EconSouth (Third Quarter 2002)


COVER STORY



Cover Story

Energy Helps Power the Southeastern Economy

With energy use declining in the nation over the past year, Southeastern states that depend on producing and selling energy could begin to feel the pinch.

As the economy powered down in 2001, energy consumption in the United States declined for the first time since 1990. According to the U.S. Energy Information Administration (EIA), energy consumption in the United States totaled 96.51 quadrillion Btus (British thermal units) in 2001, down from 98.77 quadrillion Btus in 2000 and 96.76 quadrillion Btus in 1999.

Petroleum remains the largest source of energy in the United States, accounting for 38.23 quadrillion Btus, or nearly 40 percent of all energy consumed. Natural gas and coal provide much of the rest at just over 22 quadrillion Btus — about 23 percent of consumption — each. Even so, except for nuclear electric power, “wood, waste, alcohol” energy (mostly a corn-derivative called ethanol that is blended into gasoline), and solar and wind power, energy consumption declined last year for every source. Not surprisingly, the decline in energy consumption has had the greatest impact on fossil fuel–producing states, especially those whose economies are less diversified and therefore more dependent on energy companies for jobs and tax revenues. In the Sixth Federal Reserve District, every state except Georgia produces oil and gas. But the industry’s greatest presence, by far, is in Louisiana.

Leading the way
Louisiana is one of the nation’s leading energy-producing states: It ranks fourth in crude oil production and fourth in production of natural gas (excluding federal offshore drilling areas). The state’s extensive natural resources make it an important player in the energy industry, but the industry has a disproportionate impact on the state’s economy.

According to a March study published by the Louisiana State University Center for Energy Studies, oil and gas drilling and production activities on state leases have a direct economic impact of $733 million and an indirect impact of $249 million on the state in a typical year. The study also reported that drilling and production on state leases in Louisiana produced 3,467 jobs with energy producers as well as an estimated 3,118 jobs in related fields. The industry had a significant effect on government revenues too, according to the study, generating $432.4 million for state coffers and $57.3 million for local governments.

Still, even allowing for the millions of dollars and thousands of jobs created by the oil and gas industry, Louisiana’s inability to develop additional, non-energy-related industries remains its biggest economic challenge. The state’s dependence on the oil and gas industry means that when energy prices and production decline, so does Louisiana’s economy. For example, from 1999 to 2000, when the U.S. economy grew well over 4 percent, Louisiana’s economy contracted 2.7 percent, according to the U.S. Bureau of Economic Analysis. Only Louisiana and Alaska, another major energy producer, suffered such fates.

Considered apart from the state’s economy, however, Louisiana’s oil and gas industry seems to be in very good shape. The state’s proven oil reserves have been revised downward in recent years, but federal offshore reserves in the Gulf of Mexico are significant, and Louisiana-based companies and employees will continue to play a major role in extracting them.

A recent report by the EIA noted that after a long decline in the 1980s, natural gas accounted for 52 percent of the major firms’ oil and natural gas production in the United States in 1999, driven by natural gas’ clean-burning properties and its profitability relative to oil. Louisiana’s dominance as a natural gas producer preceded this shift toward the use of natural gas.

Taking credit
In addition to noting environmental concerns and profitability considerations, the EIA’s report on natural gas production finds that a tax code provision has contributed to the major energy producers’ shift to natural gas. This provision, Section 29 of the 1980 Windfall Profit Tax Act, makes tax credits available to firms that produce certain qualifying fuels from wells drilled between 1980 and 1992. Qualifying fuels include oil from shale and tar sands, wood fuels and synthetics from oil. The most commonly claimed Section 29 credit, however, is for gas from coal seams, also called coalbed methane.

According to the EIA, the Section 29 credit, which is scheduled to expire this year, averaged $1.02 per thousand cubic feet of gas in the 1990s, increasing the effective price received for eligible production by 53 percent. The effect on gas production in the United States has been dramatic. The EIA reports that Section 29 companies increased U.S. natural gas production by 26 percent between 1990 and 1999 while production by other major companies not seeking the tax credits declined 14 percent over the same period.

SIXTH DISTRICT ENERGY CONSUMPTION AND PRODUCTION
  Consumption

Production

State Population
(in Millions)
Rank
(2000)
Total Energy
(Quadrillion BTUs)
Rank
(1999)
Per Capita Energy
(Million BTUs)
Rank
(1999)
Crude Oil (Thousands
of Barrels/Day)
Rank
(2000)
Natural Gas
(Million Cubic Feet)
Rank
(2001)
Alabama   4.447 23 2.0 17 459 10   29 15   349,114 10*
Florida 15.982   4 3.9   6 255 47   13 19       5,706  16
Georgia   8.186 10 2.8 10 359 25     0 NA              0  NA
Louisiana   4.469 22 3.6   8 827   3 288   4 1,497,201  4*
Mississippi   2.845 31 1.2 27 437 11   54 10   107,540  13
Tennessee   5.689 16 2.1 16 378 21     1 27              0  NA
*Onshore and state offshore only; does not include federal offshore
Sources: Energy Information Administration, Louisiana Department of Natural Resources, Alabama State Oil and Gas Board

A hot market
Section 29 seems to have had a particularly dramatic effect on gas production in Alabama, the nation’s 10th leading natural gas–producing state. As one of three states (along with Colorado and New Mexico) holding 75 percent of proved coalbed methane reserves, Alabama’s coalbed methane production increased from 36.4 billion cubic feet in 1990 to 113.5 billion cubic feet last year, when it accounted for 28 percent of the state’s natural gas production.

Alabama gas production has also received a strong boost from so-called state offshore (within three miles of the shore) drilling, which increased from 19.9 billion cubic feet in 1990 to 201.9 billion cubic feet last year. The increase in coalbed methane and state offshore production generated strong growth in Alabama’s natural gas production. Total natural gas marketed production grew from 136 billion cubic feet in 1990 to 349 billion cubic feet last year. As for petroleum, the state ranks 15th in crude oil production.

Unlike Alabama and Louisiana, Mississippi does not rank among the American Petroleum Institute’s top 10 oil and gas–producing states. But its oil and gas production is not insignificant. The state ranks 10th in crude oil production and 13th in natural gas production.

Tennessee and Florida also produce energy, but the sector is not significant to the economy of either state. Florida, which ranked 16th in natural gas production with 5.7 billion cubic feet of gas marketed production in 2001 and 19th in crude oil production, is perhaps more notable for its relative energy efficiency; the state ranks 47th in per capita energy consumption. Tennessee produces no gas at all and ranks 27th in crude oil production.

For more information about energy consumption and production in the Sixth District, see the table above.

Energy as part of a diverse economy
One of the most significant national developments of the last 50 years has been the transformation of the Southeastern economy. As millions of Americans made their way south for new jobs and new homes, the region’s economy began to resemble the national economy in almost every respect, including, of course, energy consumption. The Southeast, like the nation, now consumes far more gas and oil than it produces, adding to U.S. dependence on external oil production.

Nonetheless, for states such as Louisiana and, to some extent, Alabama and Mississippi, oil and gas production remain significant influences on the economy, and their importance is unlikely to be diminished any time soon.

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