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Schork Oil Outlook: Will Spill Legislation Destroy Jobs?

You want fries with that oil derrick?

As noted in yesterday’s issue of The Schork Report, the U.S. oil and gas industry employs over 160,000 Americans. More importantly, these are not hamburger flipping jobs. As of the first quarter the average weekly earnings of an employee in this industry was $1,403 or nearly twice the average, $765, for all employees in the U.S.

Given that the U.S. government ran a rare monthly budget deficit in April (!) as individual income tax receipts plunged 24% from a year ago, it is hard to imagine that the White House would threaten the one segment of the workface that managed to navigate the recession unscathed.

For instance, whereas total nonfarm employment has dropped by 5.7% since December 2007, employment in the oil and gas sector has risen by 7.6%.

In this vein, yesterday the Minerals Management Service (MMS) announced that is has suspended all drilling in the GoM until producers resubmit plans to meet revised safety and environmental rules. Shallow water (<500 feet) drillers are not bound to the current moratorium and will be allowed to resume operations once they file the paperwork and demonstrate compliance with the new regulations.

Then again, with insurance costs now rising, these operators might just decide to leave the GoM all together for the friendlier climes of South America, West Africa or the Arab Gulf.

Furthermore, House Democrats are writing legislation that would eliminate the current oil spill liability cap of $75 million. There is even talk that the cap could be pushed up to $10 billion. If that were to happen, then the issue of the moratorium is moot. Moody’s has reported that insurance on shallow water rigs has already risen by 25% since Deepwater Horizon and rates on deepwater rigs have jumped by 50%.

If you now raise the liability cap by 132%, the industry will not be able to insure these rigs and the offshore industry as we know it today will cease to exist in the U.S. Worse still, the alleged green economy will not be able to absorb the new ranks of unemployed drillers and engineers… on the other hand, perhaps the hamburger-flipping industry could use a few skilled derrickhands.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.