Full text of Energy Highlights : July 1982

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PALLAS
Federal Reserve Bank of Dallas

July 1982

Business Cycle Hits the Oil and Gas Industry
In contrast with its experience in the
early seventies, the oil and gas in­
dustry appears to have become more
cyclical since 1978—possibly the
result of greater exposure to market
forces. This has important implica­
tions for the industry outlook as the
economy recovers. Petroleum refining
and natural gas production appear
poised for recovery, while drilling faces
more trouble and crude oil extraction
holds a steady course.
Cyclical Behavior

Isolating cyclical behavior as devia­
tions from long-term trends reveals the
behavior of various components of the
energy industry over the business
cycle—as is shown by the charts on
page 2. Total industrial production is
used as a monthly indicator of overall
economic activity.
Since the removal of oil price con­
trols began in mid-1979, deviations
from the trend in drilling have begun to
follow the national business cycle
more closely. This is somewhat of a
surprise because drilling activity had
been regarded as countercyclical. Drill­
ing was booming during the 1973-75
recession and appeared to fare well
during the 1980 recession. However,
drilling performance during the 1980
recession was more a product of the
rise in oil prices than the business
cycle.
The emergence of cyclical weakness
in drilling lagged the onset of the 1980
recession by three to five months. In
the current recession, a decline in

deviation from the drilling trend led the
downturn in the economy by two
months. While oil price decontrol has
stimulated drilling to new heights, it
has also exposed participants to a
greater fluctuation in drilling incen­
tives, increasing the volatility of
marginal producers’ entry and exit, and
heightening sensitivity to the business
cycle.
In comparison with drilling, crude oil
extraction has exhibited only slight
cyclical weakness in the current and
1980 recessions. OPEC-maintained
world oil prices have established fairly
stable incentives for domestic produc­
tion, and therefore most of the varia­
tion in oil consumption, which is
strongly cyclical, is at the expense of
imports.
During the 1980 recession, devia­
tions from the trend in refining closely
matched those of total industrial pro­
duction, with recovery lagging by one
month. During the 1973-75 recession
refining lagged recovery by two
months. The downturn in deviations
from the refining trend lagged the cur­
rent recession five months. But refin­
ing had been declining in absolute
terms before that.
Excluding variation in weather from
the norm, seasonally adjusted natural
gas extraction generally tracks the
economy closely, with recovery lag­
ging one month.
Trends

Increases in the prices of oil and gas
relative to other productive inputs have

encouraged exploration for these fuels
and discouraged their consumption.
Oil consumption has fallen sharply
since decontrol, while gas consump­
tion has risen at a rate below that of
the general economy since implemen­
tation of the Natural Gas Policy Act in
1978. Meanwhile, rapid adjustment to
price incentives sent the drilling trend
skyrocketing at about a 50 percent an­
nual pace following decontrol. As ad­
justment matured, however, the rate of
increase slipped to about 10 percent a
year in late 1981.
Higher oil and gas prices have
resulted in a movement toward alter­
native energy sources such as coal.
Furthermore, evidence is mounting
that higher energy prices have led to in­
creased conservation and a changing
composition of demand for final
goods. Goods produced in less energy
intensive industries now represent a
larger share of total sales. While the
energy intensive industries can be
generally counted upon to recover
more strongly than other sectors as a
recession ends, these long-term trends
toward alternative fuels, conservation
and a changing composition of final
demand cannot be ignored in examin­
ing the prospects for expansion in the
oil and gas industry.
Outlook

If previous patterns are any guide,
the recovery in drilling should lag the
economy by three to five months.
Crude oil extraction will remain largely
(Continued on back page)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

CYCLICAL BEHAVIOR
(Adjusted to remove seasonality and trend)

SOURCES:

Board of Governors, Federal Reserve System.
Federal Reserve Bank of Dallas.

ROTARY DRILLING RIGS RUNNING

L0

1981

1. Louisiana, New Mexico, Oklahoma, and Texas.
SOURCE: Hughes Tool Company.

1982

FOOTAGE DRILLED
(Excluding service wells, stratigraphic and core tests)

1981
1. Louisiana, New Mexico, Oklahoma, and Texas.
SOURCE: American Petroleum Institute.

I

1982

I

ENERGY BRIEFS
Some portions of the oil and gas industry appear to be poised for a turnaround while others
are in for more trouble.
• The good news is in refining. While capacity
utilization in Texas refining exhibited weakness
in the first quarter, falling from 61.5% in
December to 61.1% in March, it jumped to
68.1% from 65.8% in the week ended June 18,
following a weak but steady upward trend
through April and May.
• The decline in refining employment has stabi­
lized. Texas’s May figure of 38,600 was the
same as in April and February and just 100
workers less than in March. However, May’s
figure was almost 12 percent below December
1981’s peak.
• The bad news is in drilling. The Texas rig count
in May was 34% below the December high of
1449. However, footage drilled in Texas de­

CRUDE OIL PRODUCTION
AND NATURAL GAS EXTRACTION

Oil

T e x a s .....................
District s ta te s ’ . .
United S ta te s . . .

