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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.

Postings are weekly.


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04/02/2015


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).

West-texas-intermediate

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.

April 2, 2015 in Energy, Louisiana, Oil | Permalink

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Exploration may be down, but doesn't that mean production has increased?And refineries must be booming in the LA area. As you mentioned, industries that use petroleum as feed stock or to produce intermediaries must be doing well. Is there any kind of balance effect for the industries that are doing better because of the drop in oil prices to compensate for the loss of revenues from exploration?
Enjoy your column Ms. Durham.

Posted by: Ronald Bowlin | 04/03/2015 at 11:50 AM

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

11/05/2013


Energy Industry Keeps on Track

The Atlanta Fed’s Energy Advisory Council met at the New Orleans Branch on October 21 for its semiannual meeting to discuss current economic issues in the energy industry. Members were largely optimistic when sharing their views about demand, productivity, and pricing, which correlates to the ongoing “energy boom” we have discussed previously in SouthPoint. That said, some council members expressed concern about longer-term labor trends and noted ongoing uncertainty surrounding fiscal and regulatory policy issues.

We’ve heard for quite some time about the increase in oil and natural gas production, particularly related to shale resource production, processing, and transportation. With regard to the latter, council members discussed the importance of rail industry investment, which has been substantial recently. Increased use of rail transport has helped resolve transportation bottleneck issues that arose with rising production from shale resources. In fact, the American Association of Railroads reported that the U.S. rail industry has seen an unprecedented surge in crude shipments from less than 9,500 carloads in 2008 to more than 234,000 carloads in 2012. The numbers continue to increase in 2013. There were 97,135 carloads in the first quarter, up 166 percent from the first quarter of 2012.

With regard to pricing, council members generally agreed that natural gas prices will eventually rise. Factors behind the increase will likely be twofold: first (and probably most importantly in the near-term), once exports of liquefied natural gas begin, the supply glut in the United States is expected to alleviate, aligning U.S. pricing more closely with world prices. Second, the abundance of natural gas is prompting investment in technology dependent on it (for example, transportation, utilities, and manufacturing). As more projects that consume natural gas come online, higher demand is likely to push up market prices.

Some council members reported some concern about employment in the energy sector, because demand for skilled workers has outweighed the supply and led to labor shortages. One member pointed to an age gap in staff educated in engineering and possessing specialized skills. This appears to be tied to the decline in geology and energy-related education programs in colleges and universities following the oil price crash in the 1980s. Although these programs have regained popularity in recent years, and the supply of recent graduates with the desired degrees is growing, there is likely to be an experience gap that could be difficult to fill as current, more tenured workers retire.

Finally, though the Energy Advisory Council was generally upbeat about current industry conditions, members agreed that issues such as uncertainty surrounding fiscal policy, regulations, and ambiguity in the tax code are weighing on their confidence in the outlook. However, despite these concerns, members were unanimous in their belief that the policy and economic environment in the United States remained more attractive than most other energy-producing regions around the globe.

Photo of Rebekah DurhamRebekah Durham, economic policy analysis specialist in the Atlanta Fed’s New Orleans Branch


November 5, 2013 in Employment, Energy, Oil, Transportation | Permalink

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08/20/2013


Energy Brightens Louisiana's Manufacturing Outlook

Oil and gas activity is at its strongest level in decades, and investment is a big part of the story. The Atlanta Fed’s Energy Advisory Council reported an estimated $160 billion in capital investment across the Gulf Coast for pending projects related to liquefied natural gas (LNG) import/export terminals and petrochemicals over the next several years. Numerous gas shale plays (a term for shale formations containing natural gas) and technological innovation in hydraulic fracturing (commonly called “fracking”) techniques have made supply of natural gas abundant and prices low.

This increased investment and plentiful and low-cost natural gas are having a major impact on manufacturing in Louisiana in particular, leading many industry experts to declare a “renaissance” and “new industrial revolution” in Louisiana. Chemicals manufacturing in particular is expanding at a rapid pace in Louisiana, considering natural gas is a key feedstock in its production process. Over the next two years, chemical firms are planning more than $60 billion in new and expanded investments in the state.

Loren Scott, an emeritus faculty member in Louisiana State University’s E.J. Ourso College of Business’s economics department, conducted a study of the chemicals industry in Louisiana, published by the Louisiana Foundation for Excellence in Science, Technology and Education in 2012. Scott reported the state’s chemical industry is thriving and providing thousands of jobs, billions of dollars in economic impact, and generous tax revenues to state and local governments. “The chemical industry is the top producer of direct jobs in the Louisiana manufacturing sector, a major player in the national economy and is the state’s top manufacturing exporter,” Scott said. The industry accounted for 7.3 percent of all earnings in the state in 2011, generating $8.9 billion and 26,944 jobs. Scott’s report provides a list of nearly 20 chemical firms that announced billions of dollars in expansions across Louisiana in 2012. He attributes this wave of growth to the competitive advantage generated by low natural gas prices.

