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May 1996 Houston Business FEDERAL RESERVE BANK OF DALLAS HOUSTON BRANCH A Perspective on the Houston Economy Industrial Structure In Oil Cities: Diversification Revisited T These cities do not present an unusual industrial profile. A few oil cities remain highly dependent on oil extraction, but such dependence is also found in the ties between non-oil cities and industries such as autos, computers or steel. he April issue of Houston Business presented a list of 29 cities that are home to a significant number of oil extraction employees. That article focused on the role of these cities within the oil industry, the number of oil and natural gas jobs, and the distribution of these jobs among oil production, services, machinery and headquarter establishments. In recent years, low and volatile energy prices, rising industry productivity and growing foreign, rather than domestic, exploration were found to have reduced the number of U.S. energy jobs and changed their geographic distribution. The focus of this article shifts to the share of oil and gas extraction employment in these 29 cities and to the implications of significant oil employment for industrial structure. In particular, this article addresses the question of whether these cities, collectively or individually, had become so dependent on oil extraction that they were left with few growth alternatives when the oil bust arrived. The answer, it turns out, is that, as a group, these cities do not present an unusual industrial profile. A few oil cities remain highly dependent on oil extraction, but such dependence is also found in the ties between non-oil cities and industries such as autos, computers or steel. Strong regional economic linkages to a single industry are not unique to the oil extraction industry. INDUSTRIAL DIVERSIFICATION Any discussion of how any one industry affects a region quickly turns to industrial diversification. If this industry is hurt, what alternatives does the region have? Diversification is difficult to measure, but for this study, we made an industry-by-industry comparison of earnings (wages, salaries and benefits) paid in each oil city with that paid in the United States as a whole. The United States represents near-perfect diversification in the sense of being a mix of all industries in all cities. The measure used in this study is large for cities where the shares of earnings across industries diverge widely from the U.S. norm. The measure also isolates those industries that make each city different from the United States. The measure is I = n (si − si * )2 i =1 si * ∑ ∗ 100, where si is the city share of earnings in industry i, si* is the U.S. share of earnings in industry i and n is the number of industries. Table 1 shows this list of oil cities, rankordered from top to bottom according to their index value in 1987, which indicates how different they are from the U.S. norm. Table 1 Diversification Indexes for 29 Oil Cities City Index Made different by Midland–Odessa Houma, Louisiana Lafayette, Louisiana Casper, Wyoming Wichita, Kansas 1,274 980 650 329 310 Bakersfield Laredo Longview – Marshall Abilene, Texas Corpus Christi Amarillo Tulsa New Orleans Wichita Falls New York Houston Tyler Mobile San Antonio Los Angeles Fort Worth 256 232 188 185 170 163 144 144 141 121 119 75 74 59 59 58 Oil and gas extraction Oil and gas extraction Oil and gas extraction Oil and gas extraction Transportation equipment, excluding automobiles Oil and gas extraction Oil and gas extraction Oil and gas extraction Military Oil refining Oil and gas extraction Oil and gas extraction Oil and gas extraction Military Brokerage and finance Oil and gas extraction Oil and gas extraction Paper manufacture Federal military Motion pictures Transportation equipment, excluding automobiles Oil and gas extraction Air transportation Primary metal Oil and gas extraction Oil and gas extraction Metal mining Oil and gas extraction Wholesale trade Oklahoma City San Francisco Pittsburgh Shreveport Denver Salt Lake City Dallas Chicago 51 46 41 39 39 31 29 15 Average oil city 208 When computed for 1993, the values were not much changed from those in Table 1. The industry that contributed most to making each city different from the United States is also listed. Midland–Odessa, Houma and Lafayette top the list, an indication that these are the cities most different from the United States as a whole. Oil and gas extraction is what makes these cities different; not much else is distinctive about their industrial structures. The No. 2 industry in Midland–Odessa, for example, turns out to be pipeline transportation. A look down the list, at least as far as New York, reveals that if oil and gas extraction is not the No. 1 industry contributing to differences from the United States, it is No. 