05/06/2011
Insight from our Energy Advisory Council
The Federal Reserve Bank of Atlanta's Energy Advisory Council met at the New Orleans Branch a few weeks ago. The Energy Advisory Council is one of five such councils that are part of the Atlanta Fed's Regional Economic Information Network (REIN). Others include agriculture, trade and transportation, travel and tourism, and small/emerging business. The Energy Advisory Council consists of representatives from upstream and downstream production firms, utility companies, and manufacturing/fabrication companies.
Part of the meeting focused on the recent increase in oil prices, and council members discussed the causes and sustainability of higher energy costs. The conclusion was that the price increases were largely the result of higher demand and the increased potential of supply issues, the latter being most affected by recent unrest in the Middle East. Longer-term, members agreed that Gulf of Mexico energy production may not reach its potential. They noted that although 10 offshore drilling permits have been approved since the expiration of the moratorium on deepwater drilling in the Gulf of Mexico, only one was for new exploration. The other permits were issued to resume operations that had been shut down during the moratorium.
Another focus of the meeting was the crisis at the nuclear plant in Japan and the possible repercussions this event may have for the U. S. nuclear power industry. Currently, council members noted, the new nuclear facilities being approved and built have an advanced design, which does not require electricity to cool an overheating reactor, but uses gravity instead. The advanced designs will have other redundant backups as well. In addition, the oversight of existing nuclear plant operations will likely become even more stringent. With the government's current push for clean energy, members agreed that a slowdown in permitting new facilities is not likely.
More generally, council members discussed rising commodity costs being felt throughout the industry, especially with regard to steel (see the chart). They agreed that higher raw materials costs will eventually be passed through to oil and gasoline prices.
Also among the notes from the meeting:
• Activity in the utility sector is up as measured by electricity sales, with the industrial sector showing positive activity, but weakness persists in the residential and commercial markets.
• The introduction of horizontal drilling and liquefaction has changed the natural gas industry, both from the supply and demand side. Supply has increased as a result of the development horizontal fracturing, and demand has increased in part because of the high cost of petroleum.
Input from our Energy Advisory Council and other advisory councils helps us gain insight into economic developments in key industries and sectors in the region's economy. Since developments in these important areas of economic activity influence the broader economy, this insight is a key part of our overall assessment of economic activity in the nation as a whole.
By Kate Glover, Regional Economic Information Network analyst at the New Orleans Branch of the Atlanta Fed
May 6, 2011 in Commodity Prices, Energy | Permalink
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12/02/2010
Thoughts on Georgia's economic outlook and energy demands
On December 1, I participated in the program on "Promoting Sustainable Energy Resources," which was organized under the aegis of the Consulate General of France for the Southeastern USA and an array of French and American partner institutions and organizations. I'd like to outline my comments on that issue and related economic matters:
The national and state economies are recovering, but slowly.
Recent data and reports from business contacts indicated that economic activity rose modestly in October through mid-November.
Nationally, estimates indicate that real gross domestic product (GDP) grew 2.5 percent in the third quarter, similar to the modest growth rate posted in the second quarter.
The consensus real GDP forecast of economists is for positive but slow growth through 2011.
In Georgia, the recession was steeper and the recovery to date has been more muted than what we have seen in other areas of the nation. Nonetheless, the narrative of a slow, steady recovery holds for our state as well.
According to the U.S. Department of Energy, Georgia ranks ninth among all states in terms of total energy consumption. As the state's economy recovers, energy demand is expected to increase.
In manufacturing, recent data showed an increase in industrial activity in October, although the pace of growth appeared to decelerate in Georgia.
A notable share of Georgia's industrial output is tied to the construction sector, which we'll talk about in a minute. Because of the deep downturn in development, our manufacturing recovery may be a bit more tepid than what we're seeing at the national level.
Kennesaw State University's Econometric Center publishes a purchasing managers index (PMI) for Georgia. It reflects manufacturing activity at the state level. The survey asks plant managers about current production and orders, among other things, that feed into an overall index. Anytime that reading is above 50, it represents an expansion in manufacturing activity, and when it's below 50, it represents a contraction.
After spending nearly two years below 50, Georgia's PMI entered expansion territory early this year—rising steadily before decelerating in August, September, and October to a reading just above 50. Manufacturing is expected to continue to expand modestly going forward. As the state's industrial activity improves, its energy demands likely will rise.
I noted a moment ago that the state's construction sector is largely dormant. Census data show that after averaging roughly 8,000 new housing units through 2005, permits for new residential construction declined to below 1,000 in 2010. It's unlikely that this number will be picking up soon because of the large inventory of unsold homes on the market and the difficulties that remain in obtaining housing finance.
Energy demand for construction will therefore likely not be increasing at the pace seen earlier in the decade.
