Higher education and oil: The cost of credit and crude – A strategic corollary for industry and higher education

Abstract

The market shock that accompanied COVID-19 has the potential to significantly transform higher education. At the same time, it presents an opportunity for higher education to learn from industry and adopt successful policies and practices. This paper provides lessons learned from the oil industry which may help higher education institutions to successfully navigate disruption and improve organizational outcomes. A four-phase business cycle model is presented as a strategic corollary for industry and higher education to support decision-making and provide a mechanism for discussion and policy development.

Keywords

Business cycle management Coronavirus COVID-19 disruption higher education oil

Introduction and importance

Harvard Business School Professor Clayton Christensen has predicted that half of the approximately 4,000 colleges and universities in the USA will be bankrupt in 10 years (Christensen, 2017; Hess, 2018; Muraski, 2015). Compounding the issues behind this prediction, challenges to US universities include rising tuition costs, student debt, governmental support, staff vs. faculty growth and infrastructure costs (Muraski, 2015). Henry C. Lucas, Jr, Chair of the Department of Decision, Operations, and Information Technologies at the University of Maryland’s Robert H. Smith School of Business, recommends that leaders move quickly to take advantage of changes rather than be disrupted (Muraski, 2015). US colleges will need to refocus their strategies to adapt as a result of budgetary pressures amplified by the Coronavirus (COVID-19) pandemic, and are encouraged to focus on the equity, inclusion and transparency of student outcomes such as return on investment (Gray, 2020).

The traditional business model of colleges and universities is broken, with many unable to generate sufficient revenue to cover costs (Horn, 2018). The average tuition discount rate in the USA hovers near 50%, with a discount rate of 35% or greater considered a danger zone for tuition-dependent institutions (Horn, 2018). The tuition discount rate, along with limited economies of scale, complex operations, online learning and population shifts creates further challenges for higher education institutions (HEIs) (Horn, 2018). As a result of changing regional demographics, HEIs are facing declining enrollments which will generate planning challenges for administrators who will be required to adapt to the changing economic and demographic landscape (Fain, 2017). Coupled with historical trends, universities currently face even greater prospects of closure as a result of the COVID-19 pandemic, and those which have enrollments under 1,000, have limited endowments, are located outside major urban areas and are tuition-dependent face the greatest risk and are seen as the most vulnerable (Hayes, 2020; Horn, 2018). In a Times Higher Education survey of 200 university leaders representing 53 countries, predictions of bankruptcy as a result of COVID-19 varied by country (Jump, 2020). In the USA and the UK, over 80% of respondents expected the pandemic to cause bankruptcies, while 43% in Japan and 17% in East Asia expected it to cause bankruptcies (Jump, 2020).

While the oil industry had been strong in past decades, similar to higher education, the oil industry business model is broken and critics are calling for the industry to rethink its business practices related to customer and client coordination, cost structure and technological progress (McDonald, 2016). While investments in the oil industry have risen 400% in the past decade, global production has increased by only 15% (McDonald, 2016). North American oil producers have renegotiated contracts to reduce costs, but the cost savings may not be sustainable in the long term (McDonald, 2016). With growing renewable energy markets, price volatility and inflationary costs, challenges are increasing in a competitive global market. As a result, the oil industry has continued to invest in digitizing oilfields through integrated data communications, real-time analytics and optimization to increase the value of oil and return on investment (Finance Monthly, 2019).

Factors impacting industry organizations are also impacting higher education – such as a global decline in public support and funding (Choudaha and Rest, 2018; Tilak, 2010). Like the oil industry organizations colleges and universities must react to the dynamic environment, in their context through innovative programs, curricula and coursework to increase the value of higher education and return on investment. International accrediting bodies, such as the Association to Advance Collegiate Schools of Business (AACSB), are designed to encourage change in business schools and hold them accountable for improving business practices and high-quality education over time (AACSB, 2016).