2. Cities ranked below the first three cities on the list almost always have some industrial alternative, other than oil and gas extraction, to fall back on; these alternative industries stand out in this measure and make each city distinctive. Near the top of the list, Wichita, Kansas, stands out as a city where aircraft manufacture, even more than oil, pulls the city far from the national norm, and military employment does the same for Wichita Falls and Abilene, Texas. As second industries, Bakersfield, California, has agriculture; Laredo has transportation services; and Houston, Longview–Marshall and New Orleans have chemicals. SOME PERSPECTIVE To help interpret these results, we made a second list of 29 cities by rank-ordering all U.S. metropolitan areas by total 1987 earnings. For every oil city, the next smallest metropolitan area not already on the oil-city list was chosen. The result was a comparable list of 29 metropolitan areas, displayed in Table 2; these areas are similar in size to the oil cities but are not dependent on oil extraction. Atlantic City is home to hotels and casinos and, with the largest index on either list, turns out to be most different from the U.S. norm. Instruments in Rochester, chemicals in Brazoria and autos in Detroit also pull the index values well off the norm. The average index in 1987 for the two lists is not very different (208 for oil cities versus 194 for non-oil cities), and the difference grew only slightly when the calculations were repeated for 1993. Although some highly diversified cities, such as St. Louis, Buffalo, Philadelphia and Minneapolis, are on the alternative list, in many instances a single industry pulls the city away from the United States’ typical industrial structure. These results are not confined to smaller cities. Table 3 summarizes the index for the largest cities on the list and classifies them into diversified, intermediate and not diversified. On the intermediate list are many cities that serve as key regional distribution centers but are pulled from the norm by a single important industry; examples include oil extraction in Dallas, steel in Pittsburgh, air transportation in Miami and entertainment in Los Angeles. On the “not diversified” list are four cities that serve as headquarters for large industries. It is difficult to know what the nation’s four largest and most important industries might be, but autos (Detroit); financial services (New York); federal government (Washington, D.C.); and oil extraction, refining and petrochemicals (Houston) might be a good guess. These four cities stand atop a national hierarchy of smaller cities that play distinct regional roles in their Table 2 Diversification Indexes for 29 Selected Cities City Index Made different by Atlantic City Rochester, New York Brazoria, Texas Detroit Huntington, West Virginia Victoria, Texas Washington, D.C. 2,054 816 697 357 294 209 175 Hotels Instruments Chemicals Motor vehicles and parts Oil refining Oil and gas extraction Federal civilian government Paper manufacturing Fisheries Coal mining Amusements State and local government Trucking and warehousing Coal mining Rubber and plastic Instruments Air transportation Railroads Tobacco products State and local government Electrical equipment, excluding computers Instruments Apparel Wholesale trade Transportation equipment, excluding automobiles Instruments Educational services Fabricated metal State and local government Monroe, Louisiana Barnstable, Massachusetts Steubenville, New York Orlando Lawrence, Massachusetts Joplin, Missouri Evansville, Indiana South Bend, Indiana Santa Rosa, California Miami Omaha Raleigh – Durham Albany, New York Orange County, California 98 81 80 79 75 74 68 68 61 48 47 32 31 29 New Haven, Connecticut Knoxville, Tennessee Atlanta Wilmington, Delaware 27 26 21 20 Minneapolis Philadelphia Buffalo St. Louis 19 12 12 11 Average city 194 Table 3 Diversification Among Large Cities (Index of Industrial Diversity) Large cities on the list Index value Diversified (index < 25) St. Louis Buffalo Philadelphia Chicago Minneapolis Atlanta Boston 10.9 12.0 12.0 15.2 19.2 20.6 21.4 Intermediate (25 < index < 80) Dallas Denver Pittsburgh San Francisco Miami Los Angeles 28.7 38.5 40.6 46.4 48.3 58.9 Not diversified (80 < index) Houston New York Washington, D.C. Detroit 119.2 121.3 175.2 351.1 industries. And each of these four cities has suffered gains and losses in recent years with the ups and downs of its chief industry. If Houston’s role in the nation’s energy industry distinguishes it from other U.S. cities, it is a role that has parallels in other industries and among the nation’s largest cities. CONCLUSION This study offers a perspective on industrial diversification among U.S. cities, including oil cities, that is based on industrial structure. Some metropolitan areas, such as