas prices is one of the topics to be explored throughout this

paper. If the decrease in gas prices is ethical, this study will conclude that the savings

experienced nationwide for every consumer exceed the severity of lost wages of workers in

Louisiana. Since various sources of oil are used to fuel the entire U.S., it may prove beneficial to

understand the savings one Louisiana resident experiences against the lost wages of an oil

worker. The greatest good can be measured to determine if the reduction in oil prices is ethical.

The ethicality of OPEC supplying more oil than necessary, an allegation uncovered earlier, will

be examined.

Key Questions

Is drilling ethical? This question was chosen because the researcher has found that most

of the sources dedicated to oil and gas was comprised of environmental topics. There is a

constant struggle between oil companies and environmental groups. The environmental groups

have an agenda to preserve the Earth while oil companies have a motive to make revenues and

operate efficiently. Although the environmental side of oil and gas has little to do with

employment and gas prices, the very nature of oil extraction is damaging to the Earth.

Controversy surrounds the use of fracking fluid and environmentalists demand to understand

what fracking fluid is made of. The environmental side of oil and gas is so significant; it can’t be

avoided. Saving the environment is a source of tremendous cost for oil companies as they are

pressured to reduce greenhouse gas emissions. Alternative fuel use may be a topic to explore if


the researcher finds the use of alternative fuels has a financial impact on oil companies.

Alternative fuel furthers the interest of environmentalist groups at the expense of oil companies.

This paper seeks to identify if growth in alternative fuels could contribute to laying off workers

in the oil industry.

How is the state budget affected when workers are laid off? Do transfer payments

increase when gas prices are low in areas where many are employed in the oil and gas

industry? When workers are laid off, they generally seek other employment and draw on

unemployment funds. To understand how this affects the state government and its budget,

questions must be answered that relate to how fast a worker will find new employment. Along

with this, expectations of such workers must be examined to understand if workers are laid off

temporarily, permanently, or if they are simply underemployed. Full time workers may have

hours cut to reduce their employment status to part time. The aim of this paper is to provide a

recommendation for state governments when dealing with unemployment in this sector.

How is the price of gasoline figured? This million-dollar question is at the heart of this

paper. Without understanding how gas prices are determined, the savings experienced and

bottom line for oil producers could not be understood. The price of gasoline has many factors in

addition to formulas to determine the price. This paper will cover the factors that have to be

taken into consideration. The paper will also rank these factors in terms of importance. This

paper seeks to identify the three largest factors on gasoline prices. Gasoline prices have two

components: the price of one barrel of oil and how this translates into price per gallon.

Methodology

To answer questions about employment levels, the Louisiana Workforce Commission’s

website will be a valuable resource because it holds figures and data related to recent changes in


employment. This information is broken down by sector. The national oil and gas sector data on

the Bureau of Labor Statistics (BLS) website will helpful to get a national perspective and to

determine if the unemployment experienced in Louisiana is indicative of what is occurring

nationwide.

Environmental questions will be answered through videos dedicated to the subject and

articles discovered in OCLS. The researcher interviewed a tour guide of Honey Island Swamp

for details related to what Louisiana was like before oil and gas exploration. Questions related to

figuring the price of oil by the barrel and per gallon will be answered by reading a text book

dedicated to how the price of oil is derived. OCLS provides articles that offer additional details

on the calculation of oil prices by the barrel and by the gallon.

The overarching methodology to gather research to answer the questions presented are to

read, watch, and listen to the sources picked out previously through the production of a working

bibliography. Charts, graphs, tables, and pictures will be shared to help readers visualize the

concepts presented in this paper. Interviews have either been conducted or are scheduled to get

personal perspectives and accounts on the current employment landscape for Louisiana’s oil and

gas workers.

Information & Literature Review

Prior to conducting an analysis of the research collected in order to formulate an opinion

about employment in Louisiana’s oil and gas industry, the history of the oil and gas industry in

Louisiana must first be understood. “The Jennings Oil Company contracted with Heywood

Brothers and Dobbins to drill two exploratory wells, each to a depth of 1000 feet, in the hope of

finding oil…” (LOGA, n.d., para. 3). The story continues on, “Nothing happened. The well was

bailed again. Finally, a 4-inch stream of oil came gushing out of the well, spewing oil over 100


feet into the air” (LOGA, n.d., para. 9). The birth of the oil industry is interesting, but even more

relevant is the occurrence of jobs lost in the oil and gas industry today. The optimism of

explorers back in 1901 is not shared by oil and gas workers that have been laid off recently

because of diminished crude oil prices.

