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FRBSF

WEEKLY LETTER

November 16, 1990

Oil in the West
The invasion of Kuwait by Iraq in early August,
and the doubling of oil prices, has returned attention to oil's role in the economy. While past
oil shocks have demonstrated that higher oil
prices are detrimental to national economic
growth, those past experiences also have shown
that the effects of higher oil prices are very uneven across regions of the country. In this Letter,
we look at some of the implications of higher oil
prices for the nine western states that comprise
the Twelfth Federal Reserve District.

and consumption sides is necessary to evaluate
the full impact. In general, changes in oil prices
can affect an oil-producing region's economy
by changing oil wealth and output.
The first effect, changes in oil wealth, is potentially important in Alaska and California. Higher
oil prices provide windfall gains to oil producers.
In Alaska, these gains have an immediate effect
on the state's finances since a one dollar per
barrel increase in oil prices raises $150 million
in annual oil revenues for the state.

Importers and exporters
One measure of a region's exposure to oil price
shocks is the extent to which it is a net importer
or net exporter of oil. An area that produces more
oil than it consumes stands to gain when prices
rise since higher oil prices transfer income from
oil importing regions to oil exporting regions. Of
the District states, only Alaska is a net exporter,
producing 738 million barrels in 1988 while consuming only 43 million barrels of oil products.

Higher oil profits also can benefit the producing
region to the extent that those profits remain in
the region. However, in both California and
Alaska, oil production is dominated by publicly
traded major oil companies. Higher oil company
profits appear as higher earnings and dividends
to stockholders who do not necessarily reside
in those areas. Profits, therefore, need not be
regionally concentrated.

Although only net exporters may be expected
to benefit from higher oil prices, the degree to
which other states are harmed by higher oil
prices is determined in part by their dependence
on net oil imports. In 1988, the western states
other than Alaska consumed just over one billion
barrels of oil products while producing 389 million barrels of crude oil. On a per capita basis,
the region (outside of Alaska) had net imports
of 14.9 barrels per person, 1.5 barrels above the
average for the nation. California had below
average net imports (at 9.2 barrels per person),
whereas the other states had net imports ranging
from 19 barrels per person in Arizona to 39
barrels per person in Hawaii.

Higher oil prices also can boost a region's oil
industry and supporting industries by encouraging new oil exploration and development activity.
Boosted activity can spill over into other sectors
of the economy, creating jobs and income. This
effect is not likely to be large in the West, however. The 50 active drilling rigs in California and
12 in Alaska on October 22 represented a negligible increase from the 45 and 11 rigs active in
the two states, respectively, a year earlier.

Production
Dependence on net imports provides one
measure of the potential effect of higher oil
prices, but a closer look at both the production

This limited response by the District's energy
sector has two causes. First, because oil wells are
long-term investments, expectations about longrun prices are more important than current prices
in the investment decision. Consequently, until
oil companies are convinced that prices will
remain substantially above the level of the past
several years, they will be unwilling to invest
in significant new capacity.

THE WESTERn ECOnOmy

The Western Economy is a quarterly
review of economic conditions in the Twelfth Federal Reserve District. It is published in the Weekly Letter
on the third Friday of February, May, August and November.

FRBSF
Second, California and Alaska are not likely
to increase production sharply because the West
has relatively old and well-developed reserves.
For example, during the entire period since 1972,
California's annual production has varied littlefrom a high of 1.1 million barrels per day in 1985
to a low of 0.9 million barrels per day in 1975.
Moreover, Cal ifornia's untapped proven reserves
are located largely offshore, in environmentally
sensitive areas. Alaska's current fields, notably
Prudhoe Bay, have seen declining production. Its
most promising new area-the Alaska National
Wildlife Refuge-has unknown reserves, and
drilling there would generate environmental
challenges. In any case, it would take years to
develop the fields and to establish the necessary
transportation infrastructure.