The boom in Louisiana manufacturing is not limited to the chemicals industry. Others are reaping the benefits of low natural gas prices. Steel makers, for example, are gaining from both the reduced cost of manufacturing as a result of low natural gas prices and from strong demand for steel pipe used for oil and gas drilling. Companies are setting up shop closer to major gas distribution hubs in Louisiana, and others are polishing up aging plants to replace coal with cheaper natural gas. The Atlanta Fed’s Energy Advisory Council reported this capital investment is being made in the utility sector.

Employment growth in manufacturing should increase as these investments and relocations accelerate. The chart below shows that manufacturing job growth in southern Louisiana, where much of the state’s energy-related activity is located, has consistently outperformed the rest of the state and the nation as a whole.



What does all of this mean for the future of Louisiana manufacturing? It looks bright, as long as natural gas remains accessible and low cost—which could be challenged by other parts of the world with vast, untapped shale plays. With all of the excitement and progress it’s easy to forget that just three years ago, manufacturing was considered a declining industry in Louisiana. Energy-related activity, especially in the southern part of the state, is helping to shift that perception.

Photo of Rebekah DurhamBy Rebekah Durham, economic policy analysis specialist in the Atlanta Fed’s New Orleans Branch


August 20, 2013 in Employment, Energy, Louisiana, Manufacturing, Oil | Permalink

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12/12/2012


Energy Renaissance

Professor David Dismukes, associate director of the Center for Energy Studies at Louisiana State University (LSU), said in his presentation to the Atlanta Economics Club on December 11 that the United States is "entering an energy renaissance period." He added that the outlook is very bright and that the "United States—and North America generally—has quickly become one of the most attractive regions for new investment."

LSU's Center for Energy Studies provides energy information and analysis that respond to the needs of the legislature, public agencies, and business and civic groups. The center also maintains some very useful and unique energy databases. Dismukes has been on the LSU faculty for over a decade, and since that time has led a number of the center's research efforts on topics associated with almost all aspects of the energy industry.

New natural gas availability is having a considerable impact on all energy markets today and on a longer-term, forward-looking basis. The increase in production from shale is now migrating into liquids and crude oil production. Dismukes said that "the expansion of this revolution is increasing liquids production as well as facilitating additional natural gas production despite low prices."

"Reserve development, production, and capital expenditures are all up to record levels," he continued. He believes that the effect on hiring will be significant as the energy infrastructure expands. There will also be considerable economic development opportunities through lower energy costs.

Developments will change energy market dynamics, including those associated with clean energy initiatives and renewables, nuclear power, carbon capture and storage, and energy efficiency. "Renewables have a bright outlook, and the economics have seen significant improvements." Currently, 37 states have renewables portfolio standards policies in place that should continue to increase demand for renewables.

Regionally, the impact of the energy boom will be felt most directly in Louisiana, where most of the Southeast's energy infrastructure is located. But the longer-term implications of cheap, abundant, and diverse sources of energy will be significant for the rest of the country as well.

Photo of Michael ChrisztBy Michael Chriszt, a vice president in the Atlanta Fed's research department

December 12, 2012 in Energy, Louisiana, Oil | Permalink

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06/30/2010


The Gulf spill's employment effect: Early evidence

In an attempt to gauge the oil spill's impact on employment, we've been tracking initial unemployment insurance claims for the coastal regions of Louisiana. Looking at weekly initial unemployment insurance claims, which are first-time applications for unemployment insurance, provides an indication of week-by-week changes in employment for coastal Louisiana parishes and is thus a high-frequency view of employment trends. We developed two measures: one for all coastal parishes, and another that includes Jefferson and Lafayette parishes. Jefferson extends to the coast, but the vast majority of employment in this parish is located in the suburbs of New Orleans, and Lafayette Parish is home to many people employed in oil and gas drilling and related services. Neither measure includes Orleans Parish.

For the Louisiana coastal regions, there was little immediate effect on initial claims data after the spill on April 20, which is not particularly surprising since the true extent of the spill remained unknown at the time. Late May saw the beginning of an increase in claims. This trend was short lived, however, as an equally marked decrease in new claims followed. In addition, BP's hiring of some out-of-work fishermen and others to assist in the clean-up has likely offset some of the job losses.

063010
(enlarge)

We are also looking at data about initial unemployment claims by industry, which are available on a monthly basis. Through May, the job losses do not seem to be centered in any particular region or industry in Louisiana. This situation may change as time goes on, and weekly initial claims will be a good indicator to watch.

The Atlanta Fed will continue to watch employment indicators for the coastal regions of Louisiana and the Gulf. More detailed job analysis will be available in late July when the U.S. Bureau of Labor Statistics releases June state- and metro-level employment data.

By Brian Goodman, an intern in the Atlanta Fed research department

June 30, 2010 in Employment, Louisiana, Oil | 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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