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Oilfield economics 101: Overtime and undertime

Robert Hayes Published: April 2, 2014
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Some time ago, a brother at church asked how work was going for me and I replied in a rather depressed way, “very busy”.  This brother, (Mickey Welborn) responded with two quotes, the first one was, “I have come to learn in the oilfield that if you ever have enough people or enough equipment to do a job, you are losing money”.  Other  folks I mentioned this to agreed with him so I chose to do an economic evaluation of this approach.  In order to conduct an analysis of this model, some very clinical ascriptions will be made to cast this as a business model.  That quote may very well be a corollary to the second he gave me which stated, “what people really want is a quality product at a fair price”.

Now to a bit of economics math to make some sense of what he said.  Let me first go over the math which might cause someone to first disagree with that business model.  Starting with the assumption that having enough workers means that you don’t need any of your workers doing overtime as they are fully able to complete all tasks each week in 40 hours or less.   Start with a 40 hour week per employee with any hours above 40 being paid at time and a half.  For simplicity take a job that requires 120 man-hours.  If you have 2 workers who put in 60 hours in a week, they are giving the same hours that 3 workers would give at 40 hours each.  If you hired that third worker, you would pay them straight time for the full 40 hours.  Using only two workers putting in 60 hours with time and a half for the last 20 hours each will be the more expensive option by 17%.   This because that extra 40 hours being paid not at straight time but at time and a half increases the overall cost, nothing else being considered.  Looking at it this way, if you don’t have enough people to do a job, you would seem to be losing money.

On the other hand, if you regularly have all work being completed using straight time, then technically your workers do not need the full 40 hours and would be getting paid when there is no work to do.  In order to again be losing 17% in this scenario, the actual model would be to have 3 workers being paid for 40 hours per week each (120 man hours) but only having real work for 100 hours.  In other words, 100 hours of work that week being done by 3 full time employees could be considered a 17% loss in a sense.

Both cases assume hourly wages with the latter also requiring a minimum weekly guarantee of 40 hours per week.  Still, this is a relatively tight range, between 100 and 120 hours of work to do per week will cause you to have a relative loss of 17% depending on how many regular weekly workers you employ.

So using this rather clinical model, ascribing 3 workers for 100 hours of work per 40 hour work week or 2 workers for a 120 hour work week give the same percentage loss relative to strict hourly pay scales.  The advantage being using the 2 worker model, if the workload decreases at any time, you are substantially above where you would be if you had to pay 3 workers for 40 hours during that same week.  Mickey Welborn’s models works very well then when you have a variable work load such as that taking place for many oilfield workers.

The same conclusion can be made for the portion of the first quote implying that you never want to have enough equipment.  Not having enough equipment can be interpreted as never having equipment being idle and not being used to produce a service or otherwise generate revenue for its owner.  The real criteria which would apply here appears to be the second quote that, “what people really want is a quality product at a fair price”.  If the work can’t be done right and in a timely fashion, this may give a customer incentive to look elsewhere to take their business.

These numbers make it tempting to think the optimal workload would be to insure workers average around 5 to 10 hours of overtime each week.  This does not consider a number of other factors such as worker benefits, potential regulatory requirements, job scope and type etc., all of which could easily change these numbers.

Perhaps the real driving basis for this whole generalized model is just that what we all want from commercial products and services is a “quality product at a fair price”.  Technically, this really requires workers who are reliable, hard working and honest with employers who are not consumed with greed.  The arithmetic above requires an equivalence among workers and any repeat business requires customers finding your products and services preferable to alternatives.  Again, a large range of variables will exist between different jobs and services even in the same industry from one week to the next so application to real world scenarios can be expected to differ substantially on a case by case basis.