Higher education and industry lifecycle model development

A phased lifecycle model is developed for comparing the higher education industry to the oil industry and deriving higher education administrative policy and practice recommendations. Strategic business cycle management (BCM) is an underdeveloped area of research in management and organizational science (Bromiley et al., 2008). BCM focuses on a set of countercyclical behaviors that, when applied in a timely manner during business cycles, can improve organizational performance relative to competitors (Bromiley et al., 2008). Countercyclical hiring during a recessionary period may result in a lower-cost and higher-quality workforce. Countercyclical cost-cutting prior to a recessionary period may allow an organization to be more prepared for the resulting downturn that competitors are less prepared to endure. This compares with procyclical behaviors that directly follow business cycles, such as hiring during an expansion period and reducing the workforce during a recessionary period (Bromiley et al., 2008; Nekarda and Ramey, 2013). Four market phases are developed and discussed: 1) expansion, 2) shock, 3) consolidation, and 4) transformation. These are described in further detail below.

Market expansion

The first phase of the industry lifecycle model is market expansion, also known as the disruption setting stage. Common traits of this stage include rising costs, government funding, limited use of technology and a focus on service value. Market expansion exists between the growth and maturity stages of a typical business industry lifecycle. Sales and earnings are expanding from “cash cow” products or services, but the rate of expansion has slowed to equal that of the overall economy. Firms seek to compete on quality and value to differentiate themselves from low-cost offerings. The level of innovation is incremental, and a limited number of firms grow larger and gain more industry dominance (Inc., 2020).

During the market expansion phase, the cost of higher education in the USA has increased three times adjusted for inflation in the past 35 years, while value has remained constant (Hixon, 2014). As productivity has remained constant at US universities, costs have continued to outpace inflation by the rate of productivity increases in the economy – generally 1–2% per year (Hixon, 2014). To place this in an industry perspective, US higher education costs outpaced medical costs and consumer prices over a thirty-year period (Hixon, 2014). During periods of enrollment and recessionary shocks, there has not been a resetting of higher education prices similar to that of oil prices. Tuition cost resets have been implemented in limited numbers in an effort for the tuition list price to reflect the actual price more accurately without discounts. Institutions have sought price reductions to increase enrollment through perceptions of affordability and to reduce criticism of increasing costs; however, this policy may also reduce perceptions of quality and the amount of aid (Lapovsky, 2015). A study of eight lower-enrollment private universities in the USA with tuition cost and fee resets generally showed improved enrollment and net tuition revenue during the year of the reset, with more variance on longer-term results potentially as a result of the tuition cost reset being only one part of a wider set of organizational changes (Lapovsky, 2015).

Crude oil prices are a measurement of various oil types, with some examples of oil prices including West Texas Intermediate and Illinois Crude, used primarily in the USA; Brent Blend, used in Europe and Africa; and the Organization of Petroleum Exporting Countries (OPEC), which uses a basket price from Algeria, Indonesia, Nigeria, Saudi Arabia, Dubai, Venezuela and Mexico. Crude oil prices have a cost impact on many downstream products and services, including transportation, industrial manufacturing, power generation and food. Crude oil prices are also impacted by supply and demand, so, for example, there are increased prices during summer months with increased levels of transportation and temperature. Supply disruptions or projected economic growth may cause changes in demand which also affect the overall prices (Amadeo, 2018).

Oil prices affect the economy in many ways, including through transportation costs, the price of goods associated with oil-based products and investments in energy-intensive sectors of the economy. In the USA, five of the last seven recessions were preceded by significant increases in the price of oil, caused in part by events that included wars, political conflicts, supply changes or external factors. Oil prices increase during strong economic times due to output growth and decrease when the economy weakens and demand slows (Sill, 2007). By comparison, a review of higher education enrollment during previous US recessions has shown limited overall enrollment impacts; however, linkages were found within gender, ethnicity and enrollment during prior recessions (Wright et al., 2013).

