The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
HoustonBusiness A Perspective on the Houston Economy FEDERAL RESERVE BANK OF DALLAS • HOUSTON BRANCH • Upstream Petroleum Employment in the Current Drilling Cycle Oil and gas extraction employment in the United States has been dominated by productivity gains in the producer sector since the 1980s. Although drilling and oil services still show a strong pattern of movement as the rig count rises and falls, productivity has exerted strong downward pressure on producer jobs since the 1980s. T he number of U.S. jobs related to oil and gas production, drilling and services rose a strong 7.3 percent in 2004, the result of a continued upswing in domestic exploration activity. It represents the fifth employment increase in the oil and gas sector since 1989, but structural declines in oil- and gas-related employment seem likely to dominate in the future. Regional changes in oil and gas activity and employment accompanied the 2004 U.S. job increases. Specifically, Texas, New Mexico and the Rocky Mountain states have emerged as winners, while oil-bearing, offshore and mid-continent regions have lost out.1 This article examines recent U.S. trends in oil- and gasrelated employment within the context of longer-term developments in the industry. Our ability to compare employment across time and regions is com- APRIL 2005 plicated by lags in government data releases and recent changes to the rules governing both industry classifications and metropolitan statistical definitions. Even so, the available data tell an interesting story about upstream energy employment through 2004. National Trends The Bureau of Labor Statistics (BLS) provides employment data on three upstream energy sectors relevant to our investigation: oil and gas extraction, drilling, and oil and gas support. These correspond roughly to the industry terms of production, drilling and oil services, respectively.2 One can reasonably aggregate the BLS drilling and support series, leaving two segments of employment: extraction (production) and drilling and support (drilling and services). Figure 1 plots these two series against oilfield activity as measured by the Baker Hughes rotary rig count. As shown in Figure 1, while drilling and support generally track cyclical trends in rig activity, employment in the extraction sector has been in a Figure 1 Employment in Oil Extraction and Support Compared with Rig Count Figure 2 Productivity in Oil and Gas Outpaces the Nonfarm Economy Index, January 1990 = 1 Index: 1990 = 100 1.6 170 1.4 160 Oil and gas extraction Manufacturing Nonfarm business 150 1.2 140 1 130 .8 120 .6 110 .4 Rig count Drilling and support Extraction .2 100 90 0 80 ’90 ’92 ’94 ’96 ’98 ’00 ’02 ’90 ’04 SOURCES: Baker Hughes; Bureau of Labor Statistics; authors’ calculations. near-constant decline in recent years. In fact, extraction employment saw two decades of decline between 1983 and 2003, with 1991 the only (modest) exception. The strong 7.3 percent increase in total upstream employment in 2004 (measured December to December) was widely noted as the first in years. Extraction jobs rose 5.4 percent, and the sum of drilling and support service jobs rose 8.6 percent.3 Prior to the 2004 gains, the total upstream industry saw cyclical increases in 1990, 1993, 1996 and 1999. The Baker Hughes rig count has reached 1,000 working rigs four times since 1989: in April 1990, January 1998, October 2000 and April 2003. The average industry employment corresponding to each date was 359,300, 322,600, 301,000 and 298,200, respectively, indicating that the industry has learned to do more with fewer workers. However, the data also make clear that most of the gains in output per worker in recent years have been concentrated in the extraction, or producer, sector, which follows a long downward trend. Drilling and support have tended to follow the drilling cycle much more closely. ’92 ’94 ’96 ’98 ’00 ’02 SOURCE: Bureau of Labor Statistics. per oil and gas worker surged Throughout the U.S. econ3.6 percent annually from 1990 omy, productivity gains have to 2002, well ahead of the 2.2 been the enemy of short-run percent rate in the U.S. econemployment gains. Since the omy and nearly matching manlast peak in production in the ufacturing’s 3.9 percent rate. fourth quarter of 2000, gross This means that downward presdomestic product has risen 11.2 sure on oil jobs due to producpercent, while nonfarm estabtivity improvements was over 60 lishment jobs have not grown percent greater than that on the at all. January 2005 saw the overall U.S. economy. number of jobs in the U.S. Where do these productivity economy finally match the pregains come from? For the econvious employment peak, endomy as a whole, they are widely ing more than three years of attributed to the New Economy: jobless recovery. new ways to arrange the workWith no new jobs, the inplace and improve production crease in output has been covprocesses made possible by ered by growing output per computers, semiconductors and work hour — productivity gains. advances in telecommunications. Nonfarm productivity grew just 1.4 percent annually on average Table 1 from 1973 to 1990 Oil and Gas Production by State and Region, 2003 but surged to a 2.5 Crude oil Natural gas percent annual rate (billion cubic feet) (thousands of barrels) State/region after 1990. Over Alaska 355,582 490 the past four years, California 250,000 337 with job growth Kansas 33,944 419 stalled, economyLouisiana 90,111 1,362 wide productivity New Mexico 66,130 1,604 1,558 65,356 Oklahoma gains accelerated Texas 405,801 5,244 to 3.9 percent. Throughout the Federal Gulf of Mexico 569,131 4,406 Rockies 105,931 2,905 1990s, the oil and Southeast 32,196 642 gas industry was a Other 99,271 918 leader in producUnited States 2,073,453 19,885 tivity improvement NOTE: State totals include offshore production belonging to the state. Federal Offshore (Figure 2 ). Output except Gulf of Mexico are in “Other.” 