Plunging Crude Prices: How U.S. States Fare - Oil Price and Consumption Forecasts

February 11, 2015

Mine Kuban Yücel looks at how declining oil prices correspond to states’ employment rates, economic growth and severance tax revenue. She presents global price and consumption forecasts, anticipating that markets will adjust to the low price environment and noting that demand for oil is sensitive in the long run more so than the short run. “Supply,” she reminds us, “is elastic” and newer horizontal wells, once shut down, can be restarted in two weeks. Yücel closes her remarks with a look at projected global GDP and uncertainties that lie ahead.

Presentation (PDF)




Mine Kuban Yucel: So we did a study in 2013 looking at how the states were affected by lower oil prices, and we found that eight states are hurt by lower oil prices, and those you see here in the red. They are Alaska, Louisiana, North Dakota, New Mexico, Oklahoma, Texas, West Virginia and Wyoming. And the darker the red, the worse the impact. So the state that’s hurt the most is Wyoming. Those numbers are the percentage change in employment due to the fallen oil prices. So given a 50 percent decline in oil prices, for example—again, I’m going to give you a Texas example, a 1.2 percent decline in employment. What does that amount to? That’s about 140,000 jobs. So does that mean Texas is going to go into a recession? No, because last year Texas added almost 400,000 jobs. But it does mean it’s going to slow. Growth is going to slow in Texas. Last year we grew 3.4 percent. This year, our estimate is between 1.5 to 2.5 percent. And I think as we go through the year, that number may actually go down. But we don’t think we’re going to go into a recession.

So why are these eight states hurt by lower oil prices? What you see here are the shares in employment of these eight states in the five major energy-related industries. So you have oil and gas, petrochemicals, oil field equipment, coal mining and refining. And when oil prices fall, all these industries with the exception of refining are hurt. So Wyoming, which has the highest share of these energy industries is hurt the most. Now, a state like Texas or Louisiana—you can see Louisiana here. Second, Texas sort of toward the right. They are much more diversified in the kind of energy industries that they have. So they have petrochemicals, they have refining and oil and gas. So they’re quite a bit more diversified. Another point to make with this is it shows you how the share has risen from 2000 to 2013 with the shale boom, and North Dakota is the state that actually has the highest growth in its share of oil and gas industries.

So falling oil prices also hurts state severance taxes, and all these states have some kind of severance tax, but some are more dependent on severance taxes than others. So you see, Alaska gets almost 80 percent of all its taxes from oil and gas taxes. So that’s a huge dependency. North Dakota gets about 46 percent and Wyoming about 40 percent. Texas is quite diversified since 1986, the first oil bust, and Texas gets about 9 percent of its overall tax revenues from oil and gas severance taxes.

Now, of course, with the halving of oil prices and with oil production potentially falling, these are going to be halved. So you’re going to get quite a bit less revenue and some states’ budgets are in trouble, like Alaska. And how much is this money? Well, for Texas I have that number. In 2013, Texas had $4.5 billion from oil and gas severance taxes. So it’s quite a big chunk of money. And I’m going to show one more Texas picture if you haven’t seen Texas pictures. This will sort of show how Texas has diversified. So this is a different way of looking at it. This is not as a share of total tax revenues, but it’s actually a share of total revenues so that’s wrong. So it’s total revenues. So it includes not just taxes but also fees and all kinds of other revenues. And you can see that in the 80s, there was about 18 percent. There was a high dependence and now we’re about 4.5 percent. So Texas has diversified its revenue sources and is much less dependent on oil and gas right now.

So where do we go from here? Well, the outlook for the global economy has dimmed in 2015. What you see here is the changing outlook or the changing forecast for growth in the emerging markets and in advanced economies. So the blues are the emerging and the red is the advanced, and this is showing you how that forecast has changed as it went through from September 2014 to January of 2015. And the emerging market forecast or growth forecast has come down by almost a percentage point, from 4.5 to 3.5. The advanced economies also have come down, but they were pretty small to start with, about 1.8 percent growth in advanced economies. So the growth forecast is that it’s been revised down as we go forward. And do you remember this chart? You saw 2013 and 2014 and this is the forecast for 2015 in terms of oil consumption growth. So we saw in 2014 the OECD growth was going to be negative. Well, you see it’s positive now. That’s the blue bar. And so it’s not that Japan or Europe is going to get any better. It’s the U.S. So U.S. growth is offsetting the decline in those two countries. Russia was the green or former Soviet Union and they were pretty small growth in 2014. Well, the prediction is is going to be negative in 2015 because the Russian economy is in a shambles. And then looking at non-OECD Asia, which is the red. Well, basically China is behind that and that’s where the growth has been coming from in past years, and that’s where most of the growth is going to come from this year. But you see that we’ve sort of—this is not our forecast. This is the Energy Information Administration. That forecast has come down, so it’s a little bit less, and the reason for that is the Chinese economy. The Chinese economy in 2014—the official numbers were 7.4 percent G.D.P. growth and that was the lowest since 1990. And for this year, it’s 6.8 percent or so. So China is slowing. But, again, these are current assumptions and they’re going to change as we go forward.

What about the price forecast? So they always tell us you never put a number and a date together. But the EIA has to do this, so they have their forecast and here is EIA’s price forecast. That’s the red line. It starts about $47 per barrel in January and goes to about $67 by the end of this year. The solid green line is what the market is. So if you look at the market futures, that’s what the market thinks, and they have a lower price forecast. They go up to about $56 per barrel by the end of this year. Those dotted lines are the confidence bands. They’re the 95 percent confidence bands, which means that the prices are going to lie between those bands with 95 percent probability. But the problem is they’re huge. So it tells you how much uncertainty there is out there in terms of oil prices.

I’m going to show you one more chart for oil uncertainty. This is the oil O-VIX, which is the index that measures the market’s expectation of future oil price volatility. And you can see that it’s really up there and, in fact, it surpassed the level that it was at around 2011, the European crisis. So overall, the VIX is sort of overall equities and that’s a lot more subdued. So there’s a lot of uncertainty about oil prices going forward.

So what’s the outlook? Well, the market’s going to adjust and we’ll adjust to the low price environment. We’ll see a contraction in supply and we’ll see an increase in demand. Demand, you have to remember, is not very sensitive to price changes in the short run, but it is more sensitive in the longer run. So we’re going to see people driving more, people buying more gas-guzzling cars and buying more trucks. In fact, we’ve seen this already. The sales of light trucks has gone up. And even though the IMF did lower the growth forecast for global growth, it’s still expected to rise 3.5 percent this year and 3.7 percent next year and oil prices are expected to rise. Not by much, as you saw in both the market and the EIA forecast, but supply is more elastic now. So these new horizontal wells—you can shut them and then they come back in about two to three weeks is what the oil guys tell us. Unlike the traditional vertical wells, when you shut that down, it took about a year for that to come back. So it’s much more supple and so the supply response is going to be quite a bit swifter if there is an increase in prices.

Of course, there’s a lot of uncertainty out there and I’m going to list you an outlook for European economies and China, turmoil in the oil-producing areas of the Middle East and, last but not least, you have to remember the oil market is not a competitive market. It’s working like one right now, but OPEC has not had the discipline to behave as a cartel. You have to remember Saudi Arabia has 2 billion barrels of excess capacity. They’re the only country in the world with any excess capacity. So you have to keep that in mind always. And as far as the U.S. goes, hey, we’re in a sweet spot. Low oil prices are helping the U.S. economy. They’re a tailwind to the U.S. economy. And you saw that a lot of the states are benefiting from lower oil prices. So I leave you with sort of a nice, positive picture. And that’s it.


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