Figure 1 shows the oil prices per barrel vs. tuition prices per credit or, to simplify, the cost of credit and crude. The tuition prices per credit are sourced from the US Department of Education adjusted for 2019 dollars, using an average of 120 credits for undergraduate degree completion (International Student, 2020; Marcus, 2018; US Department of Education, 2019a). US tuition prices per year have seen a steady adjusted price increase over time with low volatility. In comparison, the oil prices are dollars per barrel adjusted for inflation to January 2020 using Illinois Crude Oil, and oil prices may vary based on grade, type or location. Historically, inflation-adjusted oil prices reached a low in 1998 and by 2008 they had reached an all-time high, with high volatility throughout various peak periods in 1979, 1990 and 2008 (InflationData, 2020). Over time, inflation-adjusted prices have increased on average for oil, explained in part by increasing extraction, exploration and technology costs (InflationData, 2020).

Figure 1.

The cost of credit and crude: a historical unit comparison of a credit of tuition with a barrel of oil. Source: Tuition data from US Department of Education (2019a); oil data from InflationData (2020).

Market Shock (vs. Shocks)

Following market expansion, the second phase of the industry lifecycle model is a market shock. Common traits of this phase include bankruptcies, government intervention and market shifts as a result of political, economic, social, technical, environmental or legal factors. In 2020 COVID-19 has generated a market shock across nearly all industries. The World Health Organization (WHO) declared COVID-19 a global pandemic, which has spread with high velocity reaching 199 countries and territories around the world (Gupta, 2020). At various points, 40% of the world population has been under lockdown to reduce virus transmission (Gupta, 2020). This lockdown has led to mass disruptions and has resulted in the closure of businesses, schools and other activities (Gupta, 2020).

The oil industry has experienced several shocks over the last several decades as a result of market factors. As recently as 2018, a hedge fund manager was calling for $300 a barrel oil due to limited investments in new projects by the oil industry and a predicted supply shock (Blas, 2018). However, by early 2020 the US price of oil had instead collapsed to less than $20 a barrel (Paraskova, 2020). Oil prices were highly volatile in 2020 as a result of the COVID-19 crisis, surpassing volatility in cryptocurrencies such as Bitcoin (Kimani, 2020). In 2020, for the first time in history, US oil prices briefly turned negative due to a massive demand shock (BBC News, 2020).

By comparison, the higher education industry has experienced shocks primarily during recessionary periods. However, the COVID-19 crisis, beginning during the 2019–2020 academic year has the potential to change the higher education industry more substantially than any prior recessions, approaching what some see as an impact closer to that of the Great Depression, with estimates of revenue losses between 25 and 50 percent in 2021 (Friga, 2020). UK universities are projected to face a critical £2.6 billion funding gap as a result of international, European Union and domestic student enrollment (McKie, 2020). According to a survey of American Colleges and Universities, 72% of colleges plan to lay off employees, with 55% projected to make across-the-board budget cuts, and 40% to reduce research and development funding (Gray, 2020). In general, private institutions have more financial pressures than public colleges. In Forbes’s financial health rankings of private non-profit institutions in the USA, nearly 20% (n = 177) received the lowest financial grade of D (Cordite and Schifrin, 2020). The Forbes report found that the overall financial health of colleges had continued to deteriorate, with many at risk of closing or merging (Cordite and Schifrin, 2020).

A contributing factor to the impact of the market shock is an outdated business model of higher education, which includes high fixed facility costs, locations away from employment centers, common non-differentiated curricula across institutions, on-site live lectures, the static allocation of resources regardless of degree demand changes over time, a focus on degree-granting instead of individualized learning outcomes and skills, and limited professional development and business skills for employability (Hixon, 2014; Smith, 2017). As a recent example of government intervention in the higher education industry, and as a result of increased skepticism about the value of college education, the USA has sought to merge the Departments of Education and Labor to align education more closely with job preparation (Berman, 2018). In Europe, prior reforms such as the Bologna Process have sought to standardize degree development to address issues of graduate employability and mobility between countries (Pereira et al., 2020). The organization Universities UK has called on the government to support educational institutions through financial support and student enrollment caps during the COVID-19 crisis (McKie, 2020).