Economic Review of Oil Prices

Prior to delving into what experts conclude about crude oil, crude oil must be defined.

The (EIA) defines crude oil:

Crude oil was formed from the remains of animals and plants (diatoms) that lived

millions of years ago in a marine environment before the existence of dinosaurs.

Over millions of years, the remains of these animals and plants were covered by

layers of sand, silt, and rock. Heat and pressure from these layers helped the

remains turn into what we now call crude oil. (“EIA,” 2015, para 1.)

The EIA’s definition of crude oil coincides with the researcher’s understanding of crude oil and

will be adopted as an acceptable definition of the term. Crude oil is the main source of gasoline

consumed in the United States and will be the focus of this paper as the research explains the

correlation between crude oil prices and employment in the oil and gas sector.

Supply. Crude oil prices are derived through the factors that will be continually discussed

in this paper. Economics plays a major role in what the price of a barrel of crude oil will be and

the supply side of the law of demand with regard to crude oil prices has been best described by

chapter nine of Understanding the World Economy (2002) when the author explains, “…oil

reserves are a direct outcome of exploration activity, and the higher the price of oil the more

supplies will be looked for and brought on stream. The world’s oil supply is thus not fixed - it

increases with its price” (p.177). The author continues onto explain the implications the going


price of one barrel of oil has on what types of reserves will be explored when the author

explained:

This principle is true even of one given reservoir: how much oil is there, in

economic terms, depends on how far it pays to extract the oil from all the other

junk that surrounds it: water, mud, gas, etc. If it is too fragmented, too messy a

cocktail, then it does not pay to pump up much other than the purest, most

accessible deposit. But if the price of oil increases, it becomes worthwhile to

extract more from that same source. What counts as the total of commercially

viable reserves in the world, therefore, immediately increases as oil prices

increase – the economic boundary of all existing reservoirs shifts out [and this

does not include all the other unknown reservoirs that now become worth looking

for].” (p. 177) (See Figure 4, p. 39)

Essentially, this work is designed to help readers understand that different methods of extracting

oil out of the ground will be employed based on the going price of a barrel of crude oil. When

the price is low, minimally invasive methods are used. When the price is comparatively high,

major operators and independent operators (defined later) will be able to afford to use costlier

methods of extraction. Alquist and Guenette (2014) supported the same conclusion presented

when they stated, “This production increase has been made possible by the existence of

alternative oil-recovery technologies and persistently elevated oil prices that make these

technologies commercially viable” (para. 1). Oil reserves measured by BP in the year 2000

revealed that the Middle East has the highest concentration of proven oil reserves as presented in

Figure 4 (See p. 39).


Demand. The aforementioned effects of supply are useful to understand the supply side

of the law of demand with regard to oil prices. The demand side must also be understood to have

a holistic understanding of what drives oil prices.

Understanding the World Economy (2002) presented:

As world incomes, trade and travel have increased at an accelerating pace, so has

the consumption of all energy supplies – from 7.7 billion barrels of oil equivalent

(bboe) in 1925 to around 64.2 bboe in 2000. Of this, oil consumption has

increased from approximately 1 bboe to 25.7 bboe over the same period. That is,

the actual growth of the world economy has been fueled mostly by oil [and

recently, by natural gas – a related energy source]; demand for other forms of

energy has changed, by comparison, relatively slowly. (p. 170).

The demand for oil can change for a limited number of reasons. Keat, Erfle, and Young

(2013) call these reasons the non-price determinants of demand. The non-price determinants of

demand are based on changes in consumers tastes and preferences, a change in consumers’

income, the price of related products, the future expectations of buyers, and the numbers of

buyers that exist in any market (p. 41).

Strategy and Policy of Louisiana’s Oil & Gas Market

Director of North Louisiana for the Louisiana Oil and Gas Association (LOGA), Ragan

Dickens (2016) explained that operators, both major and independent, have reduced costs as a

result of decreased crude oil prices (personal communication, June 15, 2016). A major oil

operator is defined by “U.S. Legal” (n.d.) as “In the Oil and Gas industry, Operator means the

individual, company, trust, or foundation responsible for the exploration, development, and

production of an oil or gas well or lease….it is the oil company by whom the drilling contractor


is engaged” (para. 1). An independent operator would be a smaller operator that only functions

in part of the entire extraction and production process rather than the entire production process

like major operators. Dickens (2016) explained that major operators explore, extract, refine,

store, and market oil and that major operators are involved in the entire oil production process

from finding reservoirs, to selling gasoline in retail gasoline markets. He further explained that

independents all over Louisiana are either filing bankruptcy or are merging with larger operators

as their ability to cut costs diminish. The single most effective way to cut costs is through

cutting the workforce. Dickens (2016) concluded that independent operators usually explore for

oil and extract oil from the ground but pass on the rest of the production process to major

operators or independents engaged in the downstream (refining) portion of the production

process. He termed this first part of crude oil production as upstream activities. Dickens also

purported that operators are asking their suppliers to reduce their prices and that a continual push

to lower costs at all levels of the oil and gas industry has caused a depression in the market as

market participants are not able to pay existing rates for service and materials used in the

production process. Operators are asking for 20-30% reductions in rates.

