Southpoint

June 15, 2015

Assessing the Impact of Oil Price Declines on Louisiana's Economy

It's no big secret that the energy sector is a huge contributor to Louisiana's economy. According to the Energy Information Administration, Louisiana is one of the nation's biggest energy producers and consumers, largely because of the industrial sector, which includes many refineries and petrochemical plants. In fact, with 19 operating crude oil refineries, Louisiana ranks second in the nation in both total and operating refinery capacity. Nearly 112,000 miles of pipelines transporting crude petroleum and natural gas run throughout the state and the Gulf of Mexico. Additionally, the Henry Hub natural gas distribution point in Erath, Louisiana, is the interconnecting point for nine interstate and four intrastate pipelines that provide access to major markets throughout the country.

A 2014 study by Louisiana State University economist Loren Scott cited that the oil and gas industry's total direct and indirect annual impact on the state economy is around $73.8 billion from taxes, royalties, fees, salaries and other money spent in Louisiana by the industry. Also, according to the U.S. Bureau of Economic Analysis (BEA), oil and gas extraction and petroleum and coal products manufacturing accounted for more than 12 percent of Louisiana's real gross domestic product in 2012.

Consequently, what happens in energy markets influences Louisiana's economic performance. So when oil prices tumbled in 2014, I wondered about the extent of the impact on the state's economy. A barrel of West Texas Intermediate crude oil fell from a peak of more than $105 in mid-2014 to less than $50 a barrel in early 2015. The price has since recovered a bit, to about $61 a barrel as of June 11, yet it remains a fair distance from last year's peak (see chart 1).

Earlier this year, the Atlanta Fed's Energy Advisory Council shared some insights about changes in business activity and investment in the region as a result of lower energy prices, which I recapped here. But what about the labor market? During the last several months, I've seen numerous announcements of worldwide oil and gas layoffs, which Houston consulting firm Graves & Co. tallied at more than 100,000 jobs. How many Louisiana energy sector workers will be caught up in those layoffs?

Unfortunately, the true impact is not very easy to extrapolate. It's not as simple as extracting employment data on oil and gas industries, since pieces of so many other industries (such as manufacturing and construction) support the energy sector. Plus, even more industries are influenced by the energy sector's growth or contraction, such as education, health care, tourism, and services industries—it's extremely difficult to determine the number of "spillover" jobs created or lost. Using an input-output table constructed by the BEA, the impact study cited above estimated that for every job created in the extraction, refining, and pipeline industries, 3.4 additional jobs are created in other industries in Louisiana. Holding all else constant, that multiplier should apply to jobs lost in Louisiana's economy.

Business contacts in the Atlanta Fed's Regional Economic Information Network (REIN) have cited instances of layoffs tied to falling energy prices over the last few months. Furthermore, various media outlets have reported recent layoffs in Louisiana's energy sector (for example, here, here, and here). However, REIN contacts also indicated that firms that generally compete with oil and gas companies for workers in a very tight labor market have scooped up recently laid off workers, likely masking the net impact and potentially clouding the multiplier calculation.

If the focus is on jobs lost in Louisiana's energy sector alone as a result of falling energy prices, at this time I'll concentrate on what's happened in the segment that encompasses the bulk of energy-related jobs: the goods-producing sector, which includes the mining and logging, construction, and manufacturing subsectors. When more detailed industry data through the first quarter of 2015 are published by the U.S. Bureau of Labor Statistics (BLS) later this year, I'll revisit the impact on specific energy-related industries.

In mid-2014, when the price of oil peaked and then began to fall, jobs in the goods-producing sector in Louisiana followed a very similar trajectory (see chart 2).

In July 2014, the goods-producing sector contributed about 4,000 new jobs on net in Louisiana. Then, as the price of oil began to fall, job creation followed suit, and in January 2015 the sector subtracted nearly 3,000 jobs. Judging from the data, as well as REIN anecdotes, it is clear that oil price declines from mid-2014 to early 2015 resulted in job losses in Louisiana's energy sector. Recent BLS data reflected just 800 net goods-producing jobs lost in the state in April. So is the environment improving, considering oil prices recovered a bit?

