energy and the gulf coast economy robert w. gilmer senior economist and vice president federal...
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Energy and the Gulf Coast Economy
Robert W. Gilmer
Senior Economist and Vice President
Federal Reserve Bank of Dallas
October 2004
The views expressed in this presentation are strictly those of the author and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or of the Federal Reserve System. Any secondary distribution of this
material is strictly prohibited. May be quoted with appropriate attribution to the author.
-0.50
0.51
1.52
2.53
3.54
91 92 93 94 95 96 97 98 99 '00 '01 '02 '03
Percent Change
(Year-Over-Year-Growth)
Annual Growth of Jobs in Gulf Coast Metro Areas
-1.5-1
-0.50
0.51
1.52
2.53
3.54
Per
cent
91 92 93 94 95 96 97 98 99 '00 '01 '02 '03
.
Annual Growth of Jobs in Gulf Coast Compared to U.S.
(Year-Over-Year-Growth)
3
3.5
4
4.5
5
5.5
6
6.5
7
2000
2001
2002
2003
Per
cen
t
Gulf Coast US
`
Unemployment Rate
Gulf Coast vs. US: 2000 to Present
• US Economy
• Global Economic Conditions
• Oil and Natural Gas Markets
External Forces that Drive the Gulf Coast Economy
• GDP growth slows to 0-2 percent in 2000 on the heels of Fed interest rate increases. Just as the Fed finished raising rates to slow the Old Economy, the NASDAQ collapsed along with the New Economy.
• By March 2001, the US economy is in recession as both Old and New Economies are hurt.
• Unprecedented rate cuts by the Fed revived the Old Economy, as housing, consumer durables and autos have done well throughout the decline and recovery.
• Recovery began in November 2001, but 9/11, accounting scandals, and Iraq provided shocks and uncertainty that kept business investment slow.
U.S. Enters Recession in 2001
113
114
115
116
117
118
119
2000 2001 2002 2003 2004
Inde
xRecession Ends in November 2001
Coincident Index for US Economy
-4
-2
0
2
4
6
8
10
1989 1991 1993 1995 1997 1999 2001 2003
Gross Domestic Product
Quarterly Percent Growth, Chained 2000 Dollars
• Hangover from high-tech -- especially telecommunications.
• Series of continued shocks and uncertainty that have slowed investment: 9/11, accounting scandals, and the invasion of Iraq.
• The industrial sector was weak.
• A mild expansion implies mild recovery.
Why has Recovery Been so Slow in the US Economy?
0
500
1000
1500
2000
2500
3000
3500
4000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
1000
2000
3000
4000
5000
6000
NASDAQ and S&P 500 are Once Again in Sync
102
104
106
108
110
112
114
116
118
1998 1999 2000 2001 2002 2003 2004
Industrial Production Increases…
270
280
290
300
310
320
330
340
350
2000 2001 2002 2003 2004
205
215
225
235
245
255
265
Overall retail sales, left scale
Excluding autos, right scale
6
Retail Sales Growth Continues…
Billions of Dollars
800
1000
1200
1400
1600
1800
2000
2200
Thousands
5.25
5.75
6.25
6.75
7.25
7.75
8.25
Percent
Housing Starts and Mortgage Rates
1997 to 2004
-200
-100
0
100
200
300
400
'83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03
Employment Growth
Thousands per Month 1983 to 2004
-1500
-1000
-500
0
500
1000
1500
2000
2500
Months Following Trough
Jobs
(000
's)
-->
1990-91 Recession and Recovery -->
2001 Recession and Recovery
Cumulative Job Growth After the Recession
1990-1991 Recession Compared to 2001
-3
-1
1
3
5
7
9
Ann
ual R
ates
Quarterly Change 4-Quarter Avg
Productivity Growth Has Accelerated Since 1994
• $10-$11 in winter 1997-98, but back over $20 by July 1999, touched $30 per barrel in February 2000, and $35 the following September.
• U.S. recession pushed crude under $20 per barrel,but back over $30 in September 2002.
• This year we saw $40, $45 and $50 per barrel in May, August and September.
High Oil Prices Have Been With Us for Some Time Now
• $50 barrel of oil today is $13 in 1973 or $27 in 1982.
• We have exported many of our most energy intensive industries.
• Energy conservation now part of building codes, fleet mileage standards, etc.
Oil Matters Less to the Economy Today
0
0.5
1
1.5
2
2.5
3
3.5
4
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04
12-month growth rate
CPI inflation rate
CPI less energy
Consumer Price Inflation Remains Low
2003 2004 2005
US 2.1 3.6 2.9
China 9.1 9.0 7.5
India 7.2 6.4 6.7
Euro Area 0.5 2.2 2.2
Japan 2.5 4.4 2.3
IMF World Economic Outlook
Annual Percent Growth
95
105
115
125
135
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Trade Weighted Value of the Dollar
1995 to Present
• Stimulates local exports.
• Reduces foreign competition for domestic business.