Consumption
Although positive production effects are not
likely to be extensive in the western region,
consumption effects will be noticeable. In the
nine states, total oil consumption in 1988 was
24.4 barrels per person, just slightly below the
25.5 barrels per person national average. Per
capita consumption in Arizona, California, Idaho,
Oregon, and Utah was below the national average, ranging from 19 to 25 barrels per person,
while Hawaii (39 barrels), Nevada (30 barrels),
Washington (28 barrels), and Alaska (81 barrels)
exceeded the national average.
Differences in the composition of consumption,
however, are important in determining the relative burden of higher oil prices on consumers in
the District states. Three categories of consumption account for most oil use: motor gasoline,
distillate oil, and aviation fuel.
Per capita gasol ine consumption in the District
was almost identical to the national average.
Consumption ranged from 7 barrels per person
in Hawaii to 14 barrels per person in Nevada, but
most states were close to the 11.5 barrel national
average. California, the most populous state and,
consequently, the largest user of gasoline in the
region, consumed 11.3 barrels per person in
1988. Thus, the effect of higher oil prices on
gasoline expenditures would be about the
same in the West as in the rest of the country.
Distillate consumption was below the national
average of 5 barrels per person, although large
variation in consumption exists in the western
states. High use of heating oil yielded distillate

fuel consumption of 5 to 7 barrels per person
in Idaho, Oregon, Nevada, and Washington, and
nearly 17 barrels per person in Alaska. The other
District states, in contrast, face less of an increase
in expenditures than does the rest of the country
because of their lower reliance on heating oil.
Western consumption of aviation fuel exceeded
3 barrels per person in 1988. This figure is over
a barrel per person higher than the national average because of longer average travel distances.
Alaska reported consumption of 30 barrels per
person, Hawaii had 9 barrels per person, and
Nevada had 4.6 barrels per person in aviation
fuel consumption. This higher aviation fuel
consumption was an important factor boosting
total oil consumption in many of the western
states. Because the higher cost of jet fuel is split
between passengers and airline companies, the
region would be adversely affected only if higher
transportation costs were to reduce total travel.
Although these three categories account for most
oil consumption in the District, residual fuel oil
consumption is important in Alaska and Hawaii.
Particularly in the case of Hawaii, this oil is
largely used to generate electricity and, since
there are few alternatives available, consumers
in Hawaii are especially vulnerable to higher
oil prices.

Conclusions
Higher oil prices yield winners and losers. With
the exception of the Alaskan State government,
however, winners are not concentrated geographically. Higher oil revenues are distributed
across the nation to owners of oil stocks, and the
effects of higher oil prices on production, exploration, and development of new oil are relatively
small in the West.
The effect on consumers is not likely to be much
different in the Twelfth District than in the rest of
the nation. Because their consumption of gasoline is about the same, higher gasoline prices will
affect most states' consumers about the same as
the average consumer in the nation. Lower reliance on oil for industry uses and heating will give
most western states outside of the Pacific Northwest an advantage relative to the other states in
the nation, but that gap is likely to be fairly small.
Higher aviation fuel prices could harm the West
if travel were curtailed, but if the visitor industry
were not materially affected, most of the costs
would be imposed on airline company stockholders and passengers throughout the nation.

Ronald H. Schmidt
Senior Economist

Carolyn Sherwood-Call
Economist

DISTRICT INDICATORS
(Seasonally Adj usted)

89Q3

89Q2

89Q1

88Q4

118.7
130.4
2332.0
90.4
63.6

115.2 . 113.0
114.3
117.3
2534.2 2425.5
90.4
92.6
62.4
62.7

115.1
122.9
2511.8
90.5
61.8

116.2
120.9
2431.5
93.4
61.7

112.6
112.4
2473.5
96.2
60.1

1714.4
2617.0
132.0

1765.9
2606.8
130.3

1811.1
2518.3
128.1

26.2
1015.8
76.2

17.8
1017.5
71.3

BO.4

BO.3

125.2

128.4

21.8
909.5
56.2
79.5
126.1

MINING
MINERAL PRICES, 1986=100
METAL MINING EMPLOYMENT, 1985=100

133.5
202.2

125.6
200.9

123.3
200.9

CONSTRUCTION
NONRESIDENTIAL AWARDS
RESIDENTIAL PERMITS
WESTERN HOUSING STARTS, THOUSANDS
CONST.RUCTION EMPLOYMENT, THOUSANDS