Reports from REIN contacts have been mixed. Some business leaders indicate that the volatility of lower energy prices has become better understood and integrated into flexible business plans, positioning firms to respond to the current environment. However, their response, in some cases, has involved and continues to involve layoffs, though these reports have tempered recently.

Time will tell what the ultimate impact of this period of precipitous oil price declines will be on Louisiana's economy and labor market. I'll revisit this topic after our next Energy Advisory Council meeting and the release later this year of detailed industry data from the BLS.

By Rebekah Durham, economic policy analysis specialist in the Regional Economic Information Network at the New Orleans Branch of the Atlanta Fed

• June 15, 2015 in
  • Employment
  • Energy
  • Louisiana
• Permalink
• Comments

April 2, 2015

Tracking Energy’s Trajectory

Last week, the Atlanta Fed's Energy Advisory Council convened to share industry experience during the last several months since gathering in November. I recapped some of the discussion elements following the November meeting here. At that time, the price of oil had declined by about 40 percent since its mid-June 2014 peak. From that time through last week, the pricing trend continued along a downward trajectory (though February saw a slight rise that tapered in March), with both Brent and West Texas Intermediate spot prices down by more than 50 percent from last year's peak (see the chart).

Also, when the council met in November, exploration and production (E&P) firms—marginal producers in particular—were the focus of concern as a result of falling energy prices and had begun to reevaluate business models and technologies and renegotiate cost structures with service providers. At that time, the council acknowledged that sustained or declining oil prices may lead to capital spending reductions. During last week's meeting, the general sentiment descended somewhat, and the discussion shifted from potential to definitive reductions in business activity, investment in particular.

Council members shared their opinion that energy investment had indeed slowed in the region, listing billions of dollars of project delays and cancellations of efforts not already underway, including more than just E&P firms. Oil-field service providers, industrial construction companies, and manufacturers of pipeline and other industrial equipment also felt the effects of low energy prices through reduced business activity. Furthermore, council participants reported that drilling permits for new oil wells declined in the region, which is a national trend that continues in the face of mounting production and supply of oil. (You can see updated drilling rig count information.) This reduced investment is important considering that nationally, energy is a big contributor to gross domestic product growth, as described in a recent Atlanta Fed macroblog post. In a nutshell, expectations for growth in 2015 declined among most advisory council members with direct ties to oil and gas production and/or support. However, they shared a general sense that the industry will see a pick-up after 2015 and that delayed projects will resume.

Conversely, two other sectors represented on the Energy Advisory Council continued to expand. Growth in utilities was strong, particularly the industrial segment, and the petrochemical industry experienced expansion in most business segments. In fact, we continue to receive reports about petrochemical investment along the Gulf Coast from council members and business leaders in the Atlanta Fed's Regional Economic Information Network. These industry exceptions were not a big surprise considering that both industries use oil and gas products as feedstock for operations; for them, lower energy prices are good for business.

So, where is the oil and gas industry headed, and will investment pick back up? Many factors are at play—for example, global economic growth and its relation to supply and demand, geopolitical events, oil storage levels, to name a few—and they are clouding my crystal ball. Nevertheless, on the whole, Energy Advisory Council members indicated that they will continue to approach 2015 cautiously and pay close attention to energy prices as a driver of decisions, and they expect that oil and gas investment and projects will accelerate beyond 2015.

By Rebekah Durham, economic policy analysis specialist in the Regional Economic Information Network at the New Orleans Branch of the Atlanta Fed

• April 2, 2015 in
  • Energy
  • Louisiana
  • Oil
• Permalink
• Comments

December 17, 2014

A Timely Talk with Energy Professionals

If you read or watch the news, you've undoubtedly noticed what's happening with the price of oil. But for those of you who may have missed these reports, here it is in a nutshell: the price of Brent crude oil, the international benchmark, has declined more than 40 percent since its peak of over $115 in mid-June (see the chart).

