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Plunging Crude Prices: Impact on U.S. and State Economies

Mine Yücel Federal Reserve Bank of Dallas

February 12, 2015

The views expressed here are those of the speakers and do not necessarily represent the views of the Federal Reserve Banks of St. Louis and Dallas or of the Federal Reserve System.

2

Oil and Gas Prices Plunge

US. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma [WCOILWTICO], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/WCOILWTICO/, February 12, 2015.

US. Energy Information Administration, Henry Hub Natural Gas Spot Price [WHHNGSP], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/WHHNGSP/, February 12, 2015.

3

Outline

• How did we get here? – World oil supply/demand balance

• Impact on U.S. economy • Impact on state economies • Where do we go from here?

4

World Oil Consumption Growth (Year-over-year)

0

1

2

3

4

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

World oil consumption growth

Source: Energy Information Administration.

Million barrels per day

5

World Oil Consumption Growth (Year-over-year)

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2013 2014

OECDNon-OECD AsiaFSU and Eastern EuropeOther



6

World Consumption and Non-OPEC Production Growth

(Year-over-year)

0

1

2

3

4

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014


Non-OPEC production growth



7

-2

-1

0

1

2

3

4

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014


Non-OPEC production growth

OPEC production growth



World Oil Consumption and Production Growth (Year-over-year)

8

Iraq and Libya Production Up Since June

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15

Libya

Iraq

Million barrels per day change since June

Source: Bloomberg.

9

-30

-25

-20

-15

-10

-5

0

5

10

15

20

-2

-1

0

1

2

3

4

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

World oil consumption growthNon-OPEC production growthOPEC production growthChange in WTI price (right axis)


Million barrels per day Dollars per barrel

Demand/Supply Balance and Oil Prices

10

Energy Prices Fall More Than Other Commodities

40

50

60

70

80

90

100

110

Sep-14 Oct-14 Nov-14 Dec-14 Jan-15

All Non-Energy

Industrial Metals

Energy

Sources: S&P; Bloomberg.

GSCI Index, Sept 2, 2014 = 100

11

In Contrast to Falling Prices in 2008

30

40

50

60

70

80

90

100

110


All Non-energy

Industrial Metals

Energy

SOURCES: S&P; Bloomberg.

GSCI Index, Sept. 2, 2008 = 100

12

Impact on U.S. Economy

13

U.S. Oil and Gas Production

0

10

20

30

40

50

60

70

80

90

0

2

4

6

8

10

12

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010


Billion cubic feet per day

Natural Gas

Crude Oil


Jan 2015 Estimates

14

U.S. Crude Oil Production from Shale

0

500

1000

1500

2000

2500

3000

3500

4000

Jan 2010 Nov 2014 Jan 2010 Nov 2014 Jan 2010 Nov 2014


1,463

Thousand barrels per day

1,187

3,403

Texas

North Dakota

Utah Colorado Wyoming New Mexico

Oklahoma

Montana Kansas

786

236

1,098

15

Gulf Coast Crude Oil by API Gravity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2011 2012 2013 2014

Light (API => 35)

Heavy (API < 35)



16

U.S. Imports of Crude Oil by API

0

1

2

3

4

5

6

7

8

9

10

2010 2011 2012 2013 2014

Light (=>35 API)

Heavy (<35 API)



17

U.S. Imports of Crude Oil Have Fallen below Production

0

2

4

6

8

10

12

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Production

Imports



18

Exports of Gasoline and Diesel

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

DieselGasoline


Million barrels per day, SA, 3 MMA

19

Rig Counts

0

50

100

150

200

250

300

0

200

400

600

800

1000

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Source: Baker Hughes.

North Dakota

Texas

US less TX & ND

Rig Count Rig Count

20

Despite Rig Count Declines, Oil Production Holding Up

8.2

8.4

8.6

8.8

9.0

9.2

9.4

May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15

Source: Oil and Gas Journal.


21

New Rigs and Wells Very Productive (New well oil production per rig)

0

100

200

300

400

500

600

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Bakken

Eagle Ford

Permian


Barrels per day

22

How Low Can Prices Go ?

• Breakeven costs for different areas: – Bakken

• $28 - $85 per barrel

– Eagle Ford • $46 - $80 per barrel

– Permian Basin • $52 - $75 per barrel

23

Importance of Oil and Gas to U.S. Economy

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1972 1977 1982 1987 1992 1997 2002 2007 2012

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics.

