Labor Union Leverage & Oil Prices

As if oil weren't already horrifyingly expensive on the world markets, according to Bloomberg British Petroleum shut down a North Sea pipeline due to a strike at a Scottish refinery and, in separate news, gunmen attacked a Nigerian export terminal in an area already beset by strikes and terrorism. At the end of the day, the world was paying up to $119.93 for a barrel. Trading is up 79% over a year ago with 25% of that increase coming this month.

The Scottish strike is over pensions. The union is flexing its muscle to demonstrate that the company had better not unilaterally change pension benefits if they wish to keep negotiating with the union.

One thing we know from any negotiation is that leverage carries the day. It's all about leverage and in negotiations, we spend most of the time creating it. Sometimes you have a natural leverage point: the ability to pay wages vs. the ability to withhold labor. Sometimes you have to create leverage through the process. In this instance, it was set up as a 48-hour strike to demonstrate the workers' insistence on keeping their current pensions, a position strengthened by the workers' demonstration that this is something over which they were willing to withhold their labor AND the external demand for oil.

The result: leverage. Domestically, concerned commuters topped off their tanks amid gas shortages (if they could find an open station) and the British economy lost about $100 Million a day in lost production; more will be lost in production as it will take weeks to regain operational capacity. Internationally, coupled with the Nigerian attacks, the price of oil increased up over $119 and almost to $120 a barrel; almost $100 a barrel over the historic trading price for oil and $90 more than that of the last 40-odd years.

The Federal Reserve Open Market Committee policy meeting will be held on April 29, 2008 and oil traders will be looking at what the Fed will do: a further rate cut increases the likelihood of inflation in a stagnant economy, which weakens the dollar. Since oil is a dollar traded commodity, a weak dollar means increased oil prices, both for American companies buying it and because it provides less incentive internationally to increase supply or reduce consumption.

It now looks like The Unite union - the union behind the BP strike - called it at the right time for their purposes, for maximum impact domestically and internationally, creating a high degree of leverage. Chances are, there will be enough political pressure applied to the company that there will not be any implemented changes outside of those that are negotiated at the table, lest the company, and the economy, suffer the wrath of one labor union in the North of the UK.