Many reports have discussed what the decline means to the energy industry and economy as a whole. In fact, the Atlanta Fed's very own macroblog published a post that examined the impact on energy investment and overall economic growth. We were also fortunate to be able to discuss this important and timely situation, along with other industry trends, with energy sector representatives last month during our Energy Advisory Council meeting held at the New Orleans Branch. So what did council members think about the declining price of oil? I gleaned a few key takeaways.

Industry effects
Council members reported that the recent drop in the price of oil had led exploration and production firms to reevaluate operational flexibility, cost-management strategies, and extraction technologies. These firms also initiated renegotiations with oilfield service companies for reductions to pricing structures, which a recent report suggested may drop as much as 20 percent.

In addition, council members conveyed their expectation that marginal oil producers may be negatively affected by falling oil prices, as their breakeven point is typically much higher than the larger producers. They shared that foreign oil-producing countries that acquire a majority of their revenues from the world's most traded commodity may also be adversely affected, which is a known concern among many key people inside the industry. The council also pointed out that if oil prices continued to decline or even hold at current levels, capital spending may be affected since firms would have fewer profits to reinvest into production and growth. Some reports indicate that this effect on spending is already beginning to occur. However, some members told us that they anticipate continued steady production in both deepwater and onshore drilling since many of these projects are large scale and long term and have high front-end costs (which in many cases have already been funded). Decisions about future projects may need to be reconsidered, however.

All in all, the Energy Advisory Council meeting was very timely, considering our attempts to understand what was happening globally with the price of oil and its impact on the economy. It will be interesting to learn how the energy industry will have adapted to current events when the council convenes again in March 2015.

By Rebekah Durham, economic policy analysis specialist in the Atlanta Fed's New Orleans Branch

• December 17, 2014 in
  • Economic Growth and Development
  • Economy
  • Energy
  • New Orleans
  • Oil
• Permalink
• Comments

April 23, 2014

Key Issues Fuel Discussion of Energy

The Atlanta Fed's Energy Advisory Council met on March 25 for its semiannual meeting to discuss current economic conditions in the energy industry. On the whole, council members were optimistic about the energy sector and expect growth in 2014 to be solid in most of the sector's areas. However, council members shared concerns about infrastructure and transportation constraints and labor trends.

The unusually severe winter weather—and its exposure of limitations in the U.S. natural gas distribution infrastructure—was also a key topic of discussion during the meeting. Demand for natural gas was high and regional supply was sufficient, yet transportation and distribution were severely limited, particularly to the Northeast. To meet the demand for utilities, many power providers resorted to using coal instead of natural gas.

Some council members spoke about the importance of the rail industry in the distribution of energy products; demand for rail fleet was high and expected to grow. Members expressed hope that increased use of rail transport would help resolve transportation issues, yet many energy representatives were concerned that the rail industry would not be able to build fleet fast enough to keep up with demand.

Council members also discussed ongoing shortages of skilled labor. A shortage of engineers has led businesses to consider offshoring engineering and conceptual work. Firms were also concerned that there would not be enough tradesmen to execute projects slated for implementation later this year and into 2015. The shortages have created backlogs and caused firms to offshore an increasing number of projects, particularly modular construction of plants, meaning that a company unable to find the skilled labor needed to construct a plant facility may instead have the plant constructed abroad in modules and shipped to the United States for assembly. The technology required to transport large parts and equipment has become readily available and has become more cost effective than it was a few years ago.

Overall, council members are optimistic about the present and future of the energy sector, even as they continue to encounter challenges that must be surmounted to allow the sector to continue to thrive.