Transportation is another area of the economy that requires a lot of energy. Personal transportation is likely off where it was a few years ago because of the state's high unemployment rate; fewer people are driving to work.
That said, as personal spending increases as the economy recovers, the shipment of goods around the state will likely rebound. Georgia is a national logistics hub with the port of Savannah and transportation hubs like Atlanta. The state's energy consumption from freight transportation will therefore likely rise faster as the economy rebounds.
In short, Georgia's energy demands look like they are likely to rise in the short term as the economy recovers, and in the long term as the state returns to more normal growth patterns. Georgia has traditionally outpaced the national average in terms of the pace of economic growth, and there's every reason to believe that this pace will return once the remaining economic imbalances are worked out.
Providing the energy for this accelerated pace of economic activity is a central part of the story. During the recession, a number of developments have occurred that allow me to be optimistic when it comes to employing our energy resources more efficiently in the future.
First, many businesses—large and small, industrial and service-oriented—have undertaken serious programs to increase their energy efficiency. Doing more with less was a theme we heard over and over again from our business contacts in Georgia. This effort includes reducing their energy bills through investment in cost-saving equipment and installation of energy-reducing policies. We have initiated several energy-savings programs at the Atlanta Fed just in the last few years.
Doing more with less may also be reflected in the kind of homes that are built in Georgia, once we start building them again. Smaller, more energy-efficient homes may be the norm, and this type of home will help us contain energy demand from the residential sector.
For many car buyers in the last few years, fuel efficiency has been a major factor in the decision about what model to acquire. Fuel efficiency in cars and trucks is improving, and as long as consumers demand better and better results, manufacturers will have no choice but to make them.
Doing more with less, energy savings as a means to achieve greater cost savings (both in our businesses and in our homes), and increased fuel efficiency are ideas that have accelerated during the recession. These improvements will allow us to meet future energy demand, but they do not truly get to the question of sustainability.
I'd like to quote from an energy study done at the Atlanta Fed published in 2009 by my colleague Laurel Graefe. She writes:
"The supply of energy as we have known it is in the process of transition. Today's 'easy' conventional oil that the world relies upon as a primary energy source is being depleted, and, regardless of the exact timing of peak oil production—be it this year or fifty years down the road—the world faces the challenge of adapting to a new model of energy supply.
"The underlying issue in the debate regarding energy resource depletion is the fear that the transition from conventional oil to substitutes will be expensive and chaotic, leaving insufficient time for supply substitution and adaptation."
Finding substitutes for our current stock of energy resources is a question for today, not tomorrow. We are taking small steps to meet future demands more efficiently and with less pollution. That progress is all good. But we need to take bigger steps to really address the question of sustainability. More and more people will come to Georgia, and their demand for energy resources will continue to increase. Meeting that demand in a framework of sustainability is the issue of the 21st century.
By Michael Chriszt, an assistant vice president in the Atlanta Fed's research department
December 2, 2010 in Construction, Employment, Energy, Housing, Manufacturing, Transportation | Permalink
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10/07/2010
Bioenergy and Georgia
Yesterday I saw a great presentation by Jill Stuckey, the director of Georgia's Center of Innovation for Energy. Its mission is to increase the production and use of renewable energy and alternative fuels in Georgia. The fact that state governments are supporting the application of green technologies is not surprising. In fact it would be more surprising if they were not. What I did find most interesting was just how well positioned Georgia is to become a major player in the biomass energy sector.
Jill noted that Georgia is second only to Oregon in forested land: nearly 25 million acres. (Alabama and Mississippi are also in the top five, highlighting the idea that the entire region is ripe for biofuel development.) In terms of privately owned forest land, Georgia ranks first in the nation. Largely because of this, she noted that Forbes ranked Georgia third in the United States for alternative energy potential.
Products that Georgia's Center of Innovation for Energy is supporting include wood pellets, which are burned to generate heat and electricity. There is currently quite a bit of interest in this product from Europeans as they strive to meet their renewable energy mandates. There have been 12 biomass-to-electricity projects announced in Georgia as well.
How sustainable can harvesting woodland for energy be over the long term? After all, nobody wants to lose their forests and it would not be very green to chop down all our trees. Jill pointed out that according to the Georgia Forestry Commission, the state's commercial timberlands grow 19 million tons more wood each year than is harvested, resulting in growth exceeding removals by 38 percent. So the current model does appear to be sustainable.
Another factor that positions Georgia as a potential leader in the biomass/biofuel sector is the partnerships being developed with universities to commercialize research. Any model for long-term development and sustainability needs a research component, and Georgia clearly gets that connection. Institutions such as Georgia Tech's Institute of Paper Science and Technology and the University of Georgia's Bioenergy Systems Research Initiative are contributing to the state's emerging leadership in this sector.
