Download is the oil price plunge damaging the Us economy?

February 27, 2015
Is the oil price plunge damaging the U.S. economy?
The plunge in oil prices has generally positive consequences for the global economy while, as feared by the Bank of
Canada, these appear to be quite negative for the Canadian economy. In the United States, the economic effects are
widely considered to be positive, especially for consumers. But have any negative impacts been observed? And might
they offset the benefits of lower oil prices for the economy as a whole? Where are the risks concentrated? What perception
does the Federal Reserve (Fed) have of the situation?
the lower prices will bring that amount down to US$260B
in 2015 (graph 2). For the 116 million households in the
United States, this is equivalent to an average saving of a
little over US$850 in the course of a year. Such an amount
can only be positive for economic growth. Already,
consumption is giving very encouraging signs. In the last
quarter of 2014, real consumption showed its strongest
growth since 1996. Obviously, a portion of this windfall
will be allocated to savings, but overall, we can assert that
the effects will clearly be beneficial for real GDP growth.
The main positive factors of lower
oil prices
The more than 60% drop in oil prices between June 2014
and the beginning of 2015 is having direct, positive
consequences on the wallets of U.S. consumers. Oil prices
have pulled down gasoline prices in their wake; these have
tumbled from US$3.60 per gallon in the middle of 2014
to less than US$2.00 at the beginning of this year. Since
mid‑January, prices have inched back up to around US$2.25
per gallon, which is still just two thirds of what they were at
this time last year. Households have already reacted to this
new state of affairs, and the consumer confidence indexes
are on the rise (graph 1).
Graph 2 – Lower gasoline prices are beneficial to U.S. consumers
US¢/gallon
450
Graph 1 – The confidence of U.S. households has improved
a great deal
Index
In US$B
425
400
400
375
350
Index
350
100
105
100
325
300
Conference Board (left)
300
95
University of Michigan (right)
250
90
90
85
75
2006
2007
2008
2009
2010
2011
Price of gasoline at the pump (left)
65
200
Desjardins forecasts
150
80
70
225
200
85
80
275
250
95
2012
2013
2014
175
2015
2016
Gasoline consumption (right)
75
60
Sources: Energy Information Administration , Bureau of Economic Analysis and Desjardins, Economic Studies
55
70
2013
2014
2015
Businesses also benefit to a large extent from lower oil and
gasoline prices, as these are major inputs in many industries.
Even if we exclude a portion of the transportation sector
(in order to avoid double counting of gasoline sales to
households), U.S. businesses use the equivalent of around
10 million barrels of oil per day. The effect of a price drop,
from an average of US$93.10 per barrel in 2014 to US$58.00
Sources: Conference Board, University of Michigan and Desjardins, Economic Studies
More specifically, the effect of lower gasoline prices is
making itself felt on household income as if it were a tax cut
enjoyed with every fill-up. In 2014, Americans consumed
a total of US$360B worth of gasoline. We can predict that
François Dupuis
Vice-President and Chief Economist
Francis Généreux
Senior Economist
514-281-2336 or 1 866 866-7000, ext. 2336
E-mail: [email protected]
Note to readers: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.
I mportant: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that
are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group
takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are
provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein
are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2015, Desjardins Group. All rights reserved.
February 27, 2015
Economic Viewpoint
per barrel (based on West Texas Intermediate [WTI])
in 2015 according to our most recent forecasts, generates
a saving of US$125B. If we add that to the US$100B that
households will no longer have to spend, the total effect of
US$225B is equivalent to 1.2% of annual GDP.
The effect of lower prices on production
and investment
On the downside, the direct effects that lower oil prices will
have on the U.S. oil industry immediately spring to mind;
in fact, the great vitality that has characterized that industry
in recent years has been one of the causes of the current
price slump. What concerns should we have regarding
production, investment and employment in that sector?
The majority of analyses evaluate the cost of producing a
barrel of oil at around US$60 for conventional extraction
methods, and at around US$75 for shale oil. Therefore the
lower international prices are hurting the U.S. oil industry,
especially unconventional oil extraction, such as shale oil.
We can already observe that investment in this sector is
down. The number of rigs in operation has plummeted by
36.7% since the peak of October (graph 3). But we need
to be careful here, since that statistic is not seasonally
adjusted, and the weather during this period has been quite
inclement.