02

-2 .9
-3 .3
-.8

Percent change from
four quarters earlier
1981
Q3
Q4

-2 .3
-2.1
.0

-3 .5
-2 .4
.5

1982
Q1

clined only 9% from December to April while
wells drilled fell by only 1%.
• Employment in Texas oil field machinery
manufacturing dropped sharply in May, as it
became evident that large inventories of oil field
equipment were accumulating. This drop fol­
lowed a smaller April decline, which was
preceded by 25 months of nearly continuous
growth.
• During the five month period from December
1981 to May 1982, weakness in the oil and gas
industry was accompanied by rapid increases
in the dollar amount of energy loans outstand­
ing from commercial banks in the Eleventh
Federal Reserve District, possibly suggesting
increased distress borrowing.

REFINERY CAPACITY UTILIZATION
Daily
aver age
1982:01
Thousands
barrels

-8 .8
n.a.
1.2

2,400
n.a.
8,683
Millions
of

Gas

T e x a s .....................
District s tates' . .
United S ta te s . . .

feet

-1.1
-.9
1.9

-5.1
-4 .0
-2 .5

-3 .0
2.3
6.0

-2 .7
-1 .4
-.1

18,845
46,619
55,762

1. Louisiana, New Mexico, Oklahoma, and Texas,
n.a.— Not available.
SOURCES: Texas Railroad Commission.
U.S. Department of Energy.
Federal Reserve Bank of Dallas.

SOURCES: U.S. Department of Energy.
Federal Reserve Bank of Dallas.

ENERGY LOANS OUTSTANDING1
Eleventh Federal Reserve District

TEXAS ENERGY INDUSTRY EMPLOYMENT
Number of employees
_____ May 1982

Industry

Oil and gas extractio n .. .
Petroleum re fin in g ......... .
Oil field m a c h in e ry ......... .

Percent change from
i.
preceding
month
----------_
---------------_____ _____________
March
April
May

0.3
.3
.5

SOURCES: U.S. Bureau of Labor Statistics.
Federal Reserve Bank of Dallas.

-1.1
- .3
- .9

-1 .5
.0
-4 .2

.
Thousands
of
persons

Percent
/'honno
chang
from
May
1981

289.8
38.6
82.5

7.9
-1 0 .0
5.5
1. Based on survey of largest banks in the District.
2. Includes crude petroleum and natural gas.
SOURCE: Federal Reserve Bank of Dallas.

Rig Count: An Incomplete Indicator of Drilling Activity
The rig count is frequently used as
an indicator of drilling activity because
it is widely available and reported
before footage and wells drilled.
However, it is only an input measure,
one of several factors needed to pro­
duce drilling output. In fact, viewed
alone, the rig count may prove to be a
misleading indicator of drilling activity
because it does not always move at the
same rate or in the same direction as
footage and wells drilled.
Footage and wells drilled often in­
crease with the rig count, but at a
slower rate. In times of high demand,
frequently projects are undertaken in
areas where drilling is more difficult or
where a shortage of skilled drilling
crews develops. In addition, as drilling
climbs, projects are begun with rigs
that are less productive than those
already in use. A tight drilling market
also leads to more frequent mis­

matches between equipment and
projects.
If the relationship between the rig
count and drilling activity was stable,
the difference in rates change between
the two would not hinder use of the rig
count as an indicator of drilling activi­
ty, but there is also a lack of close cor­
respondence between the two. Statis­
tically, movements in the rig count are
related to only about 60% of the varia­
tions in footgage and wells drilled in
Texas and about 75% of these varia­
tions for the United States. This is
because other input factors influence
drilling activity that are neither
measured by nor related to the rig
count. For example, the number of
hours per month that the rigs are able
to run is dependent upon weather
variations. For each month there is
also a different distribution of sites
with various degrees of drilling

difficulty.
Though the rig count is the most
timely and convenient indicator, it is
not a measure of footage or wells
drilled and should be viewed with
caution.
—Nancy Packer

Business Cycle (cent.)
unaffected, but oil imports will rise
with a growing economy. Refining ap­
pears to have bottomed and could
recover coincident with the economy,
give or take a month. Natural gas ex­
traction can be expected to follow its
historical pattern of a strong recovery
that lags the economy by about one
month. However, these cyclica l
developments may be masked to some
extent by the underlying trends.
—Stephen Brown

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