When asked if the use of hydraulic fracturing (fracking) was too expensive when the

price of crude oil is too low, Dickens (2016) responded that hydraulic fracturing is a relatively

expensive part of the oil production pie. This helps to prove the assumptions revealed earlier in

the supply side of the law of demand: When oil process are low, costlier methods of extraction

are abandoned, thereby lowering total supply. The most important direct quote obtained from

Dickens is when he was asked if there is a relationship between crude oil prices and the level of

employment in the oil and gas industry in Louisiana, he responded, “That is exactly the case”

(Dickens, personal communication, June 15, 2016). The researcher confirmed that the belief


there is a direct correlation between crude oil prices and employment in the Louisiana oil and gas

industry is true.

Ecology. To understand the ecological implications of drilling, a second interview was

conducted with “Honey Island Swamp Tours” tour guide, Terry Reid. T. Reid (personal

communication, June 11, 2016) explains that the building of levees by the Army Corps of

Engineers, Louisiana’s chapter of the U.S. Army Corps of Engineers (UACE), prevented the

natural sediment from forming landmass. According to the “UACE’s” website, the UACE was

establish to operate the naval academy at West Point but has since been tasked with providing

outdoor recreation and environmental engineering services for the entire nation (“UACE,” n.d.,

para. 3). Reid’s analysis of environmental damage done by the UACE will be compared to what

environmentalists claim as the real cause of destruction to Louisiana’s shore line will be

discussed in a later section of this paper.

To understand the landscape in the oil and gas industry in Louisiana before the significant

reduction in oil prices, the U.S. Census Bureau (2014) explained, “The mining, quarrying, and

oil and gas extraction sector of the economy showed tremendous growth from 2007 to 2012 as

the number of establishments rose by 26.4 percent, according to the 2012 Economic Census

Advance Report…” (para. 1). Shortly after this period of growth, the oil and gas economy

shrank. Waguespack (2015) blames OPEC for the reduction in the price level of crude oil and

stated that their oversupply and increased production caused oil prices to fall dramatically (p.

86).

Ethics

Up to this point the overwhelming consensus is that reduced oil prices are detrimental to

the oil and gas market but the contrary has not been presented. Laskowski (2015) claimed, “It's


cheaper to transport goods. Consumers have more to spend and the savings on gas help to offset

flat wages” (para. 2). He continues,

At the same time, most of us who do not live in states known for energy

production view the lower costs for gasoline and heating oil as a welcome gift.

The national average price of gas is expected very soon to slip below $2 per

gallon, and when it does that will bring gas prices to the lowest level since March

2009.” (para. 2)

This source helped to answer questions about the savings consumers experience at the expense of

oil and gas workers. The rest of the sources used to formulate an opinion proved that the extent

to which the oil and gas industry is effected in Louisiana exceeds the good experiences of the

nation’s consumers.

Utilitarian views could support the decrease in oil prices because of the vast number of

consumers that are saving money at the pumps. Utilitarian ethics could also deem a drop in oil

prices as unethical. Batson and Neff (2012) explain that the state lottery could be deemed

unethical through the utilitarian lens because the vast majority of players lose and these players

are mostly poor. State taxes are generated but have no real effect on income. Therefore, the

state lottery would be unethical because the amount of good done is surpassed by the losses

experienced by low-income families (p. 29). This is a good analogy to understand that the few

dollars saved by drivers at the pump translates back into jobs lost for Louisiana’s oil and gas

workers.

This entire report would be useless to readers that are against capitalism itself because of

the disadvantages produced by capitalistic decisions leaders make. Readers must be careful to

understand the viewpoint that supports capitalism. “Adam Smith [1723-1790], a Scottish


philosophy professor, formulated capitalism as an economic system ethically superior to

mercantilism. Living conditions for peasants in Scotland were harsh at the time of Smith’s

philosophy and freedom was stifled” (Collins, 2009, p. 21). Capitalism however, must be

balanced by a deep rooted sense of integrity by those that are decision makers. The Stewardship

Council (2009) presents theories related to the environment, finances, generosity, and eternity.