Midland–Odessa and Lafayette, seem to be built on oil, with few alternatives. But the oil industry’s results are hardly unique in concentrating in a certain area; gambling in Atlantic City and autos in Detroit are similar in that they contribute to a relatively narrow economic base. On average, the industrial structure of oil cities is not that different from that of non-oil cities. Houston, as the nation’s largest oil city, has an industrial structure that sets it apart from the U.S. norm. Yet even Houston’s bond with oil has parallels among the nation’s largest cities: Detroit and autos, New York and financial services and Washington, D.C., and federal employment. Houston may be unique as the nation’s largest oil city, but other large U.S. cities play similar roles as headquarters for some of the nation’s biggest industries. APRIL 1996 HOUSTON BEIGE BOOK H ouston respondents to the Fed’s April Beige Book survey saw a solid local economic expansion under way, and they expected continued good economic conditions. Retail sales, auto sales, and sales of new and existing homes all improved in recent weeks, and home and auto sales are running at record levels. RETAILING AND AUTO SALES Retailers reported that demand has improved and winter inventories have cleared out. The fundamentals remained unchanged to the extent that markdowns and heavy promotions are still needed to move goods, but consumers at least proved more responsive to major sales events. Sales of autos and trucks climbed 9 percent in March, compared with 12 months earlier, then 29 percent more in April, the best April showing since 1982. Low interest rates, cool dry weather, tax refunds, rebates from national manufacturers and a good local economy boosted April figures. PETROLEUM AND PRODUCT PRICES Crude oil prices rose past $20 per barrel in mid-March and ranged between $23 and $25 during most of April. The key factor pushing prices upward has been low inventories of crude oil and products. The threat of Iraqi crude’s returning to market made the idea of building crude inventories unattractive because any resulting drop in crude prices would force markdowns in the value of the inventory. In late April, the level of crude oil inventories was at a 15-year low. Heating oil inventories were stretched by one of the longest, coldest winters on record, which delayed production of gasoline for the summer driving season. Refiners’ margins have been volatile and mediocre. By not holding inventory, refiners often found themselves caught between wholesale prices and the rising cost of crude. High prices at the pump have benefited gasoline marketing more than refining. Cash prices for natural gas have edged slowly down toward $2.20, the lowest price in several months. As the cold winter ended, however, storage was only 18 percent of capacity. Heavy storage injections are expected to hold prices at favorable levels. PETROCHEMICALS Petrochemical demand improved, inventories were in good shape, and prices were stable or rising. The industry’s sharp slowdown in 1995 seemed to be over. Despite higher energy feedstock costs, the industry’s margins were positive and respondents expected continued improvement over the summer. OIL SERVICES AND MACHINERY Respondents in oil services continued to report strong demand, good prices and solid profits. The key drivers remained offshore activity in the Gulf of Mexico and the North Sea, and growing activity in foreign markets. Domestic activity improved in recent weeks, led by a surge in natural gas drilling. The Gulf of Mexico, particularly well positioned to deliver gas to the East Coast, continued to attract strong interest. HEALTH CARE SERVICES The trend toward managed health care and away from traditional health insurance continued. Large employers and insurance companies continued to insist on better cost management, which often means shifting care out of hospitals and toward outpatient clinics and home care. Houston’s overall health service employment continued to grow at about 4 percent, but industry restructuring resulted in large layoffs at some hospitals and strong local growth in home care. HOME-BUILDING Housing starts in March were at the highest level of the past 10 years, as home sales in the first quarter ran 35 percent higher than one year ago. Existing home sales hit the highest total ever registered for March. Despite the strong local market, prices of building material are stable, with lumber, plywood and wallboard prices level or falling. For more information, call Bill Gilmer at (713) 652-1546. For a copy of this publication, write to Bill Gilmer • Houston Branch • Federal Reserve Bank of Dallas P.O. Box 2578 • Houston, Texas 77252 The views expressed are those of the author and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.
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