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The Atlanta Fed's SouthPoint offers commentary and observations on various aspects of the region's economy.

The blog's authors include staff from the Atlanta Fed's Regional Economic Information Network and Public Affairs Department.

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12/17/2014


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).

Brent_spot_price

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.

Photo of Rebekah DurhamBy 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

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Industrial Info Resources reports 2014 construction and maintenance spending on U.S. pipelines declined 10% while downstream chemical process and manufacturing plants increased spending more then 80%. 40 new natural gas fired power plants being planned valued at $20 Billion.

Posted by: Donald Cotchen | 01/22/2015 at 10:19 AM

Great article! My thoughts are that with prices dropping in countries that might be prone to recession, will consumers not spend the money they are saving because they continue to wait for prices to drop. Encouraging deflation.

Also, airlines that have locked in fuel prices 90 days in advance, how will they react in the near future contracts?

Posted by: Ronald Bowlin | 12/20/2014 at 08:19 PM

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