I live near an area where there is a large prevalence oil and gas refineries and O&G-adjacent industries. The men and women who keep these plants running work a grueling schedule and are often involved in fairly risky activities due to the nature of the stuff they are dealing with (flammable or toxic materials). Despite this, tons of locals flock to these jobs and there there is a huge surplus of available people who are seeking these jobs. By huge, I mean people testify to applying to these jobs for literal years before they ever get an opportunity (many don’t without connection). Entry level typically requires experience or an Associates degree. I should note that experience is helpful but not critical, the job is not easy but is not rocket science either. These jobs can generally get you to 6 figures in the first year, and most top out around 150K in a MCOL area. The benefits are generally excellent, some even have pensions. Yes, these companies are extremely profitable and I’ve already mentioned that the work is hazardous and has odd hours, but with the massive surplus of willing and able labor, why do these companies still pay so highly?
In: Economics
One thing I don’t think anyone else has mentioned is the cost of a fuck up. Not even talking about hurting people but just shutting and restarting down a rig/refinery over 12 hours costs millions. Good pay is the incentive not to lose your job due to negligence
They pay well to retain people at a dangerous and grueling job where being short staffed or having a shallow applicant pool costs more than what they pay.
It’s a delicate balance. If they didn’t pay so well, there wouldn’t be such an abundance of people lining up to work in these jobs. They’re good jobs, but they are dangerous, and if you mess something up, you will get fired, unless what you mess up kills you in which case you are dead.
The answer is mostly that these companies find they are better off in the long-run having it be seen as a good and desirable job so that they always have a steady supply of high-quality labor. The refineries make a lot of money compared to the payroll, and accidents lead to lost productivity. Basically they’ve found that paying 20% more for labor assures a really strong workforce, and guarantees that the refineries hit their productivity goals, which results in more profit for the company that if they saved the 20% of the labor cost but occassionally had stoppages due to accidents or strikes.
As others have mentioned, “supply of applicants” and “supply of *suitable* applicants” can be two *very* different numbers.
From experience, a lot of people think “I have no education and I don’t mind getting dirty, sure, I’ll apply to this dirty job for six figures” and then once they find out that it’s high-stress, very dangerous, and you’re in a remote location six months at a time, they back out. Or, more likely, they are ill-suited for stressful, dangerous jobs that require isolation, but there’s no good way to find that out from a walk-in or resume.
Secondly, a lot of jobs have a *wild* training ramp. Even if they do have a good number of suitable candidates, they may want to lock in a higher salary, since the cost of training someone new is far higher than the additional salary they pay everyone–plus, there’s a premium for having a consistent crew.
Some places don’t care about high turnover. For some places it’s critical that they *don’t*. Pay is then adjusted accordingly.
So this *is* actually supply and demand working. Supply, in the sense that the pool of applicants probably isn’t as big as you expect, and demand, in that they want more than just a warm body, they’ll pay a premium for a warm body that’s gonna stick around.
The posted salary is just an estimate or a bid from the employer.
If the posted salary is exactly at market price, or the equilibrium point of supply and demand, then you will get exactly 1 qualified applicant per job posting. If it is higher, then you get more than 1 qualified applicant per posting, and if it is lower, then you get less than 1.
I assume that the local employers intentionally want more than 1 qualified applicant per job posting and they are ok with paying more than market price in order to achieve that goal. Either that or whoever at the employer was responsible for posting the salary estimated too high and the company never got around to fixing it.
How many people want the job isn’t what determines the supply side of this equation. It’s how many people are qualified for it.
Its not just “supply and demand sets the price”. The price can influence supply. People make job decisions based on both financial and personal factors. Industrial jobs tend to be unsafe, less convenient, and in less desirable places to live. So there is more need for the financial benefit to outweigh the personal sacrifice to get a strong supply of workers.
There may also be unions that negotiate contracts to enforce minimum pay across the industry, turning it from “less pay = fewer applicants” to “less pay = lawsuit or strike”.
That said, supply and demand may not be as imbalanced as you assume:
The job requires technical skills and professional training. They’re not paying entry level interns fresh out of school 150k, they’re paying experienced workers who are looking for stable pay and good benefits. You said it yourself: it takes years of experience and networking connections to get hired. Not all applicants are qualified, and thus don’t fill the demand they are looking for.
Large # of companies in the area also means lots of competition. If you don’t hire a good candidate, someone else will. If you offer to pay less, there’s lots of other nearby options they can apply to instead. So although you have a high supply of workers, the local demand is also very high and there is less risk to an applicant if they reject a bad offer.
I think you’re confusing highly local supply and demand for regional supply and demand. There’s a ton of demand on the gulf coast and nearby. However, the supply and especially skill of labor depends highly on people’s willingness to live wherever there is.
Houston, being a major city with tons to do can attract the best and the brightest for less money. A major player on the ship channel won’t have much trouble getting Joe with 10 years of experience in exactly what they need because Joe wants a decent salary, but also wants ways to spend his money. It’s potentially extremely difficult to get an apprenticeship where Joe works because there’s plenty of well-trained Joes willing to do the job.
However, I worked in a facility around 60 miles from Houston. We didn’t have very much trouble getting techs because the whole small town nearby was trained in some capacity. However, we had to have apprentices because no one would move in otherwise. They even accepted related people working in the same plant (twin brothers, father-son, husband-wife) because what else do you do if your pool is mostly a small town? Engineers always wanted a different plant assignment eventually and getting anyone with a bachelor’s degree not right out of school could be very difficult.
This job doesn’t contradict the theory of supply and demand necessarily. It’s a really hard job. People only want to do it BECAUSE it’s high paying. If they paid a blue collar wage they would struggle to staff it. There’s also probably a divide between the people who want to do this job and the people who could feasibly do the job. If you have a surplus of applicants you can be selective and avoid bad hires, which are costly. Oil generates so much revenue that it’s worth it to pay to make sure there are not staffing shortages. It’s way more costly to have to decrease oil production due to staffing than it is to pay the employees what seems like a lot for labor work but is a pretty insignificant dollar amount in terms of the type of money an oil site can generate.
> extremely profitable
Not really. The industry as a whole has massive swings in profitability, sometimes high, sometimes low, even in the same year.
For example, in 2021, the 12-month trailing average profit margins for oil and gas production companies was 4.7%, but the average per quarter were as follows:
Q1: -22%
Q2: -1.4%
Q3: 3.2%
Q4: 31.3%
This is important to understand because with such big swings, they *have* to be very selective with who they hire. They’re not going to hire just any Joe Shmoe off the street simply because he applies for the job, because they can’t afford to pay someone a large salary who isn’t going to do a good job.
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