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Truck driver shortages expected to increase oil prices and constrain supply

(Photo: Shutterstock)

In 1995, Volkswagen launched its tagline “Drivers Wanted,” helping to boost its sales by 18 percent the following year. Funny but true: the phrase also had the unintended effect of sending confused job seekers to VW dealerships after misinterpreting the promotion. Right now, the oil sector could use just such a promotion as the current labor tightness in the industry, particularly for truck drivers, is reaching historic levels.

The driver scarcity relates most to an intensifying of several key issues relating to supply, demand, and new regulations. BP Capital recently released a report about the issue. The report highlights the driver demand.

The energy sector constraint has naturally risen as the U.S. has approximately doubled its total oil production over the past decade to currently 10 million barrels per day (mmbl/d). Expectations are that U.S. production will continue to rise, possibly reaching as high as 14-15 mmbl/d over the next decade. Still, it’s not simply the number of wells being drilled that has driven the increased oil-related trucking needs.

FreightWaves spoke with Trip Rodgers about the issue. Rodgers is Portfolio Manager at BP Capital Fund Advisors, an energy investment management firm.

“I don’t see the constraint easing any time soon,” he says. “Oil production is expected to grow from here. The shortage is only going to be accentuated because of the growth of oil production especially in the Permian shale basin. You have more trucks hauling sand, hauling water. More trucks taking oil away from the basin due to constraints with the pipeline capacity, especially in the short term.”

The increase in sand use naturally requires more trucks to haul the sand to the well, either directly from an in-basin mine or from a rail terminal. As shown in the example by Solaris in the above image, an average well that consumes 10,000 tons of sand during the fracking period of a well (many wells use substantially more) equates to roughly 400 truckloads of sand to be delivered to the wellsite. Assuming 10-15 days for the completion stage of an average well, this implies 27 – 40 sand truckloads per day to each individual well (not considering proppant storage systems, where sand delivery may be spread out over more days). For the Permian Basin, where sand consumption totals more than 4mt/quarter currently, the report estimates this amounts to over 2,000 trucking round trips per day in the region, a figure that is expected to grow substantially in upcoming years.

Often when people think about the issue of water at a wellsite, they mainly focus on the water required to frack the well. Even more voluminous than the amount of required frack water is the flowback water that is generated from a well’s production. This water must be disposed of via trucking or pipes to a regulated saltwater disposal well or be recycled and used as frack water. The latter is a process that is still too capital intensive and expensive versus disposal for most oil producers to employ.

Also, the amount of flowback water differs considerably by basin. Importantly, the Permian Basin, which is expected to provide the bulk of growth in U.S. shale production, has one of the highest water cuts, reaching as much as 90 percent over the life of the well in some cases. Moreover, within the Permian, water cuts are proving to be the highest in the less-developed, yet rapidly-growing Delaware Basin in West Texas and Southeast New Mexico. For example, in its 4Q 2017 conference call, Carrizo Oil & Gas highlighted how its oil output had been impacted by higher-than-expected water cuts in the Delaware Basin.

While some additional pipelines should ease the takeaway constraint in the second half of 2019, in the meantime neither rail nor trucking, seem prepared to meet the increasing need for drivers, particularly in the oil sector.

A key problem is the aging demographic of the U.S. supply pool of truck drivers. More than 29 percent of trucking employees fall into the 45-54 age group, the highest figure of any age category. This compares to less than 16 percent for the 25-34 age category. Similarly, the American Trucking Association (ATA) states the average truck driver age in 2016 was 49 years old, significantly higher than the average of 42 years old for the overall U.S. workforce.

The report notes that drivers are sometimes walking off the job due to being paid less because of recent hard enforcement of the ELD Mandate, specifically as it applies to the HOS rule. However, later the report notes that due to the driver shortage, wages for drivers are going up.

“They are making more,” says Rodgers. “And I do think they’ll continue to make more. You’ll see inflation on driver pay. I don’t think it’ll allay the constraint, just due to the dearth of drivers. The penalties are quite stiff for non-compliance with HOS, especially since April. You can’t just skip between companies as some drivers were doing with companies being less strict with the rules.”

So what are the penalties drivers are now experiencing? “Your rig can be taken off the road,” says Rodgers. “And there’s a point-based system in which you lose points and it gets on your record.”

In terms of constraint applying pressure to oil prices, Rodgers says the issue is real. “I’m hearing anecdotally–with people I speak with at conferences and in the industry–this is one of the most pressing issues. We’ve heard of even larger companies sending people to CDL school and pay for their license.”

The general expectation is the resulting higher wage costs from truck driver shortages will ultimately be passed on to oil producers, partially offsetting recent improvements in well efficiencies and effectively raising their marginal cost of production. This in turn should increase the oil price required for producers to bring additional barrels to market.

Also, according to the report, it should be noted that the recent trend among U.S. oil producers with their enhanced focus on capital returns and growing within their cash flows, cost pressures will likely be given even greater consideration when E&Ps draft their plans for future production.

This will constrain the growth of U.S. oil production. Driver shortages will constrain the growth of U.S. shale oil production, a major factor to the global supply-demand balance for crude oil.

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