Productivity in Crude Oil and Natural Gas Production

By Friedman, Brian L. | Monthly Labor Review, March 1992 | Go to article overview

Productivity in Crude Oil and Natural Gas Production


Friedman, Brian L., Monthly Labor Review


Productivity (as measured by output per employee hour) in the crude petroleum and natural gas production industry declined at an average annual rate of 1.1 percent from 1059 to 1990. [1] (See table 1.) Productivity growth was hampered by increasingly difficult access to new oil and gas supplies over the period. Productivity was alos strongly affected by the volatile rise and fall of the price of oil and related products, which influenced the economic feasibility of employing more marginal and labor-intensive types of recovery. Productivity declined during the period as labor increased in times of high prices, while output growth was slowed by diminishing reservoir pressure in existing oil fields.

There were three distinct periods of economic activity that produced different productivity trends during 1959-90: 1959-72, a period of increasing production and low prices; 1972-82, a period of declining production despite the incentives of high world oil prices and technological advances; and 1982-90, a period of predominantly declining prices and continued declining production. The following tabulation lists the average annual rates of change for three productivity-related variables during the three separate subperiods of the period under study:

                                  Annual percent change
                   1959-   1972-   1982-   1959-
                      72     82       90      90
Output per hour     5.4    -7.8     3.6    -1.1
Output              3.4     -9.    -1.2      .3
Employee hours     -1.9     7.4    -4.7     1.5

Productivity trends

From 1959 to 1972, U.S. oil and gas production was growing at an average annual rate of 3.4 percent, as the addition of newly found oil reserves exceeded the depletion of existing reserves. In general, the number of stripper oil wells declined during the period. [2] Stripper wells are oil wells that produce 10 or fewer barrels of oil per day. The low price of oil made it only marginally economically feasible to keep these wells in production. There was also little incentive to employ more sophisticated, expensive, and labor-intensive production techniques for recovering oil. Employment declined steadily at a rate of 1.9 percent year, and output per hour rose at a arate of 5.4 percent per year.

U.S. production of gas and oil, however, peaked in the early 1970's. U.S. consumption became increasingly dependent on foreign supplies, which led to two shocks to industry prices. The OPEC oil embargo occurred during 1973-74 and caused world oil prices to rise significantly. Then, the cutbacks in Iranian oil production in 1979 led to another round of rapid price increases. During 1972-82, world oil prices quadrupled.

Increasingly prices led to greatly increased U.S. industry activity in exploration and production during 1972-82. Crude oil, however, had become harder to find and harder to produce than in earlier years. The number of marginal stripper wells rose substantially. Increases in enhanced oil recovery production techniques and technological innovatives helped mitigate production declines that, nevertheless, reached 0.9 percent per year. Industry employment, however, rose 7.2 percent per year, and output per hour fell at an annual rate of 7.8 percent.

The most recent period, 1982-90, was generally a period of oversupply of foreign crude oil and declining prices. Oil prices fell very rapidly in 1986. Some of the more expensive and labor-intensive production techniques lost their economic feasibility. [3] The number of stripper wells, which had been growing since 1970, fell by nearly 9,000 in 1987. [4] Industry output continued to fall 1.2 percent per year, but employment fell 4.7 percent annually. The industry shrank in size, but what remained were, by and large, the most effecient wells, with the best equipment, run by the most experienced personnel. [5] Output per hour increased at a rate of 3.

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