US central government and state support for higher education is expected to decrease as economic factors lower tax revenue, and with expected increases in health and social spending. During the great recession of 2007–2009, US state support for public institutions decreased by 4.5%, and endowment returns decreased by 23% (Friga, 2020). As another support area for higher education, philanthropy is also expected to decrease, as it did in 2008 when giving to US institutions dropped 11.7% (Friga, 2020). In the earlier recession, to make up this shortfall many universities increased tuition; however, this is not seen as a feasible solution in the current crisis. In prior recessions universities also relied on staffing changes, such as administrative staffing layoffs, changes in part-time faculty and reduced faculty hires (Friga, 2020). The University of Arizona, with a projected $250 million revenue loss, has announced furloughs and pay cuts for all employees until mid-2021 (Kelderman, 2020). The delivery of education will also continue to shift online, accelerated by the pandemic. Colleges may also consider closing, merging or sharing resources to remain intact (Friga, 2020).

Oil shocks have been found to have negative impacts on the USA in terms of growth (Sill, 2007). Similarly, higher education is a critical component for the socio-economic advancement of individuals and drivers of economic growth, which require highly skilled workforces to meet global competitive demands (US Department of the Treasury, 2012). Contrasting industry and higher education, in industry data transparency on profit and share price is commonplace to create financial alignment during periods of supply and demand, while in higher education data silos and limited alignment across university, college and departmental budgets create difficulty in controlling the flow of funds and changes in consumption (Deneen and Dretler, 2012).

Market consolidation

The third phase of the industry lifecycle model is market consolidation. Common traits of this phase include investments in technology and the rise of a limited number of larger industry organizations. Inevitably industries decline, often due to the pace of innovation, resulting in decreasing sales cycles. Mergers and consolidations are common in this declining stage as organizations try to grow through acquisition, competing in smaller markets (Inc., 2020). As an example of a merger in the oil industry due to prior market challenges, the world’s second and third largest oil service organizations, Halliburton and Baker Hughes, attempted to merge in a $28 billion deal, although this was later called off due to US and European antitrust regulator concerns (Stone, 2016).

Prior research has shown that industries move from fragmentation to consolidation as they mature and follow a predictable lifecycle, which organizations can use to plot their path within the cycle (Deans et al., 2002). An organization’s success depends on its ability to follow the consolidation curve, with speed being of the utmost importance, in particular during the mid-point stages. Due to the increased acquisitions in this stage and the expansion of global reach, organizations must develop and preserve their core culture, drive profitability, focus on top employee retention and build a scalable technology platform (Deans et al., 2002).

Since the 2007–2009 recession, tuition at public colleges and universities in the USA has risen 28%, with total US student debt exceeding $1.3 trillion, driven in part by the increase in costs, including professional staffing (Berman, 2017). Between 1988 and 2012, full-time professional staff per 100 full-time students nearly tripled (Berman, 2017). To reduce non-instructional expenses, universities and colleges may turn to centralizing and merging similar functions. This consolidation was already occurring before the current market shock, albeit in more limited instances. In 2017, Purdue acquired Kaplan University, which combined a non-profit public university with for-profit online education. Similar to other for-profit online education providers, Kaplan faced declining enrollments, increasing online competition and legal actions (Fain and Seltzer, 2017).

For higher education opportunities during the consolidation phase, first-tier universities have an opportunity to move to a global brand, improving revenue through content creation and profit through efficiencies. Risks include up-front costs to move online and increasing online competition. Regional universities have an opportunity to include materials from star faculty at other institutions and can focus on niche areas of expertise to gain differentiation. Risks include widespread competition. Higher education institutions in the regional category are likely to face the highest probability of closure. Start-up universities have the opportunity to start from scratch without the expensive overheads and fixed costs of traditional competitors. Risks include brand development and the recruitment of faculty and students. Students have the opportunity to enroll in a wide variety of flexible course options, to realize reduced tuition costs and to be located anywhere relative to campus. Risks include limited learning outcomes achievement and course quality, in-person contact, and networking. Professors have the opportunity to incorporate content from outside experts and develop flipped classroom pedagogy to increase student engagement. Risks include not adapting to new technology and being regulated to a course proctor role using outside materials (Muraski, 2015).