“In light of the joblessness that affects millions of people today, kingdom entrepreneurs have the

opportunity to contribute toward the fulfillment of God’s intention for humankind by becoming

involved in the creation of work and enabling people to participate in stewardship of creation (p.

529). So here, the researcher uncovered another viewpoint that supports the creation of work

produced by capitalism.

The Analysis of Key Issues section of this paper explores the ethical implications of

extracting oil in further detail and provides specific accounts of unethical behavior by industry

leaders in the Amazonian region of South America. DeLeon, Stratton, and Berlinger (2009)

present a film that chronicles the everyday lives of residents that have suffered illnesses due to

crude oil extraction. Additional detail concerned with environmental damage caused by oil

extraction was provided by “Vice News” (2012) in the video Louisiana’s Coastal Crisis: Oil and

Water. $50 billion worth of damage has been done to Louisiana’s coast line according to the

video.

Human Resources

Labor is the essential focus of this paper, therefore, the following statistics representing

the labor market in Louisiana will be introduced immediately:

Industries in the Oil and Gas Extraction subsector operate and/or develop oil and gas field

properties. Such activities may include exploration for crude petroleum and natural gas;


drilling, completing, and equipping wells; operating separators, emulsion breakers,

desilting equipment, and field gathering lines for crude petroleum; and all other activities

in the preparation of oil and gas up to the point of shipment from the producing property.

(Louisiana Workforce Commission, n.d., para. 1)

The parishes with the highest number of job openings advertised online for

Subsector (3 digit) Oil and Gas Extraction in Louisiana were Ascension Parish

(7), St. Charles Parish (7), St. James Parish (6), Lafayette Parish (3), St. John the

Baptist Parish (2), St. Landry Parish (1), Bienville Parish (1), Calcasieu Parish

(1), East Baton Rouge Parish (1) and Plaquemines Parish (1). (Louisiana

Workforce Commission, 2016, para. 4)

The parishes with the highest number of employers for Oil and Gas Extraction in

Louisiana were Caddo Parish (88), Lafayette Parish (66), St. Tammany Parish

(25), Terrebonne Parish (23), Jefferson Parish (21), Calcasieu Parish (15), East

Baton Rouge Parish (15), Bossier Parish (14), Lafourche Parish (14) and

Vermilion Parish (14). (Louisiana Workforce Commission, 2016, para. 6)

These figures are irrelevant without understanding the decline in the industry’s employment

since the initial fall in the price that has occurred since 2014. The U.S. Department of Labor

provides data on nationwide establishments in the industry in Figure 3. (See Figure 3, p. 38)

Applied Management Theory

Later, the PESTEL framework will be applied to understand the situation operators are

involved in currently. Rothaermel (2016) assumes, “We defined strategic commitments as firm

actions that are costly, long-term oriented, and difficult to reverse. Strategic commitments to a


specific industry can stem from large fixed cost requirements, but also from non-economic

considerations” (p. 79).

Accounting vs. Economic Implications of Labor

Issues related to labor in Louisiana’s oil and gas labor market are clarified by the

definition of direct labor. Whitecotton, Libby, and Phillips (2015) discussed, “Direct labor is the

cost of labor that can be conveniently traced to the physical product…It [direct labor] would not

include the labor of those who do not touch the physical product, such as supervisors,

maintenance workers, and engineers” (p. 16). Direct labor that is traceable to a certain amount

of crude oil produced should be examined from both an economic and accounting view.

Accounting because of the traceability of the work performed to produce the final product; and

economically to understand the fixed cost portion of labor. The fixed cost portion of labor is

supervisors, maintenance workers, and engineers. The individual laborer that walks the oil

platforms and rigs is pertinent to the topics presented herein. The workers are variable and are

not fixed in the short run. Keat et al (2013) explained how a shift in supply leads to a short run

decrease in quantity demanded but causes a long run leftward shift in the demand curve as

consumers changes their behavior (p. 51-53). The long run is defined usually as the time period

when all inputs are variable. A definition of the long run is provided by Keat et al. recognizes

that all fixed assets are variable in the long run. One could come to the conclusion that

prolonged, reduced gas prices would outline the long run.