By Rebekah Durham, economic policy analysis specialist in the New Orleans Branch of the Atlanta Fed

• April 23, 2014 in
  • Economy
  • Energy
  • Southeast
• Permalink
• Comments

June 15, 2015

Assessing the Impact of Oil Price Declines on Louisiana's Economy

It's no big secret that the energy sector is a huge contributor to Louisiana's economy. According to the Energy Information Administration, Louisiana is one of the nation's biggest energy producers and consumers, largely because of the industrial sector, which includes many refineries and petrochemical plants. In fact, with 19 operating crude oil refineries, Louisiana ranks second in the nation in both total and operating refinery capacity. Nearly 112,000 miles of pipelines transporting crude petroleum and natural gas run throughout the state and the Gulf of Mexico. Additionally, the Henry Hub natural gas distribution point in Erath, Louisiana, is the interconnecting point for nine interstate and four intrastate pipelines that provide access to major markets throughout the country.

A 2014 study by Louisiana State University economist Loren Scott cited that the oil and gas industry's total direct and indirect annual impact on the state economy is around $73.8 billion from taxes, royalties, fees, salaries and other money spent in Louisiana by the industry. Also, according to the U.S. Bureau of Economic Analysis (BEA), oil and gas extraction and petroleum and coal products manufacturing accounted for more than 12 percent of Louisiana's real gross domestic product in 2012.

Consequently, what happens in energy markets influences Louisiana's economic performance. So when oil prices tumbled in 2014, I wondered about the extent of the impact on the state's economy. A barrel of West Texas Intermediate crude oil fell from a peak of more than $105 in mid-2014 to less than $50 a barrel in early 2015. The price has since recovered a bit, to about $61 a barrel as of June 11, yet it remains a fair distance from last year's peak (see chart 1).

Earlier this year, the Atlanta Fed's Energy Advisory Council shared some insights about changes in business activity and investment in the region as a result of lower energy prices, which I recapped here. But what about the labor market? During the last several months, I've seen numerous announcements of worldwide oil and gas layoffs, which Houston consulting firm Graves & Co. tallied at more than 100,000 jobs. How many Louisiana energy sector workers will be caught up in those layoffs?

Unfortunately, the true impact is not very easy to extrapolate. It's not as simple as extracting employment data on oil and gas industries, since pieces of so many other industries (such as manufacturing and construction) support the energy sector. Plus, even more industries are influenced by the energy sector's growth or contraction, such as education, health care, tourism, and services industries—it's extremely difficult to determine the number of "spillover" jobs created or lost. Using an input-output table constructed by the BEA, the impact study cited above estimated that for every job created in the extraction, refining, and pipeline industries, 3.4 additional jobs are created in other industries in Louisiana. Holding all else constant, that multiplier should apply to jobs lost in Louisiana's economy.

Business contacts in the Atlanta Fed's Regional Economic Information Network (REIN) have cited instances of layoffs tied to falling energy prices over the last few months. Furthermore, various media outlets have reported recent layoffs in Louisiana's energy sector (for example, here, here, and here). However, REIN contacts also indicated that firms that generally compete with oil and gas companies for workers in a very tight labor market have scooped up recently laid off workers, likely masking the net impact and potentially clouding the multiplier calculation.

If the focus is on jobs lost in Louisiana's energy sector alone as a result of falling energy prices, at this time I'll concentrate on what's happened in the segment that encompasses the bulk of energy-related jobs: the goods-producing sector, which includes the mining and logging, construction, and manufacturing subsectors. When more detailed industry data through the first quarter of 2015 are published by the U.S. Bureau of Labor Statistics (BLS) later this year, I'll revisit the impact on specific energy-related industries.

In mid-2014, when the price of oil peaked and then began to fall, jobs in the goods-producing sector in Louisiana followed a very similar trajectory (see chart 2).

In July 2014, the goods-producing sector contributed about 4,000 new jobs on net in Louisiana. Then, as the price of oil began to fall, job creation followed suit, and in January 2015 the sector subtracted nearly 3,000 jobs. Judging from the data, as well as REIN anecdotes, it is clear that oil price declines from mid-2014 to early 2015 resulted in job losses in Louisiana's energy sector. Recent BLS data reflected just 800 net goods-producing jobs lost in the state in April. So is the environment improving, considering oil prices recovered a bit?