By Michael Chriszt, an assistant vice president in the Atlanta Fed's research department
October 7, 2010 in Energy, Forestry, Georgia | Permalink
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06/02/2010
A regional event, for now
In the short term, the Gulf oil spill has largely been a regional economic event. Gulf area aquaculture and tourism businesses have been affected, but for the spill to have national implications, the energy and transportation sectors would have to be interrupted. So far, energy production has not been disrupted and shipping facilities remain open and are operating normally.
Any interruption in oil production, imports or both would have a significant impact on supply. According to the U.S. Department of Energy, Louisiana produces 1.4 million barrels per day of crude oil (2010 average to date), accounting for 27 percent of all U.S. crude oil production. Each day, 6.1 million barrels of crude oil and petroleum products (2010 average to date) enter the country through the Gulf Coast, accounting for 48 percent of all U.S. crude and petroleum product imports.
An extension of the moratorium on new deepwater drilling has not affected prices. However, David Kotok of Cumberland Advisors pointed out in Part 6 of his "Oil Slickonomics" commentary that the longer-term implications of the oil spill hold important price influences.
"Our expectation is that the oil business is about to enter a period of intense scrutiny and regulation worldwide. It will confront higher cost structures and much more inspection and regulation. This will eventually be reflected in higher oil prices."
According to data from the Port of New Orleans, the Mississippi River remains open to maritime traffic, and no ship calls have been canceled because of the spill. Port statistics show that about 500 million tons of cargo passes through the Mississippi each year, and more than 6,000 ocean vessels annually move through New Orleans on the Mississippi River. Any disruption to these facilities would have an impact beyond the port as the flow of goods reaches well beyond Louisiana.
Of course, the longer the spill goes unabated, the greater the chances that the oil production and imports could be affected and port activity could be influenced. The opportunity for the oil slick to spread throughout the Gulf also increases daily, as do the chances that it may move out of the Gulf and up the East Coast. In terms of the geography affected by such events, the regional nature of the Gulf oil spill will become more national in proportion.
By Michael Chriszt, assistant vice president in the Atlanta Fed’s research department
June 2, 2010 in Alabama, Energy, Florida, Local Economic Analysis and Research Network (LEARN), Louisiana, Mississippi, Oil | Permalink
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05/26/2010
The Gulf oil spill and northwest Florida
Several universities in the region have shared their thoughts and ideas concerning the economic impact of the Gulf oil spill. As members of the Atlanta Fed's Local Economic Analysis and Research Network (LEARN), these experts provide valuable insight into local economic conditions. This week's SouthPoint highlights one such contributor, Dr. Rick Harper, director of the Haas Center for Business Research and Economic Development at the University of West Florida.
In addition to the direct negative economic impacts resulting from the spill on sectors such as tourism and commercial fishing, Dr. Harper notes in a recent report that
"It will also be seen in diminished asset values that reflect expected future lost profitability due to the damage to their income-producing potential. Above and beyond these market transactions, it will be seen in lost well-being of residents, visitors, and others who value our natural assets."
Measuring the direct impact on tourism is complicated by the fact that the Gulf Coast is largely a "drive-to" destination and that many vacationers do not plan their trips far in advance. As a result, Harper contends that
"[F]ears that the oil spill may reach our [northwest Florida] shores this spring or summer is clearly causing visitors to change their summer vacation plans. For potential visitors, alternative vacation destinations or activities instead of a Florida Gulf Coast beach vacation become much more attractive once the risk of encountering the ongoing oil spill is factored in."
Much of the focus on the spill's impact on the tourism sector has focused on 2010. But Dr. Harper points out that not only is the current season in jeopardy, but there are possible implications beyond this year.
"Under the best-case scenario, in which the spill is completely stopped and it never reaches our shores, this negative impact to the Florida visitor industry may be largely limited to the 2010 summer season. If the spill does reach our shores, affected areas are likely to suffer longer-lived damage to one of our most valuable income-generating assets—the Florida brand image of pristine beaches, beautiful marshes, and abundant fish and wildlife."
Harper's conclusion recognizes the fact that the economic impact of the oil spill on Florida cannot yet be calculated with precision.
"However, the effect will be substantial, even if the spill never reaches our shores, because of the important role that perceptions play in planning and decision-making for our customers. The effects will be seen first in our visitor industry, including all of the businesses that rely on visitor spending in the key summer season. Those effects will have collateral damage as they ripple through the economy. Changes in asset values will be more severe if the perceptions of risk and damage are more pronounced and non-market valuations of environmental amenities will also suffer. The fiscal impact to local and state government will be seen in reduced revenue and increased spending. These effects will only become larger should a hurricane or tropical storm exacerbate the potential for damage. The more quickly the oil flow can be completely stopped, and the spill contained, the less the damage will be."