Percent of GDP

Percent of employment

US GDP US Employment

24

Impact on U.S. Economy

• The U.S. benefits from lower oil prices • Boosts consumer disposable income

– The decline in gasoline prices adds $550 to household budgets in 2015

• Reduces the cost of energy to firms • Reduces profitability of producing oil

– Layoffs and capex declines in energy firms • A 50% fall in oil prices may lead to a 0.3% to 1.0%

increase in GDP (depending on the model) • Headline inflation falls

25

Impact on State Economies

26

Regional Effects

• Increased energy activity brings oil and gas extraction and oil-field support jobs

• Local areas: – lease and royalty payments, – infrastructure construction and – increased spending on retail, leisure and hospitality, and

health services. • Local governments: greater sales taxes • State governments: increased severance tax

revenues

27

Permian Basin Employment

90

95

100

105

110

115

120

125

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Permian Counties

Rest of Texas

Source: Bureau of Labor Statistics; seasonal and other adjustments by Federal Reserve Bank of Dallas.

Index, 2001: Q1=100, SA

28

Permian Basin Retail Sales Growth

0

50

100

150

200

250

300

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Permian Counties

Rest of Texas

Source: Texas Comptroller; Federal Reserve Bank of Dallas.

Index, 2004: Q1=100, SA

29

-2.0

-4.3

-2.3 -0.7

-1.2 -1.6 -1.7

-0.7

Source: Council on Foreign Relations, “The Shale Gas and Tight Oil Boom: US States’ Economic Gains and Vulnerabilities,” Brown, Yucel 2013.

Low Oil Prices Benefit Most States (Effect of a 50% decline in oil prices on employment)

30

Energy-Related Employment

0

2

4

6

8

10

12

14

2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013

Oil & gas operations Petrochemicals Oil field equipment Coal mining Refining

Percentage of nonagricultural

Alaska Louisiana North Dakota

New Mexico

Oklahoma Texas West Virginia

Wyoming

Source: Bureau of Labor Statistics.

31

Some States Rely Heavily on Oil and Gas Severance Taxes

(Share of state tax revenues)

78.3

46.4

39.7

13.7 9.0 9.0

5.8 1.3 0.0

0

10

20

30

40

50

60

70

80

90

AK ND WY NM LA TX OK CO CA

% taxes collected

Percent

Sources: U.S. Census Bureau, 2013 annual survey of state government tax collections; EIA.

32

Oil and Gas Share of Total Revenue (Texas)

0

2

4

6

8

10

12

14

16

18

20

1978 1983 1988 1993 1998 2003 2008 2013

Natural Gas TaxesOil Taxes

Source: Texas Comptroller.

Percent

33

Where Do We Go from Here?

34

GDP Growth Forecast

4.56 4.44 4.32 4.09

3.58

2.03 1.95 1.93 1.87 1.87

0.00

1.00

2.00

3.00

4.00

5.00


Emerging

Advanced (ex. U.S.)

NOTES: Countries are weighted using oil-consumption shares calculated using 2013 consumption data from the Energy Information Administration. SOURCES: DGEI; Consensus Forecasts; EIA; authors' calculations.

Expected 2015 annual GDP growth rate (%)

35

World Consumption Growth Forecast

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2013 2014 2015

OECDNon-OECD AsiaFSU and Eastern EuropeOther



Forecast

36

Crude Price Forecast

0

20

40

60

80

100

120

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

Historical Spot Price

STEO Price Forecast

NYMEX Futures Price

95% NYMEX Futures Confidence Interval

Dollars per barrel


37

Oil Price Outlook Very Uncertain

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015

OVX (WTI volatility)

VIX (equity volatility)

Annualized percentage points

Source: Bloomberg.

38

Outlook

• Market will adjust – Lower prices will lead to a contraction of supply and

increase in demand

• Global GDP growth is expected to rise over time • Oil prices expected to rise • U.S. supply response will be swifter than in the past • Uncertainties abound

Plunging Crude Prices: Impact on U.S. and State Economies

Michael Plante and Mine Yücel Federal Reserve Bank of Dallas

February 12, 2015

The views expressed here are those of the speakers and do not necessarily represent the views of the Federal Reserve Banks of St. Louis and Dallas or of the Federal Reserve System.

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