• Direct impact on the US economy – indirect impact on Houston.
• Energy prices. Oil is denominated in dollars.
Four Effects on the Gulf Coast Economy
70
75
80
85
90
95
1997 1998 1999 2000 2001 2002 2003 2004
Bill
ions
of d
olla
rs
Exports Increase with Weak Dollar
• Baton Rouge• Beaumont-Port Arthur• Brazoria• Corpus Christi• Galveston-Texas City• Houma-Thibodaux• Houston• Lafayette• Lake Charles• New Orleans• Victoria
• Abilene• Alexandria• Austin• Bryan-College Station• Dallas• Fort Worth• Killeen-Temple• Longview-Marshall• Monroe• Sherman-Denison• Shreveport• Texarkana• Tyler• Waco• Wichita Falls
Gulf Coast and Interior Cities
• On the Gulf Coast …• Oil and Gas• Heavy Construction• Chemicals Refining• Water Transportation• Pipelines• Misc. Repair• Engineering and
Management
• Inland Cities …• Oil and Gas• Electrical Machinery• Communication• Wholesale Trade• Transportation
Services• Banking and Finance• Military
Industrial Strengths of Gulf Coast and Interior Metro Areas – Selected Industries
Gulf Coast Metro
Interior Metro
U.S Texas Louisiana
July 1990-March 2001
2.1 3.2 1.8 2.8 1.8
March 2001-Nov 2001
-0.8 -2.9 -1.6 -1.5 -1.6
Nov 2001-Present
0.0 -0.3 0.1 0.0 0.1
Employment Growth: Gulf Coast vs. Interior Metros
(Annual Rates)
2
3
4
5
6
7
8
1990 1992 1994 1996 1998 2000 2002 2004
Per
cent
Gulf Interior
Unemployment Rates on the Gulf Coast and Interior Metros
1990 to Present
5
10
15
20
25
30
35
40
1994 1996 1998 2000 2002
Dol
lars
per
Bar
rel
Refiners’ Acquisition Cost of Crude Oil
1994 to Present
1
2
3
4
5
6
7
8
1994 1996 1998 2000 2002
Dol
lars
per
Tho
usan
d C
ubic
Fee
t
Wellhead Price of Natural Gas
1994 to Present
0
200
400
600
800
1000
1200
1400
Wor
king
Rig
s
Oil at $30, Gas at $5 What is Wrong With Drilling?
500
600
700
800
900
1000
1990 1992 1994 1996 1998 2000 2002 2004
International Rig Count
• Distrust of OPEC/ Distrust of Price/ New-found Discipline
• Big Company Consolidations/ Property Sales
• Balance Sheet Concerns/Uncertainty Over Iraq
• No Prospects at Home
• Only Bad Places to Go Overseas
Where is the Drilling Boom?
0
10
20
30
40
50
60
70
Percent of Drilling Directed to Oil
1987 to Present
Percent Deviation from Five-Year Average
-60
-40
-20
0
20
40
60
Per
cen
t D
evia
tio
n
Natural Gas Inventory Swing 2001-2003
Price ofNatural Gas($/Mcf)
Price of Oil($/Bbl)
Price ofEthylene($/lb)
$1 $10 $.04
$2 $13 $.07
$3 $17 $.16
$4 $22 $.22
$5 $27 $.27
Breakeven Input Prices for Oil and Natural Gas to Produce Ethylene
Cash Margins, Ethane
2
4
6
8
10
12
14
16Cents per pound
'97 '98 '99 '00 '01 '02 '03 '04
Ethylene Margins
Texas and Louisiana Gulf Coast, 1986 to Present
0
10
20
30
40
50
60
70
80
1986 1990 1994 1998 2002
No. of Projects
New Hydrocarbon Project Announcements
1990 to Present
0
20
40
60
80
100
120
140
90 92 94 96 98 0 2 4
Em
ploy
men
t (00
0's)
Gulf Mining Interior Mining
No Boom in Oil Extraction Jobs in Gulf and Interior Cities
1990 to Present
100
150
200
250
300
350
400
450
90 92 94 96 98 2000 2002 2004
Em
ploy
men
t (00
0's)
Gulf Mfg Interior Mfg
…Or in Manufacturing Jobs
Not Seasonally Adjusted, Based on Five Weights
30
40
50
60
70
80
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
US Houston
Purchasing Managers’ Index
• The Gulf Coast economy is growing strongly, but not generating jobs -- even with high energy prices. Sharing in U.S. productivity growth explains part of the weakness.
• Energy helps, but not like it used to. Oil does not drive drilling now, there is a lack of prospects for natural gas, and an unwillingness in invest in U.S.
• Chemicals have lost their competitive advantage if natural gas is no longer a surplus commodity on the Gulf Coast.
• In the past strong U.S. and world growth, combined with high energy prices, would have meant annual rates of growth
of 4-5 percent of higher. Times are clearly changing.
Conclusions