Global Implications of Industry Threats

“MarketLine” produces industry reports on various corporation. ExxonMobil, Chevron,

and Royal Dutch Shell all have threats that stem from the global forces and markets they operate

in. “According to Exxon Mobil’s long term outlook the industry refining margins is expected to


remain weak as competition remains intense and, in the near term, new capacity additions

outpace the growth in global demand” (“MarketLine: Exxon,” n.d., p. 35). With regard to

greenhouse gas emissions:

Due to the increasing focus on issues concerning climate change, the role of

human activity in it, and potential mitigation through regulation by various

governments could have a material impact on the company's operations and

financial results. International agreements and national or regional legislation and

regulatory measures to limit greenhouse emissions [GHG] are currently in various

stages of discussion or implementation. (“MarketLine: Chevron,” n.d., p. 34)

“MarketLine” (n.d.) concluded that Royal Dutch/Shell’s threats are climate change, a

wide geographical operating footprint, and a deteriorating climate in Nigeria (p. 26). The

threats presented for these three major operators will be discussed in further detail later

for a complete look at how the Louisiana oil crisis fits into the global oil landscape.

Analysis of Key Issues

Economic Review of Oil Prices

Non-price determinants of demand. This paper revealed the effect world income levels

has on the demand for crude oil and research has eliminated any reason to compare alternative

sources of energy (renewable) as viable or relevant to the discussion in trying to understand the

effect of oil prices on unemployment in the oil and gas industry in Louisiana. Tastes and

preferences is negligible to the discussion as well because crude oil and the resulting gasoline

does not come in multiple flavors nor capabilities. Effectively, the non-price determinant of

demand discussed hereafter related to crude oil demand is the change in world population levels.

Changes in world population is the most important driver of crude oil demand and has been since


the first application of crude oil to passenger vehicles. Worldwide crude oil production is driven

by a growing world economy. As more people are born and less people are dying, the world

demand for oil is ever-increasing.

Much of the turmoil in the oil and gas industry is largely blamed on Oil Producing Export

Countries (OPEC). Various sources report that the oil producing countries that are a part of

OPEC decided to hold the supply of oil at a level above what is demanded. The surplus of oil is

in effect creating a reduction in the price level for crude oil. Dickens (2016) stated that the price

of crude oil in November 2014 was $114 per barrel. The price fell to a low of $27 per barrel at

the end of 2015 and leveled out later in mid-2016 to around $50 per barrel (personal

communication, 2016, June 11, 2016). The ethical implications of OPEC’s decisions will be

explored in greater detail later.

Strategy & Policy Review

One strategy for most operators in the oil and gas industry is to reduce costs by passing

decreased profits on to suppliers. Major operators would have significant buying power when

measured against their suppliers. Suppliers of drills, equipment, pumps, and the various

components of an oil well cannot keep prices at initial levels when such high pressures exist in

the market. Operators are forced to look at their surrounding environment to understand the

required steps the firms have to take in order to survive the depression in the oil and gas industry.

The major operators will likely have other lines of business to help keep the entire organization

solvent. Figure 2 (See p. 35), provided by the EIA (n.d.), depicts a 42-gallon barrel of crude oil.

42 gallons only produce 19 gallons of gasoline. The remaining 23 gallons are used in the

production of heating oil, jet fuel, wax, lubricating oils, and other products (para. 2). Major

operators are likely involved in the production of these substances as well.


The trickle-down effect of cost cutting is reason the entire oil and gas industry is affected.

Dickens (2016) said that 10,000 jobs were lost in Louisiana alone and that these workers are

moving into alternate and related fields. Related fields include petrochemical production.

Dickens (2016) even went so far as to share personal experiences. He had to move his office to

his home as the Louisiana Oil and Gas Association (LOGA) decreased office space as a way to

reduce costs. He also had to take a pay cut (personal communication, June 15, 2016). The

gravity of the effects felt by the rest of the industry is exemplified because LOGA as an

organization had to cut costs and this organization is not directly involved in the production of

gasoline.

Managerial Accounting. Gasoline is the readily available and ready-to-use version of

crude oil. Once crude oil has been found and deemed a commercially viable source, the crude

oil is extracted from the ground. The extracted oil is transported to a refinery, where the oil is

separated into its useful components. Figure 2 depicts a barrel of oil and the separate parts that

one barrel is broken down into (See Figure 2, p. 37). After the processed crude oil leaves the

refinery, it is transported to different parts of the country through an elaborate system of

pipelines. Major operators own the entire upstream (exploration and extraction) and downstream

(refining, pipeline delivery, and marketing) parts of the production process for crude oil.

Independent operators may only conduct upstream or downstream operations. According to

Dickens (2016) operators are being forced to make decisions that affect their stakeholders. The

companies that supply operators with the necessary tools they need are also affected because as

crude oil prices drop, operators begin to ask suppliers to lower their rates. Dickens (2016) also

asserted that some independent operators are forced into bankruptcy, to merge with larger


operators, or they became insolvent and were forced to discontinue operations (personal

communication, June 15, 2016).