Graph 3 – The oil industry is starting to scale back its operations
Number
Number
Rigs in use by the U.S. oil industry
1,600
1,600
1,400
1,400
1,200
1,200
1,000
1,000
800
800
600
600
400
400
200
200
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
2015
Sources: Baker Hugues and Desjardins, Economic Studies
The initial version of the national accounts for the
fourth quarter of 2014 shows rather mixed investment
trends relating to oil. Real investments in mining and oil
exploration and in oil and gas well installations recorded
an annualized increase of 12.4% in the fall. However, we
can expect a decline starting in the first quarter of 2015
(graph 4). Meanwhile, a drop in machinery investments
associated with the oil sector is already showing up, with
an annualized contraction of 35.3% in the fourth quarter
of 2014.
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Graph 4 – Oil industry investments in structures according to
the national accounts should soon decline
US$/barrel
Quarterly ann. var. in %
150
140
130
120
110
100
90
80
70
60
50
40
30
100
80
60
40
20
0
-20
-40
-60
-80
-100
2007
2008
2009
Price of oil (left)
2010
2011
2012
2013
2014
2015
Investments in structures – Oil and gas (right)
Sources: Datastream, Bureau of Economic Analysis and Desjardins, Economic Studies
The Fed’s data on U.S. industrial output paint a slightly
more dramatic picture: well drillings were down by 12.8%
in January, compared with last September. But we note that
oil extraction is continuing to rise, by 1.5% over the same
period. If we extend the comparison to January 2014, the
change is -5.0% for drilling, but +12.1% for extraction. We
can anticipate that production will decelerate significantly.
How important is the U.S. oil industry?
Within GDP, the oil sector shows up mainly in two categories:
drilling and extraction and related equipment. In 2013, these
GDP components had a total value of US$152.6B. That is
an increase of 60.1% in real terms, compared with 2009,
when the oil boom began in the United States. But as a
proportion of GDP, this represents just 0.9%. Moreover,
we note that this sector contributed only 2.9% of total GDP
growth since 2009, which is fairly modest. It is therefore
false to suggest, as some commentators have done, that
the economic recovery in the United States was mainly
due to the energy sector. A slowdown and contraction in
that industry will certainly have negative consequences
on real GDP growth, but the U.S. economy is quite able
to withstand that shock, especially with the support of the
beneficial effects of lower gasoline prices.
It is mainly if we look at job market trends since the
recession that we could be inclined to exaggerate the
importance of the oil sector in the U.S. economy. The shale
oil boom accelerated starting in 2009 (just when the rest
of the economy was suffering its worst contraction since
the Great Depression) but it really took off when oil prices
picked up, in 2010. Since then, the number of jobs in the oil
sector (extraction, support activities and related equipment)
has increased by 50% (graph 5 on page 3). In fact, between
January 2010 and December 2014, 225,500 jobs were
gained in this sector. During the same period, the overall
U.S. economy created 10,875,000 jobs. Thus the proportion
February 27, 2015
Economic Viewpoint
The impact will be more acute
in certain regions
Graph 5 – Job creation has been strong in the oil sector
Jan. 2010 = 100
2010
Jan. 2010 = 100
Change in employment
160
155
150
145
140
135
130
125
120
115
110
105
100
95
2011
2012
Oil sector
2013
160
155
150
145
140
135
130
125
120
115
110
105
100
95
2014
www.desjardins.com/economics
2015
Economy as a whole
Sources: Bureau of Labor Statistics and Desjardins, Economic Studies
of new jobs that were directly created in the oil sector is
just 2.1%, which is still considerable if we consider the fact
that this sector represents a mere 0.5% of the total number
of workers in the United States. However, if we arbitrarily
change the start and end dates of this calculation, we can
easily over-represent job creation in the oil sector. If we
take the cyclical peak of January 2008 as our base date, and
July 2014 as the end date, the job growth in the oil sector
comes to 187,400 jobs, versus 791,000 for the economy as a
whole... nearly one job out of four!
Notwithstanding these calculations, there is reason to
believe that the importance of the oil sector extends beyond
the number of jobs created directly in that industry. A study1
by the International Monetary Fund (IMF) concludes that
each additional rig generates the creation of 37 jobs right
away, and 224 jobs over a longer time frame. Between
mid‑2009 and the peak of September 2014, 1,426 oil rigs
were added. According to the IMF’s calculations, this
expanded activity has directly generated the creation of
53,000 jobs, followed by a potential 319,000 jobs in the
longer term. These additions must not be overlooked.
And the reverse effect could be painful: since October the
number of rigs in operation has dropped by 590, or nearly
37%. If this contraction proves to be permanent, it will
eliminate 22,000 direct jobs and 132,000 jobs in the longer
term. However, we must keep in mind that the U.S. economy
created 3,116,000 jobs in 2014, and that recent monthly
gains have exceeded 250,000. Therefore, the anticipated
contraction in the oil sector will not be a disaster for the job
market as a whole; the U.S. economy can bear that burden.
