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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.


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).

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.

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).

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

November 5, 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


August 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


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).

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.

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).

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

November 5, 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


August 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