My Energy Investment Thesis #5: The Great Generational Crew Change
From 2010 to 2019, everyone thought the Great Generational Crew Change would put more millennials in charge of making technology decisions — like these young people who managed to land a booster rocket on earth. In energy, however, millennials did NOT make the promotion and it appears to be a digital immigration vs. transformation. Lots of other things have changed (see the previous installments of my energy investment thesis: introduction, 1, 2, 3, and 4), but leadership changes have lagged behind impacting many of our investment strategies. Let's see why.
The Great Generational Crew Change
It's still baby boomers who have been making digital decisions. And baby boomers are not exiting the industry at high speeds as previously believed but rather staying beyond the traditional retirement age.
At the same time, millennials are jumping in with both feet. I can personally attest that some of the energy industry's brightest young talent is eager to work in new energy / clean. Even those that studied petroleum engineering desire to work on more sustainable forms of energy as they attempt to find their place.
Consider some of these facts:
Millennials are willing to take a pay cut to work in sustainable companies.For millennials, it's not all about money (and, considering their student loan debt, that's an impressive set of priorities). Instead, millennials are eager to work for companies that use sustainable initiatives and are making an impact on the world by using sustainable energy sources and products. Maybe this does count for showing how society is willing to pay more for clean. We have yet to see this translate for now.
Millennials are spearheading a critical industry transition. Millennials are more connected to technology than any previous generation. Technology is an important part of their world, and they understand the importance of utilizing that technology in the energy industry. This generation faces a critical responsibility: they must find greater sources of energy than ever before, but they must do it in a way that protects the environment and leaves as small a trace behind as possible. As a result, they're turning to increasingly complex forms of technology to accomplish those goals — all of which require research and development to help push them to their ultimate success.
What has changed:
The challenge is that instead of millennials selling to millennials, many of the technology winners in energy look differently than we originally believed. First, many of the technology winners are not millennials, but rather baby boomers taking advantage of the opportunity. Second, the buyers of the technologies are not millennials either. The buyers are still baby boomers (and a few Gen X'ers) who prefer phone calls over emails and still and will never be technology-dependent (except to save their careers). Baby boomers are known as digital immigrants. They did not grow up with facebook, iPhones, and didn't have a laptop until much later in life. This means that the investment strategy and an entrepreneur's sales strategy looks differently from 2010 to today.
A Closer Look at the Generational Crew Change
It was our belief, at the time, that generational turnover would drive faster adoption of low-cost digital innovation. The future decision-makers of the oil and gas companies were the digital-dependent millennials, who required technology in order to handle the tasks they would complete each day.
The oldest baby boomer turned 65 on January 1, 2011. At that point, baby boomers were expected to start retiring in droves. Every month, more than a quarter-million Americans would pass that crucial age line and be able to contemplate retirement — and many baby boomers planned to accomplish exactly that, retiring as soon as they were able so that they could enjoy more of their silver years. Every industry, including the oil and gas industry, planned to need to compensate for those critical market shifts. In the oil and gas industry, that meant promoting millennials faster, relying on data and digital efforts to replace baby boomers. This industry, like many others, has virtually sidelined the members of Generation X, which has fewer members invested in the oil and gas industry than other generations.
There were a number of considerations facing the oil and gas industry as baby boomers continued to age. The generational differences between millennials and baby boomers had never appeared more marked — and it had the potential to severely impact the industry as a whole.
- Prefer to use the phone, rather than email or text, to communicate
- Often turn to email if they must use digital communication
- Have a hierarchical organization structure
- Are not digital natives, so they have less trust over its value
- Have never known a world without Facebook
- Prefer to communicate through messaging apps than phonecalls
- Do not use email to communicate if they have another option
- Work for purpose
- Prefer a flat organization to a hierarchical one
- Are digital natives and comfortable with technology in all of its forms
This simple shift caused many industries to look at their organization structures differently — and, again, the oil and gas industry was no exception. With baby boomers set to retire sooner rather than later, it seemed time to make substantial changes in the industry to prevent it from facing a massive crisis with the arrival of those retirement years.
In early 2016, I saw this video.
It convinced me that companies that build purpose are, simply put, going to win (the data supports this but I am too lazy to add a reference). Look at the age of the team in the video as they accomplish the so-called impossible. I've never seen this in the energy industry. But as companies within the energy industry build purpose and start to produce the kinds of goals that interest millennials, catch their attention, and drive their natural determination to kick into high gear, it has the potential to see the same kinds of "impossible" advances (easy...these companies must still produce cleaner energy at LOWER costs than current solutions...read this if you think otherwise.)