Human Resources. Less desirable outcomes are also affecting the industry. Some

companies became insolvent, in which case, all the employees lost their jobs. The major and

independent operators are constricting their workforce, another source of unemployment.

Without any expectations for the future of oil and gas, workers are not expected to wait for their

jobs to reopen in the next few months.

Table 2 presents some interesting statistics about the oil and gas industry nationwide.

Productivity is actually increasing, possibly because organizations are doing more with less

resources. Total labor hours fell from in 2012 to 2015, an indicator that employment has been

reduced in this sector of the national industry. The number of companies nationwide also fell

from 9,829 in Quarter 4 of 2014 to 9,560 in Quarter 3 of 2015 (See Appendix B, p. 14). The

decrease represents the amount of operators that went insolvent or were absorbed by larger

operators.

Ethics

Environmental harm. The most impactful occurrence of ethical violations by the oil

industry was depicted in Crude: The Real Price of Oil as filmmakers chronicled the fight of

several residents of the Ecuadorian Amazon pursued in an effort to make Chevron clean up

waste from crude oil extraction and production in their natural habitat. In the film, Texaco was

acquired by Chevron, and Chevron was being sued to recover the rain forest that had been

poisoned. Residents of all ages had rare skin rashes, high incidences of cancer, and other

illnesses that were identified as a result of the toxic waste. Without reading texts on ethical

dilemmas, viewers could quickly come to the conclusion that Chevron had acted unethically.


Another theme that emerged between the two films Crude: The Real Price of Oil and

Louisiana’s Coastal Crisis: Oil and Water: the residents’ government made decisions that

impacted the environmental health of the area. In the Amazon, Texaco’s oil operations were

taken over by the Ecuadorian government. Chevron, Texaco’s new owner, defended their

position stating that the Ecuadorian government was operating the wells at the time the toxic

waste was spilled (DeLeon et al, 2009). In Louisiana, the U.S. Army Corps of Engineers

(UACE) created levees that blocked the natural buildup of sediment, thereby preventing the

formation of natural hurricane barriers. Still, it is plain to see that the oil companies’ defense

isn’t substantial enough to make outsiders believe the government caused the environmental

crisis in either case. The extraction of crude oil, release of toxic waste in Ecuador, and the

building of oil rigs and platforms caused the majority of the damage. The major oil operators

have a profit motive that swings the pendulum of guilt in their direction and away from the

reigning governments. In Louisiana in particular, levees were constructed in an effort to save

human life and reduce storm damage. Oil rigs are constructed to sell oil.

Ethical economics. Ethical implications of world economies play a role. Waguespack

(2015) claimed that OPEC wanted to control the price of crude oil and started to supply a surplus

of oil (p. 68). This is opposite what many economists today describe with regard to OPEC and

the 1970s in the U.S. In the 1970s, OPEC held production and gasoline (crude oil) prices soared.

From a Utilitarian perspective, the greatest good for all is to allow the price level of crude oil to

settle based on the laws of supply and demand. Since the detrimental effects of controlling

supply by OPEC causes harm to oil and gas workers in Louisiana, OPEC is acting unethically,

from a Utilitarian perspective.


Recommendations & Conclusions

The most important theory to focus on is the cost to employment in Louisiana and

possibly other regions where the workforce depends heavily on oil and gas. Natural gas is part

of the oil and gas industry because it a major source of energy for Louisiana, but natural gas is

limited in this discussion because it is not used to make gasoline for cars. This paper seeks to

find the implications that supply and demand, world markets, economic theories, and ethics has

on workers in Louisiana. Natural gas is important to the discussion because it lives in the same

industry as crude oil and the same types of workers and organizations produce natural gas, but

natural gas does not have significance with regard to the economic observances. Crude oil is the

focus and the reduction in the price of crude oil causes people to lose jobs. Dickens (2016) as

mentioned earlier considers the fact that workers have moved into related industries or have

moved into new career paths altogether. Oil companies have no control over OPEC’s supply

decisions. The individual workers have the ability to move into various industries and can work

for themselves. Oil companies are more rigid in their opportunities.