By Michael Chriszt, assistant vice president in the Atlanta Fed's research department
May 26, 2010 in Energy, Florida, Local Economic Analysis and Research Network (LEARN), Oil | Permalink
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05/05/2010
Spillonomics
Estimating the economic impact of the Gulf oil spill is a largely speculative exercise at this point. The variables are significant—how much has been spilled and how much more is coming? Where will it come ashore? How long will it take to clean up? The list goes on.
What we do know is that the fishing, recreation, and tourism sectors in the Gulf are already feeling the effects. The extent of the impact depends on the duration of the spill—the longer it continues, the worse the impact. That's a pretty easy call.
Some of the projections are nightmarish. David Kotok of Cumberland Advisors paints a dire picture, writing that "Three scenarios lie ahead. They rank as bad, worse, and ugliest (the latter being catastrophic and unprecedented). There is no 'good' here."
Jonah Goldberg in USA Today suggests that we keep the oil spill in perspective. "But it's worth remembering that the damage from previous, and much larger, spills wasn't nearly so lasting as people had feared."
Nobody is downplaying the event and its impact on the environment, nor should we forget about the 11 people who lost their lives in the tragedy. What we will do going forward is keep up with current events and attempt to measure their potential impact based on confirmed information we gather. Here are some sources of information that we are tracking to keep up to date with the economic impact of the spill.
The U.S. Department of the Interior's Mineral Management Service along with other agencies has created a Web page dedicated to the Gulf of Mexico Oil Spill Response that features regular updates, maps, and fact sheets. You can also register to receive e-mail notification of updates. Here are some others we are tracking:
The White House has a regular blog on the spill as well as containment efforts.
The National Oceanic and Atmospheric Administration is providing coordinated scientific weather and biological response services to federal, state, and local organizations.
The Wall Street Journal is also providing regular updates and coverage.
By Michael Chriszt, assistant vice president in the Atlanta Fed's research department
May 5, 2010 in Energy, Louisiana, Oil | Permalink
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03/10/2010
Clean manufacturing benefits Tennessee
There is no disputing that Tennessee's economy has taken a substantial hit in the recent recession. The state's manufacturing sector is composed of more than 20% transportation-related manufacturing, which has been hit especially hard in the throws of this economic downtown. However, one bright spot leading the Volunteer State's manufacturing sector recovery is high-tech manufacturing-related to renewable energy.
In 2009, The Clean Energy Economy study by the Pew Charitable Trust reported Tennessee as one of the three leading states in the United States for clean technology job growth. Tennessee, Oregon, and Colorado were categorized as states with a "large number" of clean energy jobs as well as "fast growing" when looking at the average annual growth rate of these jobs. While the national annual average for clean energy jobs from 1998-2007 was 1.9%, Tennessee's annual average was ahead at 2.1%.
High-tech, clean energy manufacturing firms are popping up all over Tennessee.
In addition to the green job investments listed in the state's 2009 Annual Workforce Report (p. 63), Missouri-based Confluence Solar announced in late January 2010 selection of Clinton, Tenn., for a new $250 million manufacturing, warehousing, and distribution facility, which could add 250 new jobs to the area. Prior to 2009, Tennessee had already recruited solar firms such as Sharp Solar and Shoals Technologies, large players in the state's clean manufacturing sector.
1The University of Tennessee highlights the importance of electric car manufacturing to the state’s economic outlook in their 2010 Economic Report to the Governor.
What's attracting these green jobs to Tennessee?
In 2008, Governor Phil Bredesen created a Task Force on Energy Policy, which developed significant strategies to make the state a viable competitor for green collar jobs. According to the Tennessee Economic Partnership, in the last two years, Tennessee attracted more than 1,000 new jobs and more than $2 billion in capital investments. Tennessee also has a welcoming tax environment for new clean-energy manufacturers. In June 2009, Tennessee enacted the Tennessee Clean Energy Future Act of 2009 and expanded its sales and use tax credit for emerging industries to manufacturers of clean energy technologies.
Additionally, Tennessee is using about $31 million in stimulus funds to create the Tennessee Solar Institute at the University of Tennessee at Knoxville and at the Oak Ridge National Laboratory. The center will focus on increasing efficiency in clean energy manufacturing and should benefit solar firms in the area.
So, while employment levels remain low for the Sixth District and Tennessee overall, statewide initiatives and firms are making investments to ensure clean energy will provide a bright spot in the manufacturing and employment outlook for Tennessee.
A special thanks to the Tennessee Department of Economic Development for their contributions to this report.
By Mark Carter, an economic analyst in the Atlanta Fed's research department, and Amy Pitts, senior Regional Economic Information Network analyst at the Atlanta Fed's Nashville Branch
March 10, 2010 in Employment, Energy, Green, Manufacturing, Tennessee | Permalink
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