The industry is still struggling to hire, attract, and recruit the future of the world to be part of fixing the traditional challenges of the industry. There is a skilled labor shortage in many industries. The energy industry, for example, could need as many as 105,000 employees in the smart grid and electric utility industry by 2030. Unfortunately, only around 25,000 individuals are predicted to move into those positions, which means a substantial labor shortage across the industry. The Department of Energy report lists several reasons for this disparity:
- Lack of appropriate training
- Lack of candidate experience
- Failure to develop the right technical skills (in spite of a digitally native generation that is comfortable with most basic forms of technology)
But three more things are throwing a wrench in the expected transition from baby boomers to millennials:
1. Graduation Rates
In addition to taking a look at the way millennials are rising to the challenge and stepping into the oil and gas industry, it's important to take a look at current graduation rates — that is, the future of the oil and gas industry.
In 2015, students who graduated with degrees in petroleum engineering found themselves struggling to find jobs. What had once been an incredibly profitable industry looked set to move straight downhill as the "lower for longer" oil price philosophy has permeated, leaving graduates scrambling to decide what to do next. Up until 2015, the number of students graduating with engineering degrees in general increased substantially, with 7.5% more graduates between 2014 and 2015. This is a number that had continued to increase since 2007. Degrees in petroleum engineering increased by more than 25% between 2014 and 2015.
This growth of graduates causes several effects within the industry itself:
Plenty of new talent and new perspective moving into the industry. Millennials choose to approach many job challenges differently than the baby boomer generation. They use new technology more easily and are willing to adapt to meet their overall goals.
Not only that, as more graduates flood the market, many employers find that they have no trouble moving a new candidate into an open position. These new candidates are eager to learn more, explore the challenges presented by the field, and find new ways to accomplish industry goals. Some employers are eager to make this generational shift, choosing to focus their efforts on employees who can be trained and will stick with the company long-term. Others may prefer to keep their baby boomer employees, who already have a strong grasp of current technology, for as long as possible. The talent, however, is there — and the industry can continue to take advantage of it.
A shortage of jobs in some areas. Graduates are flooding the field, and baby boomers are failing to retire. There are more candidates for petroleum engineering positions, and, at the same time, positions are not coming open as often. As a result, many businesses have the ability to choose the best possible candidates for their open positions, rather than feeling as though they have to "settle."
While graduates with petroleum engineering degrees often earn six-figure salaries immediately after graduation, making it one of the highest-paying jobs for recent graduates, not every graduate in the field will be able to secure employment immediately. As demand decreases, many candidates may find themselves pursuing an education in a different field, rather than risking the overabundance of talent.
2. Average Employee Age
In order to understand what innovation will continue to look like in the oil and gas industry, it's equally important to consider the average age of the workforce. In 2016, the average age of a petroleum engineer was 43.3. This number declines only slowly, with an average of about 0.317% per year. That's a strong sign that new energy, while it is entering the workforce, might not yet be up to the challenge of taking over for retirement-age baby boomers. Currently, more than 50% of the workers in the oil and gas industry have reached the age where they are eligible for retirement.
By 2022, older workers are anticipated to make up more than 26% of the workforce in the oil and gas industry. By comparison, only 21% of the workforce was made up of aging workers in 2012, and around 14% of the workforce was made up of aging workers in 2002. Across the United States, the average retirement age hovers around 63. Thanks to 2008's crash, many workers in the oil and gas industry who were in their mid-fifties and planning for retirement at the time of the crash chose to put off retirement. Now, those same workers are already in their mid-sixties.
Some of them have plans to stay with their companies for a little longer. Others are taking steps to move toward retirement. Employees in the oil and gas industry still expect to be able to retire before 65, especially if they have put the plans in place that will allow them to retire comfortably. However, right now, baby boomers are still making many of the purchasing decisions for the industry.
The Digital Immigration
What does that mean for startups and investors? It means that when you create new technology, you may face baby boomers' reluctance to embrace that new technology and the change that goes along with it. You will need to be ready to help customers implement your solution (i.e. you need a strong consulting/implementation capability).
The Great Generational Crew Change did not take place as abruptly as we all thought. But the oil and gas industry must still plan and adapt the changes as baby boomers retire and millennials take over.
The good news?
Thanks to high graduation rates in petroleum engineering, there are plenty of millennials (and graduates from the up-and-coming Generation Z) eager to take over many of those positions. The bad? Recent graduates may not possess the same skills as established professionals. If baby boomers retire in a fast tidal wave, it may be difficult to keep up with the transfer of knowledge that will make maintaining those skills possible.
All too often, investors in the energy industry forget about Generation X entirely. But Gen X continues to have a significant influence on many industries. They are the quiet financial backers who are often already established in their positions, but who are still working to learn and grow. Gen X is often viewed as the transition generation: while it espouses many of the values of the baby boomer generation, it has also embraced many of the ideals that millennials have lived with most of their lives.
As an investor, here's the rest of the good news: the industry needs technology now more than ever. There's an opening for entrepreneurs and new opportunities — whether baby boomers start retiring all at once or the transition happens slowly (the great digital immigration), there's room for anything that streamlines the industry.
If you're in the industry, you've seen all this turmoil for yourself. But there's no place that encapsulates the battle between old and new like Houston. I'll talk about this Texas hub of cleantech next time.