Author
By: Brian Piper, PhD
When the injured party works in the oil and gas industry, using earnings data for the past few years can significantly overestimate or underestimate future earning capacity. To produce reasonable estimates of future earning capacity for oil and gas workers, RPC developed a method for estimating the long-term future earning capacity of injured persons who work in oil and gas extraction or supporting occupations.
On January 6, 2020, the West Texas Intermediate (WTI) spot price was $63.27 a barrel, an eight-month high.[1] By March 9, 2020, rattled by the spread of the COVID-19 coronavirus and responding to price cuts in a dispute between Saudi Arabian and Russian producers, the WTI spot price fell to $32.54 per barrel, a drop of over 48.5%. If history is any guide, this freefall in crude prices will lead to a decline in active rigs in the US, a drop in employment in oil and gas extraction and supporting jobs, and lower wages for those workers who remain employed in this industry.
Sharp swings in oil prices and corresponding changes in associated jobs and worker earnings are common. As shown in the graph below, in the two decades from 2000 to 2019, there were at least three periods when the WTI spot price collapsed.
Many drill sites are profitable only when oil and gas prices are above a threshold. As oil prices rise, sites are activated, and additional workers are hired in both extraction and support occupations. Wages in these occupations rise as companies compete for workers. As oil prices fall, sites are temporarily shut down and workers are terminated or their scheduled hours fall. In most other industries, wages stop rising during downturns, but they are rarely decreased. In the oil and gas extraction industries, wages actually fall as employees are replaced from the stock of experienced workers looking for steady paychecks.[2]
This volatility creates challenges in estimating the future earning capacity of workers in the oil and gas extraction industries in personal injury litigation.
Depending on when workers are injured, their recent earnings may be from a time of low oil prices and of low wages and reduced work, or from a time of high oil prices, extensive overtime and high wages. Any analysis of future earning capacity must account for employee characteristics such as training and experience, but the analysis must also account for the volatility in worker earnings due to the volatility in oil and gas prices.
Our method controls for differences in worker experience. We then analyze earnings across periods of both booms and busts to develop trend lines to control for oil and gas price volatility. RPC’s sources and methods are explained in detail in this white paper.
[1] US Energy Information Administration. Available from http://tonto.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=D
[2] Bureau of Labor Statistics. Average weekly earnings of production and nonsupervisory employees, oil and gas extraction.