Market transformation

The final phase of the industry lifecycle model is market transformation. Common traits of this phase include the development of new business models, technological innovations and the rise of start-up organizations capitalizing on fast-moving industry changes. The COVID-19 crisis may be viewed as an opportunity for colleges and universities to make significant economic and academic transformations to their business models to match new realities (Friga, 2020). The global consumerization of education has begun to transform higher education, with colleges and universities operating under the market forces of competition, branding, efficiency and customer satisfaction (Bounce et al., 2016; Jabbar et al., 2018). In the UK, the government has recognized students as customers and their influence on higher education through items such as the National Student Survey (NSS). Likewise, students have recognized their consumer identity, demanding more from higher education than previously, such as career-focused programs (Bounce et al., 2016). However following the consumerization approach in higher education may fail to meet the basic market model premise of consumer satisfaction (Jabbar et al., 2018). Institutions instill both explicit and tacit knowledge that may become valuable to future employers and career paths only well after program completion. The increased focus on the consumer model increases the time spent on student support services, taking away from teaching and research, thereby impacting student learning outcomes and academic quality (Jabbar et al., 2018). There is also evidence that students disagree with the consumer approach and instead seek a transformative experience and wish to be active participants in knowledge generation processes (Ashwin et al., 2016).

The shift to the consumer model in the UK has been traced in part to the introduction of tuition fees, and has led to tensions between leadership and educators, with a required balance between academic integrity and financial stability (Jabbar et al., 2018). Higher education consumer financing models also continue to evolve. Purdue University has developed a program known as the Back a Boiler Income Share Agreement (ISA), which is an alternative to traditional grants and loans. The ISA provides students with education funding in exchange for a percentage of their future income, typically 1–5 percent of income up to 10 years based on the education funding amount (Purdue University, 2020). In a procyclical pricing model, pricing should increase faster and reach a peak during times of economic expansion and fall to reach a trough during economic recessions (Nekarda and Ramey, 2013). However, commonly across higher education costs are reduced and prices are raised during recessions to offset expenses, though this creates a compounding issue by negatively impacting services and decreasing demand and ultimately future revenue (Arnett, 2017). Higher education typically has less flexibility with countercyclical staffing than industry, and as a result resources should be better deployed during procyclical and countercyclical periods. Instead of hiring to meet current cycle demands, organizations are encouraged to hire to meet future demand and should hire during recessions to gain opportunities from a deeper and lower-wage labor pool. To be successful in the post-COVID era, colleges and universities should focus not on cost reductions which may hurt services and revenue, but rather on ongoing cost improvements, along with growth and the diversification of revenue which are often more challenging endeavors. Students may no longer purchase the whole college experience, instead choosing to earn certificates or credentials and complete specialized job curricula, leading to an unbundling of services (Arnett, 2017). Similar to the growth of industry service-oriented business models, Education-as-a-Service (EaaS) enables institutions to offer a selectable set of services, and students can follow focused areas of study unbundled from traditional degree programs. A service perspective allows the holistic perception of a student’s needs, in which students and higher education institutions co-create value across the educational ecosystem and society (GlobalEnglish, 2017; Lusch and Wu, 2012). The advantages of EaaS include personalization through customized credits, affordability, scalability and timeliness with real-time content updates (GlobalEnglish, 2017). Services are the intangible units of output an institution produces, such as educational credit hours produced, number of degrees awarded, instructional services, tutoring services, library services, career support services and food services. Typically, universities are focused on a singular output of degrees awarded rather than the set of services that lead to this output (Lusch and Wu, 2012).

The traditional higher education structure fragments knowledge into siloed academic disciplines; however, knowledge gained in higher education is carried throughout the lives of graduates, and requires learning beyond a discipline (Appel and Kim-Appel, 2018; McGregor and Volckmann, 2013). As workforce automation increases, employers seek those graduates with non-routine cognitive skills sets such as communication and innovation – skillsets traditionally emphasized in a liberal arts education as part of lifelong learning (Arnett, 2017; Ford et al., 2020). In transforming higher education to address 21st-century problems and meet societal demands, a transdisciplinary approach is called for, in which different disciplines integrate to develop innovations and solve complex problems across research, society and practice (Appel and Kim-Appel, 2018; McGregor and Volckmann, 2011).

