The 10,000 workers cut by oil firm BP yesterday probably feel none too happy.
But spare a thought for the tens of thousands of other workers losing their jobs in the oil and gas sector – and the millions more broadly in the U.S. and global economies. Most of those workers won’t enjoy the severance benefits that tend to accompany a well-paying job at an international major like BP.
In announcing a plan to cut costs (including shedding the 10,000 jobs, from a global workforce of about 70,000) CEO Bernard Looney noted both tactical and strategic considerations. With the COVID-19 pandemic having pushed oil prices sharply lower, the company (like others in the energy field) needs to bring costs in line with revenues. In addition, Mr. Looney wants BP to be more agile as the company restructures to lead the energy transition—moving the world’s energy system to dramatically reduce CO2 emissions.
Investors cheered the announcement, with BP’s share price Monday outpacing overall stock market gains even with oil prices falling.
I wrote a few weeks ago that cutting spending and staff is the right thing for oil and gas companies to do, given the historic reductions in global oil demand and lower oil prices caused by the pandemic.
But that’s not the end of the story.
Our system of free enterprise is built to reward owners of companies who put their capital at risk. It’s a system that has proven itself time and again over many years, driving superior economic growth by putting the right incentives behind the forces of innovation and efficiency. In addition to generating superior returns for owners, the system (when it runs properly) has also proven adept at generating well-paying jobs for workers. Indeed, American oil and gas workers in 2018 earned nearly double the pay of workers elsewhere in the economy, according to Dean Foreman, Chief Economist of the American Petroleum Institute.
Owners of companies – that is, the shareholders – understand that, with the prospect for earning superior returns also comes the potential for significant losses. They accept the trade-off: You can make – or lose – a lot of money, but over time, the system has shown that the winners tend to vastly outweigh the losers. Stocks as an asset class tend to be volatile in the short run, but significantly outperform other asset classes in the longer-run.
While individual companies may come and go, over time investors will earn greater returns putting their capital at risk by owning companies.
But what about the workers?
I retired from BP last year (and am still a BP shareholder). I’ve known Bernard Looney for a long time and I’m sure he will do everything possible to “do right” by BP’s now-redundant employees.
However, this may be more difficult for smaller companies with fewer resources.
Here’s where government policy comes in. A social safety net in the form of unemployment benefits, job training, etc. can help cushion the blow for workers when economic events beyond their control (like the COVID-19 pandemic) cause companies to shed workers. Don’t confuse a safety net with socialism: it’s how we make sure the benefits of capitalism work for all of us – owners and workers alike. It is a crucial element underpinning the success of our system of free enterprise.
So as we celebrate another strong day on the stock market, spare a thought for the 13.3% of the US workforce who are unemployed…and ask what we as a society should do to help them.
For myself, I’m thinking of all my friends at BP.
This post originally appeared in the Forbes blog on June 9, 2020.