Solution for residents. The effect of a reduction in the price level for crude oil has

global causes and implications. Louisiana has been hit with three major events locally in the past

sixteen years: Hurricane Katrina, The Deepwater Horizon oil spill in the Gulf of Mexico, and a

downturn in the oil and gas industry. Residents of Isle de Jean Charles are living on a landmass

that is sinking below the sea, an effect of coastal water exploration. Reid (2016) stated that the

Southeastern Louisiana Coastline is made up of salt water wetlands that gradually change over

from salty, to brackish, to fresh water as one moves inland from the Gulf of Mexico (personal

communication, June 15, 2016). The Louisiana Coastal Crisis: Oil and Water video exhibited

how the building of oil platforms in this region brought salt water into the fresh water marshes


which in turn killed the vegetation in the fresh water marshes, thereby reducing the hurricane

barriers (DeLeon et al, 2009). Hurricane Katrina was able to reach land and people quicker

because of the destruction caused by the UACE and oil companies. Essentially, residents have

an environmental nightmare. Environmentalists are against the extraction of crude oil and natural

gas because oil spills can and have occurred in recent history. The Deepwater Horizon oil spill is

the most recent occurrence of large quantities of oil being spilled into and near the natural habitat

of humans, marine and aquatic animals, and other organisms. The toxicity of crude oil is the

main concern to health.

Without moving the residents of Isle de Jean Charles, there isn’t much that can be done to

stop the Gulf of Mexico from swallowing the houses and people that live on the peninsula.

Relocation is the best option for residents because of the size of the body of water it sits in. The

Amazon however has a solution: recover the amount of damages from Chevron to clean up the

oil spill. As documented in the film, litigation has been ongoing since 1994, a cause for residents

to give up fighting to restore their land. Environmental organizations are the best source of

survival as they bring worldwide attention to the issues residents have been dealing with for

generations. Writing letters and communicating with media outlets is the best course of action to

bring the needed attention to the issues of the Amazonian Rain Forest.

Solution for the State of Louisiana. Dickens (2016) shared a statistic that has

implications for the state government in Louisiana. He stated, “For every $1 that the price of oil

drops, $11 million is lost. $114 down to $27 created an $800-million-dollar deficit” (personal

communication, June 15, 2016). The state of Louisiana is currently operating at a deficit.

Reduced oil prices deepen this deficit as the revenues are dramatically decreased as a result of

crude oil prices. A solution for Louisiana may exist. Madowitz and Novan (2013) suppose that


the mechanism employed that determines the proportion of revenue the state receives through

gasoline sales and excise taxes can be adjusted to allow for less volatile revenue streams derived

from the sale of gasoline (p. 669). Madowitz and Novan reached the assumption that a Gas

Swap Tax, adjusting the percentage of excise versus sales tax on gasoline, would be a possible

solution for other states because it worked for California. In essence, the excise tax is adjusted

upward and the sales tax on gasoline is adjusted downward (p. 668). Their solution is devised to

reduce the volatility of state revenue streams.

Conclusion

The assumption presented in the executive summary of this paper holds true: Louisiana’s

level of employment in the oil and gas sector is directly affected by crude oil prices. The sources

interviewed and analyzed during the research phase of this study proved this assumption.

Looking at the scenario Louisiana oil and gas workers are in from an economic perspective

would lead one to believe that oversupply is the cause of the hardship the state is currently under.

The economic implications are wide and far reaching. The state’s budget deficit is negatively

impacted and unemployment in the oil and gas sector spiked as workers were forced out of the

industry. The full effects of the depression in the industry have not yet been fully absorbed. The

various issues caused by oversupply in the industry are still being felt by the residents of

Louisiana that have relied on jobs in the oil and gas industry. The main thing the operators of the

industry can do to survive is to cut costs and remain savings focused until the depression of the

industry lifts.

Findings. Supply is the most notable cause for the depression of the oil and gas industry

in Louisiana. Supply held below or above natural levels for an extended period of time,

particularly by the largest oil producing countries should be considered a cause. The time period


that the oil and gas worker is unemployed is significant and detrimental but because the oil and

gas worker has alternatives to explore, the impact of a depression in the oil and gas sector of

Louisiana is limited. Still, the time period of unemployment can last six months to one year,

therefore it is unethical for OPEC to influence oil prices by increasing supply when demand is

relatively stagnant. Through the research conducted for this study, the is in fact a depression in

the oil and gas industry in Louisiana caused by the reduced price level of crude oil and its

byproduct gasoline. Americans are saving at the pump at the expense of oil and gas workers.


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FIGURE 1

Figure 1 Definitions Related to Crude Oil Production

Key Terms

Definition

Barrel A unit of volume equal to 42 U.S. gallons.

