Bullwhip effect on oil and gas jobs?

Hector Martingano
7 min readFeb 18, 2024

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I have been seeing talk on my LinkedIn feed, and even in the Financial Times, about the industry needing more petroleum engineering graduates. It’s no secret that the oil and gas sector goes through cycles of hiring and layoffs, often tied to factors like oil prices and economic conditions. It is tempting to dismiss it as just profit-driven decision-making, but I wonder if there is more to it. What if the bullwhip effect is at play? If this is true, it could prompt us to rethink how the industry handles staffing during economic cycles. Of course, this is not a simple issue, and it is one that deserves careful consideration and analysis. My aim here is to kick-start conversations that might help us navigate the challenges of the energy transition more effectively.

Introduction

There is a concept in operations management or supply chain management called ‘the bullwhip effect’. In a nutshell, it refers to the phenomenon observed in supply chains where small fluctuations in the demand turn into large fluctuations going up the supply chain (illustration source https://www.truecommerce.com/blog/bullwhip-effect-supply-chain/).

An efficient supply chain can give companies a competitive edge, and variation in demand levels can be a challenge. Servicing a fluctuating demand requires a balancing act between having sufficient product to deliver the peaks in a timely manner, while avoiding maintaining an excessively large amount of product stock. Factors like changing buying patterns, driven for example by changes in product pricing or order batching, increase the uncertainty in the demand that needs to be met. Moreover, lead times created by the physical process itself and by the flow of information further disconnect production from consumer demand. The result is the bullwhip effect, which amplifies demand oscillations up through the supply chain, leading to inefficiencies and greater costs.

If you have a business background you may be familiar with this. If not, I recommend you play the beer game to experience this by yourself (see for example https://beergame.masystem.se).

Analogy to oil and gas jobs

You are probably wondering: what does beer supply chain have to do with oil and gas jobs? Let me present the following analogy, considering the actors in the previous illustration.

It’s not a perfect analogy, but humour me, and let’s consider the education system as part of a supply chain where trained professionals are the product delivered to the job market.

My mind wandered to the bullwhip effect after stumbling upon a LinkedIn post charting the demand for engineering graduates over time, using job postings as an indication of demand. This coincided with the recent advertisement of my previous job, and what struck me about it was that while there was a single position, there were postings from the hiring company and recruiting agencies (without naming their client), multiplying the apparent demand. It got me thinking about how job postings might not be by any measure a good reflection of the true demand for professionals in the market. Curious about it I tried to find related examples on the web but could not find any. This has left me pondering whether I am mistaken in my thinking or if it’s an area needing further investigation. Perhaps someone should delve into it more deeply.

From my side, and for the discussion here, I will contribute this as a hypothesis: if we define a ‘supply chain of professionals’ as the network of players involved in getting people through university, and into employment into the industry demanding those professionals, then we can see similarities to the dynamics that can lead to the bullwhip effect:

1. Lead times. It can take about 5 to 6 years for engineering professionals with a master’s degree to go through the education system and become employable (by this I mean getting a relevant position in the industry). During that period, the initial demand drivers may change, leading to a mismatch between the skills on offer and the current demand.

2. Miscommunication of requirements. Universities may struggle to deliver the number of professionals required by the job market, as this demand is not accurately quantified, nor drives the number of students accepted into a particular field of study. A problem compounded by the misalignment between what is taught in higher education and the actual skills needed by a fast-changing industry.

3. Periodic fluctuations. For the oil and industry, this can be caused by changes in oil price triggered by supply and demand or other events affecting the overall economy.

4. Forecasting errors in demand. Neither perfect foresight nor perfect forecasts exist, and in the timeframe of a few months or years, the assumptions underlying the initial forecast can be wrong.

Now, the interesting thing is that, if the hypothesis is about right, since we know what to do to address the bullwhip effect in a general supply chain, then we may adapt some of those solutions to the supply chain of professionals.

Importance for oil and gas jobs

The bullwhip effect can lead to inefficiencies and waste in a general supply chain, as, for example, increased costs, excessive stocks, or unmet demand.

In a professional supply chain, there is something much more important at stake: time — the non-renewable resource people spend gaining those skills. Those people may leave for other industries, disillusioned at the lack of prospects, and affecting the reputation of the industry.

It might be possible for some petroleum engineers to move into other sectors in the energy industry that are seeing further expansion because of the energy transition, for example, geothermal. Those are still relatively small and not necessarily less risky than oil and gas: the energy transition will be challenging for all the players, from a technical and business perspective, and there are bound to be winners and losers. We do not know yet who.

I think as a point of social responsibility, companies need to look into how they hire and the messages they send to the public around work creation.

Solutions?

To borrow from the book of supply chain, without being extensive, let’s have a look at solutions around two themes:

  • Just-in-time manufacturing (JITM).
  • Strategic partnerships.

I will take just-in-time manufacturing in a professional supply chain to mean the ability to resource projects with the right skills in a timely manner. Strategic partnerships will remain closer to its original meaning, as it implies working with other parties in the supply chain. For the sake of organisation, I will group the ideas under the umbrella of one of those concepts, but there are overlaps.

  • Strategic partnerships with recruiters — get a single recruitment channel as the official way to hire people and communicate that clearly on your website. It might be cheaper to do it internally, but it can be difficult for HR departments to cope as they have seen themselves reduced, so this may require work with a recruiting / staffing company. Having an official company listed on your website should also mitigate against those fraudulent job offers that companies’ websites commonly warn against.
  • Strategic partnerships with universities and training companies — communicate the skills needed. One challenge of the energy transition will be to have the right skills. Universities need to provide a solid foundation on first principles, allowing students to pivot and specialise adjusting to future requirements.
  • Strategic partnerships with other companies — share employees via secondment.
  • Strategic partnerships with service or consultancy companies — have resources on a retainer.
  • Internally, JITM can be implemented by adopting more flexible organisational structures. Many E&P companies have an asset-based organization, but that can lead to effort duplication across assets. Having a minimal asset-based organization, with the rest of the resources shared on a project basis, can lead to a better allocation of staff, prioritised according to the changing needs across the assets.
  • JITM may also be implemented internally by keeping those that retire or are made redundant, and are willing to do so, on a retainer basis, to help provide continuity in the business.
  • Alternatively, if those options for JITM are difficult to handle within the company structure, they may be outsourced: let someone else manage the changing demand — i.e. through service or consultancy companies.

To be clear, my perspective isn’t influenced by my employment at a consultancy company. I joined a consultancy because I think companies with few assets are better served by access to expertise as needed (JITM), and I also think that for E&P professionals it is better to be exposed to a wider range of problems and practices than what few assets may provide.

Clear communication of the expected staffing requirements should underline all of this, considering upcoming projects, the different stages in the life of the projects, expected increases in efficiency and staff retirement.

Many pros and cons could be listed for the alternatives mentioned above. Each bullet point could be an article on its own. The devil is in the details, but such discussion exceeds the scope of what I wanted to convey. I just hope to have highlighted other ways to look at problems the oil and gas industry faces.

This is a repost of my article on LinkeIn, as found here.

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