1575.1
22758
29.4
1032.4

1585.6
25989
31.2
1042.3

MANUFACTURING
WAGES, CALIFORNIA, S/HOUR
EMPLOYMENT, THOUSANDS
DURABLES, 1985=100
CONSTRUCTION DURABLES, 1985=100
AEROSPACE, 1985=100
ELECTRONICS, 1985=100
SEMICONDUCTOR ORDERS, MILLIONS S, NOT S.A.

9OQ3

9OQ2

9001

117.1
112.4
N/A
88.1
N/A

118.1
112.9
2365.2
90.1
65.9

FORESTRY
1472.7
LUMBER PRODUCTION, MILLIONS BOARD FEET
NORTHWEST LUMBER INVENTORY, MIL. BOARD FEET 2551.3
130.1
U. S. LUMBER PRICES, 1986=100

AGRICULTURE
u.S. CROP PRICES, 1985=100
DISTRICT CROP PRICES, 1985=100
FARM CASH RECEIPTS, MILLION S
CATTLE ON FEED, 1985=100
CATTLE PRICES, CALIFORNIA, S/CWT.

89Q4

1n1.6 1716.0 1648.0 1768.7
2549.9
123.8

2440.5
119.5

2419.4
123.4

2568.8
122.4

20.3
1017.6
70.3
79.3
128.0

19.3
904.7
75.6

20.5

B07.1

131.3

66.7
79.7
129.9

18.5
753.4
62.0
137.3

14.8
912.3
72.8
78.8
152.9

125.5
190.9

131.8
187.7

134.3
182.7

147.4
176.3

147.7
168.5

1732.6
32741
30.7
1052.3

1458.0 1666.0 1519.3
30509
33475
31304
29.3
35.2
37.7
1029.0 1013.9 1003.2

1439.0
31065
29.6
983.7

1361.0
35414
33.0
968.3

11.5
3124.7
102.0
108.8
113.5
94.3
1192.0

11.4
11.3
3140.1 3163.0
103.1
104.0
111.2
114.0
116.6
115.8
94.5
95.2
1309.7 1227.7

11.3
11.2
11.1
3151.2 3151.9 3152.9
104.0
103.6
104.1
111.1
111.3
110.9
115.8
116.1
115.3
94.8
94.7
95.2
1197.9 1166.3 1300.0

11.0
11.0
3148.0 3142.1
104.0
103.6
111.6
111.5
113.8
115.1
95.7
99.8
1300.0 1066.0

WHLS/RETAIL TRADE EMPLOYMENT, THOUSANDS
RETAIL SALES, PACIFIC DISTRICT, MIL. $

4862.8
24969

4830.6
24865

4809.9
24685

4755.0
23961

4718.7
23815

4681.8
23417

4654.9
22730

4598.2
22000

SERVICES EMPLOYMENT, THOUSANDS
HEALTH CARE, 1985=100
BUSINESS SERVICES, 1985=100
HOTEL, 1985=100
RECREATION, 1985=100

5358.5
125.3
113.6
134.8
129.3

5281.8
123.8
113.6
133.8
128.2

5234.5
122.6
113.0
133.7
126.6

5191.9
120.6
110.3
131.9
128.5

5126.7
118.9
109.8
128.7
125.9

5065.6
117.7
109.4
127.1
125.9

5015.3
116.9
108.8
126.2
125.1

4965.2
115.7
123.8
125.2
109.1

FINANCE, INSUR. AND REAL ESTATE EMPLOYMENT

1278.7

1268.7

1265.5

1256.1

1244.6

1232.7

1227.4

1223.4

GOVERNMENT EMPLOYMENT, THOUSANDS
FEDERAL GOVERNMENT
STATE AND LOCAL

634.5
2834.5

657.1
2784.5

626.9
2758.7

623.1
2731.8

619.0
2700.3

625.2
2663.6

624.8
2644.8

620.8
2619.9

ENERGY
SPOT PRICE OF OIL, S/BARREL
U. S. RIG COUNT
DISTRICT RIG COUNT
FUEL MINING EMPLOYMENT, 1985=100
U.S. SEISMIC CREW COUNT