Crude Oil A mixture of hydrocarbons that exists in liquid phase in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities. Depending upon the characteristics of the crude stream, it may also include:

Small amounts of hydrocarbons that exist in gaseous phase in natural underground reservoirs but are liquid at atmospheric pressure after being recovered from oil well (casinghead) gas in lease separators and are subsequently commingled with the crude stream without being separately measured. Lease condensate recovered as a liquid from natural gas wells in lease or field separation facilities and later mixed into the crude stream is also included;

Small amounts of nonhydrocarbons produced with the oil, such as sulfur and various metals;

Drip gases, and liquid hydrocarbons produced from tar sands, oil sands, gilsonite, and oil shale.

Liquids produced at natural gas processing plants are excluded. Crude oil is refined to produce a wide array of petroleum products, including heating oils; gasoline, diesel and jet fuels; lubricants; asphalt; ethane, propane, and butane; and many other products used for their energy or chemical content.

Crude Production

The volume of crude oil produced from oil reservoirs during given periods of time. The amount of such production for a given period is measured as volumes delivered from lease storage tanks (i.e., the point of custody transfer) to pipelines, trucks, or other media for transport to refineries or terminals with adjustments for (1) net differences between opening and closing lease inventories, and (2) basic sediment and water (BS&W).

Adapted from “U.S. Energy Information Administration. (n.d.). Petroleum & other liquids:

Definitions, sources, and explanatory notes. Retrieved from:

https://www.eia.gov/dnav/pet/TblDefs/pet_crd_crpdn_tbldef2.asp


FIGURE 2

A 42 U.S. gallon barrel of crude oil yields about 45 gallons of petroleum products in U.S.

refineries because of refinery processing gain. This increase in volume is similar to what happens

to popcorn when it is popped.

Figure 2 Amount of Crude Oil Gained from Barrel of Oil

Adapted from U.S. Energy Information Administration. (2015). Oil: Crude and petroleum

products explained. Retrieved from:

http://www.eia.gov/energyexplained/index.cfm?page=oil_home#tab1

http://www.eia.gov/energyexplained/images/charts/products_from_barrel_crude_oil-large.jpg


FIGURE 3

“This section presents data on the number of establishments in oil and gas extraction.

Also included in this section is information on productivity, presented as the rate of change in

output per hour of workers in the industry” (“bls.gov,” 2016, para. 2):

Figure 3 Number of Establishments in Oil and Gas Extraction

Data series Back data

4th quarter 2014

1st quarter 2015

2nd quarter 2015

3rd quarter 2015

Number of establishments

Private industry

9,869 (P) 9,720 (P) 9,594 (P) 9,560

Local government

3 (P) 4 (P) 4 (P) 4

Footnotes

(P) Preliminary

(Source: Quarterly Census of Employment and Wages)

Figure 3.1 Productivity Measured in Per Hour of Output

Data series Back data 2012 2013 2014 2015

Labor productivity index, output per hour

84.093 95.861 107.335 119.549

Percent change from previous year

-5.9 14.0 12.0 11.4

Labor index, total labor hours

151.100 147.483 150.152 144.765


19.2 -2.4 1.8 -3.6

Output index

127.065 141.379 161.165 173.066


12.1 11.3 14.0 7.4

Unit labor costs index

117.434 108.442 100.334 93.596


1.5 -

7.7 -

7.5 -

6.7

Adapted from U.S. Department of Labor, Bureau of Labor Statistics. (2016). About the oil and

gas extraction subsector. Retrieved from:

http://www.bls.gov/iag/tgs/iag211.htm#workforce

http://www.bls.gov/cew/

http://www.bls.gov/iag/tgs/iag211.htm#iag211bdmcew.f.P








http://www.bls.gov/lpc/









http://data.bls.gov/servlet/SurveyOutputServlet?series_id=ENUUS000205211&data_tool=XGtable

http://data.bls.gov/servlet/SurveyOutputServlet?series_id=ENUUS000203211&data_tool=XGtable

http://data.bls.gov/servlet/SurveyOutputServlet?series_id=IPUBN211___L000&data_tool=XGtable




http://data.bls.gov/servlet/SurveyOutputServlet?series_id=IPUBN211___T010&data_tool=XGtable

http://data.bls.gov/servlet/SurveyOutputServlet?series_id=IPUBN211___T011&data_tool=XGtable

http://data.bls.gov/servlet/SurveyOutputServlet?series_id=IPUBN211___U100&data_tool=XGtable

http://data.bls.gov/servlet/SurveyOutputServlet?series_id=IPUBN211___U101&data_tool=XGtable


FIGURE 4

Figure 4 World Oil Reserves in 2000

Note: The amount of oil is measured in billion barrels of oil equivalent (bboe units). .

Adapted from Chapter 9: The economics of oil. (2002). Understanding the World Economy (pp.

168-191). Taylor & Francis Ltd / Books.