1
Mark Agerton et al., “Employment Impacts of Upstream Oil and
Gas Investment in the United States”, Working Paper No. 15/28, IMF
Working Paper, International Monetary Fund, February 2015, 36 p.,
www.imf.org/external/pubs/ft/wp/2015/wp1528.pdf.
Obviously, the regional effects are likely to be more severe.
The oil deposits that have been made available thanks
to the technologies disseminated at the end of the 2000s
are mainly concentrated in North Dakota and Texas. The
deposits in those two states account for a little over half
of the growth in the number of active rigs. These two
states have also experienced strong economic growth and
suffered much less from the economic crisis and the slow
recovery (graph 6). Their unemployment rates are also very
low: 4.6% in Texas (this has kept falling in recent months)
and 2.8% in North Dakota (the lowest in the United States,
but up slightly since last summer) (graph 7). Keep in mind
that while Texas has the second-largest population of all the
states, North Dakota stands in 47th place out of 50.
Graph 6 – Economic growth has been stronger in North Dakota
and, to a lesser extent, in Texas
2000 = 100
2000 = 100
Real GDP per capita
200
200
United States
North Dakota
Texas
190
180
190
180
170
170
160
160
150
150
140
140
130
130
120
120
110
110
100
100
90
90
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: Bureau of Economic Analysis and Desjardins, Economic Studies
Graph 7 – The unemployment rate is much lower in North Dakota
In %
In %
Unemployment rate
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
2007
2008
2009
2010
United States
2011
2012
North Dakota
2013
2014
2015
Texas
Sources: Bureau of Labor Statistics and Desjardins, Economic Studies
The decline in oil investments can only hurt these regions,
and the time when those economies were the envy of the
other states is probably over. The negative collateral effects
will no doubt be just as painful. The enthusiasm for the oil
sector supported consumption and home prices. The effect
is particularly intense, since wages in the oil extraction
sector are high. We note that the Texan manufacturing
3
February 27, 2015
Economic Viewpoint
sector is struggling more than that of the United States
as a whole (graph 8). But as yet there are few indications
of a real slump in these economies, and even the leading
indicators of both these states are holding steady. The risks
are more worrisome in North Dakota, whose economy is
less diversified than that of Texas. In fact, Texas might even
benefit from the fact that the petrochemical industry as a
whole will probably not suffer too much from the lower oil
prices. Processing operations, which are often integrated
within these same large corporations, will enjoy greater
profit margins and, if the prices remain low long enough,
demand for refined products could increase.
Graph 8 – The manufacturing sector in Texas appears to be feeling
the weakness of the oil sector
Index
Index
75
25
70
20
65
15
60
10
55
5
50
0
45
-5
40
-10
35
-15
2011
2012
2013
Manufacturing ISM – New orders (left)
2014
2015
Dallas Fed index – New orders (right)
Sources: Institute for Supply Management, Federal Reserve of Dallas and Desjardins, Economic Studies
Not a threat to the nation
The lower oil prices will have negative consequences on
growth, but these will remain concentrated in certain sectors
and regions. And these harmful effects will be far less than
the benefits that the vast majority of Americans will derive
from lower gasoline prices. This is also the conclusion that
the Fed has reached, according to the recent testimony by
Chair Janet Yellen, before Congress on February 24, 2015:
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“While the drop in oil prices will have negative
effects on energy producers and will probably
result in job losses in this sector, causing hardship
for affected workers and their families, it will
likely be a significant overall plus, on net, for our
economy.”
Thus, even the Fed, which has been showing extreme
caution since the financial crisis, is not overly troubled by the
negative effects of lower oil prices. It is mainly the positive
effects on growth that are attracting its attention. What the
Fed is more worried about is the negative effect of this price
slump on inflation, and in particular, a potential carryover
into core inflation. We may therefore conclude that while
lower oil prices are clearly favourable for economic growth,
their effects on U.S. monetary policy are less clear, without
worrying overmuch about the end of the oil boom in the
United States.
Our own scenarios are calling for lower oil and gasoline
prices to give net support to U.S. real GDP growth, which
should come in at 3.2% in 2015 and 3.0% in 2016, after
three years of growth below the threshold of 2.5%. Total
inflation will likely languish in negative territory in the first
half of 2015, but core inflation (excluding food and energy)
should remain relatively stable.
Francis Généreux
Senior Economist