As part of their business transformation, major oil industry companies have invested over $5 billion on renewables and other alternatives (Dickson and Yee, 2020). Going “greener” is a focus of oil companies because of changing stakeholder and regulatory demands (Dickson and Yee, 2020). For example, BP has announced an ambitious goal for their company emissions to be net-zero no later than 2050 (BP, 2020). Similarly, by 2030 education is envisaged to have moved mainly from a physical to a digital space even at large public institutions, driven by advances in technology such as artificial intelligence and virtual reality. The role of professors will then shift from producers of material to that of personalized learning coaches. However, with these changes, academic inequality is anticipated to increase at exponential rates, further separating elite institutions from all others (Kim, 2017). This increase in market stratification will be driven by endowment funding (Kim, 2017) and the role of technology in augmenting personalized education to enable experiential, engaged and empowered learning (Kim, 2017; Woodside, 2018).

The US recovery from the Great Recession of 2007–2009 accelerated the transition to a high-skilled digital economy, and nearly all jobs created required some college credentials, with predicted STEM, data science and analytics talent shortages into the next decade (Fitzgerald et al., 2017). Following this recovery growth, and even with projected industry talent gaps, demand in the higher education industry is now slowing. From 2000 to 2018, US undergraduate enrollment in degree-granting institutions increased by 26 percent, or from 13.2 million to 16.6 million students (US Department of Education, 2019b). By contrast, during 2018 to 2029 total US undergraduate enrollment is projected to grow by only 2 percent, or from 16.6 million to 17.0 million students (US Department of Education, 2019b). These projections are also being rethought as a result of COVID-19, with estimates of up to a 20 percent enrollment reduction in future semesters (Jaschik, 2020).

Conclusion and contribution

Disruption is arriving for higher education, and universities must adapt. The symptoms of industry disruption are those directly affecting higher education: costs are rising faster than inflation, service value is in decline, governmental funding is facing scrutiny, convenience is not a priority, technology usage is limited and shifting costs are decreasing. Despite decades of success and growth, discussion of a higher education bubble has continued to increase, driven by tuition costs which have increased significantly leading to unsustainable levels of student loan debt. The US federal government contributes $180 billion to higher education through tax benefits and financial aid (EdTrust, 2014). US state governments have cut higher education funding since 2008 to meet budgets. Many universities have centralized locations with limited hours and enlisted complex structures with information access difficulties. Universities contain high fixed costs and have slowly adopted technologies. In the past, universities have shifted costs to tuition increases and discounting, though price transparency and low-cost options are changing this capability (Deneen and Dretler, 2012).

With increasing costs, decreasing graduation rates and limited job opportunities, skeptics question the value of higher education (Goldman and Karam, 2020; Salovey, 2018). This convergence in higher education of high costs, low value and low convenience is creating disruption, with new companies offering low-cost, high-quality, and convenient services, taking advantage of technology during the COVID-19 crisis and market shock. To survive in the next era and utilize modern technologies in mainstream markets, universities will need to evolve to a hybrid model in which courses are licensed from online vendors while specialized in-person courses are also offered (Nisen, 2013). The growth of online education, which has been accelerated by the COVID-19 crisis, has changed higher education through improved value, flexibility, economics, costs, marketing, recruiting, learning outcomes and assessment (Deneen and Dretler, 2012; Hayes, 2020).

In the current context of the COVID-19 pandemic and the impacts on industry and higher education, this article manuscript offers a strategic management contribution of policy and practice recommendations for higher education administrations drawn from the oil industry. A lesson learned from other industries is that the early detection of disruption and the resulting adaptation can make a significant difference in successful organizational transformation. This article develops and discusses the strategic significance of business cycle management, and reviews each higher education phase using an oil industry example to improve decision-making and policy determination.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Joseph M Woodside

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