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