Reports from REIN contacts have been mixed. Some business leaders indicate that the volatility of lower energy prices has become better understood and integrated into flexible business plans, positioning firms to respond to the current environment. However, their response, in some cases, has involved and continues to involve layoffs, though these reports have tempered recently.

Time will tell what the ultimate impact of this period of precipitous oil price declines will be on Louisiana's economy and labor market. I'll revisit this topic after our next Energy Advisory Council meeting and the release later this year of detailed industry data from the BLS.

By Rebekah Durham, economic policy analysis specialist in the Regional Economic Information Network at the New Orleans Branch of the Atlanta Fed

• June 15, 2015 in
  • Employment
  • Energy
  • Louisiana
• Permalink
• Comments

April 2, 2015

Tracking Energy’s Trajectory

Last week, the Atlanta Fed's Energy Advisory Council convened to share industry experience during the last several months since gathering in November. I recapped some of the discussion elements following the November meeting here. At that time, the price of oil had declined by about 40 percent since its mid-June 2014 peak. From that time through last week, the pricing trend continued along a downward trajectory (though February saw a slight rise that tapered in March), with both Brent and West Texas Intermediate spot prices down by more than 50 percent from last year's peak (see the chart).

Also, when the council met in November, exploration and production (E&P) firms—marginal producers in particular—were the focus of concern as a result of falling energy prices and had begun to reevaluate business models and technologies and renegotiate cost structures with service providers. At that time, the council acknowledged that sustained or declining oil prices may lead to capital spending reductions. During last week's meeting, the general sentiment descended somewhat, and the discussion shifted from potential to definitive reductions in business activity, investment in particular.

Council members shared their opinion that energy investment had indeed slowed in the region, listing billions of dollars of project delays and cancellations of efforts not already underway, including more than just E&P firms. Oil-field service providers, industrial construction companies, and manufacturers of pipeline and other industrial equipment also felt the effects of low energy prices through reduced business activity. Furthermore, council participants reported that drilling permits for new oil wells declined in the region, which is a national trend that continues in the face of mounting production and supply of oil. (You can see updated drilling rig count information.) This reduced investment is important considering that nationally, energy is a big contributor to gross domestic product growth, as described in a recent Atlanta Fed macroblog post. In a nutshell, expectations for growth in 2015 declined among most advisory council members with direct ties to oil and gas production and/or support. However, they shared a general sense that the industry will see a pick-up after 2015 and that delayed projects will resume.

Conversely, two other sectors represented on the Energy Advisory Council continued to expand. Growth in utilities was strong, particularly the industrial segment, and the petrochemical industry experienced expansion in most business segments. In fact, we continue to receive reports about petrochemical investment along the Gulf Coast from council members and business leaders in the Atlanta Fed's Regional Economic Information Network. These industry exceptions were not a big surprise considering that both industries use oil and gas products as feedstock for operations; for them, lower energy prices are good for business.

So, where is the oil and gas industry headed, and will investment pick back up? Many factors are at play—for example, global economic growth and its relation to supply and demand, geopolitical events, oil storage levels, to name a few—and they are clouding my crystal ball. Nevertheless, on the whole, Energy Advisory Council members indicated that they will continue to approach 2015 cautiously and pay close attention to energy prices as a driver of decisions, and they expect that oil and gas investment and projects will accelerate beyond 2015.

By Rebekah Durham, economic policy analysis specialist in the Regional Economic Information Network at the New Orleans Branch of the Atlanta Fed

• April 2, 2015 in
  • Energy
  • Louisiana
  • Oil
• Permalink
• Comments

December 17, 2014

A Timely Talk with Energy Professionals

If you read or watch the news, you've undoubtedly noticed what's happening with the price of oil. But for those of you who may have missed these reports, here it is in a nutshell: the price of Brent crude oil, the international benchmark, has declined more than 40 percent since its peak of over $115 in mid-June (see the chart).