BO.8

n.8

Data are weighted aggregates of avai lable 12th District state data and are expressed as IIIOnthly rates unless otherwise noted.
District Indicator data are constructed by FRBSF research staff from public and industry sources.

Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Feclerai Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor (Barbara Bennett) or to the author•... Free copies of Federal Reserve
publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco 94120. Phone (415) 974-2246.

Oi:Lt6 VJ

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PERSONAL INCOME
ANNUALIZED PERCENT GROWTH RATES

Twelfth District Business Sentiment Index'

GNP

Percent
90Ql

89Q4

89Q3

89Q2

89Ql

ALASKA
ARIZONA
CALIFORNIA
HAWAII
IDAHO
NEVADA
OREGON
UTAH
WASHINGTON

8.8
9.4
12.0
6.5
15.6
12.6
7.0
6.9
11.4

-8.2
7.5
4.9
9.2
20.0
14.4
12.7
11.7
10.6

14.2
5.7
8.7
11.6
-3.5
9.8
3.6
4.9
7.8

27.3
5.7
7.3
12.5
6.1
12.1
9.7
10.3
8.6

11.7
11.3
7.7
8.9
18.6
16.4
6.3
6.5
14.0

12TH DISTRICT
U.S.

11.3
8.0

6.6
8.3

8.0
4.5

8.0
6.9

8.9
8.7

100

80

o Recession

60

f!!!!
40

•

20

* Year-to-date
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
1988

1990

1989

.. The index is constructed from a survey of approximately 75 business leaders
in the12th Federal Reserve District.

NON-AGRICULTURAL EMPLOYMENT
ANNUALIZED PERCENT GROWTH RATES
9QQ3

ALASKA
ARIZONA
CALIFORNIA
HAWAII
IDAHO
NEVADA
OREGON
UTAH
WASHINGTON
12TH DISTRICT
U.S.

* Yeer-to-date

9OQ2

90Ql

89Q4

3.4
1.4
1.7
3.1
-1.3
0.1
2.1
7.6
2.1

2.8
4.6
2.5
1.9
9.2
9.6
6.7
4.0
6.0

-3.1
5.2
3.1
3.4
7.0
8.9
2.4
4.0
6.0

7.0
2.3
2.1
5.5
5.9
8.9
3.2
3.7
5.0

2.2
0.4

1.9
2.3

3.7
2.6

3.7
2.0

3.0
1.8

UNEMPLOYMENT RATES
AVERAGE QUARTERLY DATA

89Q3

0.6
3.6
2.1
-0.5
2.3
7.6
0.5
2.4
2.0

Slower Growth

II!II Same

9OQ3

9OQ2

9OQ1

89Q4

89Q3

ALASKA
ARIZONA
CALIFORNIA
HAWAII
IDAHO
NEVADA
OREGON
UTAH
WASHINGTON

6.9
5.3
5.5
2.5
5.8
4.6
5.8
4.5
4.9

7.1
5.3
5.2
2.6
5.9
4.9
5.0
4.7
5.2

7.1
4.8
5.1
3.1
5.0

6.7
4.6
5.1
2.6
5.0

4.5

4.8

5.1
4.3
5.5

5.5
4.1
6.2

6.4
5.4
5.0
1.8
5.1
5.3
5.7
4.0
6.3

12TH DISTRICT
U.S.

5.3
5.6

5.2
5.3

5.1
5.3

5.1
5.3

5.1
5.3

* Year-to-date

Faster Growth