Many reports have discussed what the decline means to the energy industry and economy as a whole. In fact, the Atlanta Fed's very own macroblog published a post that examined the impact on energy investment and overall economic growth. We were also fortunate to be able to discuss this important and timely situation, along with other industry trends, with energy sector representatives last month during our Energy Advisory Council meeting held at the New Orleans Branch. So what did council members think about the declining price of oil? I gleaned a few key takeaways.

Industry effects
Council members reported that the recent drop in the price of oil had led exploration and production firms to reevaluate operational flexibility, cost-management strategies, and extraction technologies. These firms also initiated renegotiations with oilfield service companies for reductions to pricing structures, which a recent report suggested may drop as much as 20 percent.

In addition, council members conveyed their expectation that marginal oil producers may be negatively affected by falling oil prices, as their breakeven point is typically much higher than the larger producers. They shared that foreign oil-producing countries that acquire a majority of their revenues from the world's most traded commodity may also be adversely affected, which is a known concern among many key people inside the industry. The council also pointed out that if oil prices continued to decline or even hold at current levels, capital spending may be affected since firms would have fewer profits to reinvest into production and growth. Some reports indicate that this effect on spending is already beginning to occur. However, some members told us that they anticipate continued steady production in both deepwater and onshore drilling since many of these projects are large scale and long term and have high front-end costs (which in many cases have already been funded). Decisions about future projects may need to be reconsidered, however.

All in all, the Energy Advisory Council meeting was very timely, considering our attempts to understand what was happening globally with the price of oil and its impact on the economy. It will be interesting to learn how the energy industry will have adapted to current events when the council convenes again in March 2015.

By Rebekah Durham, economic policy analysis specialist in the Atlanta Fed's New Orleans Branch

• December 17, 2014 in
  • Economic Growth and Development
  • Economy
  • Energy
  • New Orleans
  • Oil
• Permalink
• Comments

April 23, 2014

Key Issues Fuel Discussion of Energy

The Atlanta Fed's Energy Advisory Council met on March 25 for its semiannual meeting to discuss current economic conditions in the energy industry. On the whole, council members were optimistic about the energy sector and expect growth in 2014 to be solid in most of the sector's areas. However, council members shared concerns about infrastructure and transportation constraints and labor trends.

The unusually severe winter weather—and its exposure of limitations in the U.S. natural gas distribution infrastructure—was also a key topic of discussion during the meeting. Demand for natural gas was high and regional supply was sufficient, yet transportation and distribution were severely limited, particularly to the Northeast. To meet the demand for utilities, many power providers resorted to using coal instead of natural gas.

Some council members spoke about the importance of the rail industry in the distribution of energy products; demand for rail fleet was high and expected to grow. Members expressed hope that increased use of rail transport would help resolve transportation issues, yet many energy representatives were concerned that the rail industry would not be able to build fleet fast enough to keep up with demand.

Council members also discussed ongoing shortages of skilled labor. A shortage of engineers has led businesses to consider offshoring engineering and conceptual work. Firms were also concerned that there would not be enough tradesmen to execute projects slated for implementation later this year and into 2015. The shortages have created backlogs and caused firms to offshore an increasing number of projects, particularly modular construction of plants, meaning that a company unable to find the skilled labor needed to construct a plant facility may instead have the plant constructed abroad in modules and shipped to the United States for assembly. The technology required to transport large parts and equipment has become readily available and has become more cost effective than it was a few years ago.

Overall, council members are optimistic about the present and future of the energy sector, even as they continue to encounter challenges that must be surmounted to allow the sector to continue to thrive.

By Rebekah Durham, economic policy analysis specialist in the New Orleans Branch of the Atlanta Fed

• April 23, 2014 in
  • Economy
  • Energy
  • Southeast
• Permalink
• Comments