2 SOURCE: Energy Information Administration. The oil industry has been a recognized leader in embracing improvements in materials and technology, such as 3-D and 4-D seismic, drill bit sensors and horizontal drilling.4 All have improved the industry’s ability to know where to drill, to drill deeper into the earth, and to drill in deeper waters and harsher environments. But the industry has also benefited from downsizing and outsourcing activities in relatively mundane business areas, such as personnel and accounting services. The data suggest that the bulk of these productivity gains have accrued to producers more than to drilling and support services. Productivity gains are likely to continue their dominance of oil and gas employment once the current cyclical peak is past. However, it is important to recognize that falling employment does not necessarily indicate a declining industry. It may simply be a sign of technological success. Productivity gains in manufacturing, for example, pushed employment down from a peak of 19.4 million in 1979 to 17.7 million in 2000, even though manufacturing output grew rapidly throughout the period. Despite falling employment, the upstream oil and gas sector has held on to about a 1 percent share of GDP since 1987. Regional Trends Table 1 outlines the simple geography of oil and gas in the United States. There are seven key states: Alaska, California, Kansas, Louisiana, New Mexico, Oklahoma and Texas. These seven states, along with the Federal Offshore area, four states in the Rockies (Colorado, Montana, Utah and Wyoming) and three in the Southeast (Alabama, Arkansas and Mississippi), dominate the domestic April 1999, during the last upstream industry. Together trough in overall drilling activthese states and regions accountity. ed for just over 95 percent of State data on marketed natboth oil and natural gas proural gas production are availduction in 2003. able only from 1997 to 2003.5 The recent regional energy In states like Texas and New story revolves around two Mexico, however, significant themes: the oil–gas mix and increases in drilling have mandeclining offshore activity. The aged only to maintain stable period since 1992 has marked a production. In Kansas, Oklaturning point in domestic prohoma, Louisiana and the Fedduction. During the short-lived eral Offshore, stable or declinexpansion of June to December ing drilling activity has resulted 1992, gas-directed exploration in rapidly dropping production overtook oil-directed in its levels. Production is down 10 share of U.S. activity. In June to 15 percent since 1997 in 1992, 40.7 percent of all rigs Louisiana, Oklahoma and the drilling were directed to natural Gulf and 39 percent in Kansas. gas. By the December 1992 Production in the Rockies is up peak, 56.5 percent of drilling 72 percent. Nationwide producwas gas-directed. Continuing tion is down 1.4 percent over this trend, about 85 percent of the period. drilling activity is now directed Table 3 shows one measure to natural gas. of the distribution by state and Table 2 details the share of region of oil and gas employeach region’s oil and gas activment. The data here are taken ity since 1992 as measured by from the Census Bureau’s the Baker Hughes rig count. It County Business Patterns reshows drilling activity shifting port, whereas data in Figure 1 out of states dominated by oil come from the Bureau of Labor production, such as Alaska and Statistics’ monthly Current EmCalifornia. Texas and New Mexployment Statistics survey. In ico show definite long-term Census Bureau data, workers movements of drilling activity are classified as working in into the region, both from 1992 either central or noncentral to 2001 and in the current expansion. The Rocky Mountain states fell out Table 2 of favor in the 1990s but Distribution of Drilling Activity by State and Region have returned strongly in (Oil and gas rigs drilling at peak activity) the present cycle. Percent of rigs Oklahoma and Kansas State/region 2005 2001 1992 have seen continuing 43.9 38.2 34.8 Texas declines in exploration Oklahoma 11.1 12.1 15.7 since 1992. The Gulf of Louisiana 8.2 8.1 6.7 New Mexico 5.8 6.0 4.4 Mexico has clearly not California 2.0 3.3 4.1 done well in the current Kansas .5 1.7 3.5 cycle. It was the big Alaska .8 1.0 .9 winner in the 1990s, Gulf of Mexico 7.0 12.1 5.5 with its share of drilling Rockies 14.7 10.3 13.2 activity growing from 5.5 Southeast 1.1 1.4 1.6 percent to 12.1 percent, Other 4.8 5.6 9.7 but it has fallen back to United States 100 100 100 7 percent in recent NOTE: Texas, Louisiana, Mississippi and Alabama are land drilling only, with months. The number of all offshore in the Gulf of Mexico category. Alaska and California include some offshore drilling. Dates are peaks in activity on rigs working in the Gulf December 18, 1992; June 22, 2001; and March 18, 2005. is now below its level in 3 SOURCE: Baker Hughes. Table 3 Oil and Gas Employment by State and Region, 2002 extraction, or producer, estabrent drilling lishments. The metro areas cycle.6 These State/region Extraction Drilling whose upstream employment is state and Texas 107,554 37,016 24,999 45,539 dominated by extraction are regional data are Oklahoma 24,238 8,725 5,196 10,317 Denver, 83.2 percent; Fort available only Louisiana 42,607 10,633 7,482 24,492 Worth, 66.2; New Orleans, 65; through June New Mexico 10,062 3,204 2,643 4,215 and Oklahoma City, 57.2. The 2004. For the California 12,332 3,682 2,192 6,458 typical city has 54.6 percent of Kansas 5,525 2,646 589 2,290 United States as Alaska 6,270 1,382 905 3,983 its oil- and gas-related jobs in a whole, emdrilling and support, but Lafayployment fell 9.9 Rockies 22,441 8,455 5,073 8,913 ette has 91.6 percent; Houma, 7,134 2,311 1,966 2,857 Southeast percent between Other 23,082 10,226 4,977 7,879 87.3; Bakersfield, 71.2; and June 2001 and Anchorage, 71. April 2002, then United States 261,245 88,280 56,022 116,943 The omission of central esrose 6.6 percent NOTE: Noncentral establishments only. tablishments from this employby June 2004. SOURCE: Census Bureau, County Business Patterns. ment measure challenges reThe net loss in searchers’ ability to capture the industry jobs by establishments. Central estabfull impact of upstream energy June 2004 was 3.4 percent. lishments serve multiple estabemployment in some regions. The regions that do better lishments, such as headquarOfficial data no longer allow us than the U.S. average in retainters, laboratories or central to separate central establishing jobs are those with growing warehouses. ments by industry, but past levels of drilling activity — Table 3, which counts emstudies show that the cities Texas, New Mexico and espeployment only in noncentral with the largest number of cially the Rockies. Oklahoma establishments, mostly captures these establishments are Housdoes well, but probably more employment at establishments ton, Denver, Dallas, Fort Worth, because of gains in producer in the field and serving specific Tulsa, New Orleans and headquarters employment than regions or localities. Because Odessa – Midland.8 The number in drilling or support, espethe Census Bureau no longer of central establishments is cially in Oklahoma City. States reports the specific industry probably dominated by headlosing jobs are also predictable serviced by a subset of central quarters in most of these cities, on the basis of activity shifting establishments, upstream emespecially Houston. In 1997, out of these states: Alaska, Calployment in cities with high for example, Houston had six ifornia and Kansas. Louisiana concentrations of central estabemployees in central establishhas also lost jobs as the share lishments is probably underrepments for every one in Dallas, of drilling activity shifts out of the No. 2 city. Dallas and the resented. the Gulf. Texas dominates in oil and gas employment, accounting Shifts by Metro Area Table 4 for 107,554 jobs, or 41.2 percent Table 5 shows the Change in Oil-Related Jobs by State and Region of the total. Louisiana and Oklasectoral composition of (Decline and recovery in the last oil recession) homa follow with a combined oil- and gas-related Percent change 25.6 percent of jobs. The comemployment for 16 metPeak to Trough to Peak to bined oil-producing states and ropolitan areas, with trough present to present regions account for 91.2 perthe jobs divided into oil State/region (6/01–4/02) (4/02–6/04) (6/01–6/04) cent of employment. Not surand gas extraction, Alaska –7.8 –7.1 –14.9 prisingly, drilling and oil servdrilling and support. California –13.5 3.5 –10.0 ices make up 66.2 percent of The employment measKansas –6.9 6.9 0 –17.2 –7.1 –10.1 Louisiana the industry’s jobs found in the ure here includes jobs 2.9 0.9 3.8 New Mexico field. Texas, Oklahoma and in noncentral establishOklahoma –8.0 13.9 5.9 Louisiana also lead in the numments only, excluding Texas –7.2 6.4 –0.8 ber of drilling and service headquarters, laborato–5.8 14.3 8.5 Rockies workers. ries, central warehouses Southeast –7.8 –0.7 –8.5 Table 4 returns to data comand so forth.7 parable with that used in FigThe typical metro All oil states –7.9 5.1 –2.8 ure 1. It shows percentage area shown here has 9.1 –4.1 –13.2 Non-oil states changes in oil-related employ45.4 percent of its oilUnited States –9.9 6.6 –3.3 ment by region over the curand gas-related jobs in Oil- and gasrelated jobs Support services NOTE: Data are based on the percentage change in mining activity by state. 4 SOURCE: Bureau of Labor Statistics Quarterly Census of Employment and Wages. Table 5 Metropolitan Employment in Oil and Gas, 2002 Metro area Oil- and gas-related Extraction Table 6 Change in Oil-Related Jobs by Metro Area (Decline and recovery in the last oil recession) Drilling Support Houston Odessa–Midland New Orleans Dallas Lafayette Oklahoma City Tulsa Houma Anchorage Bakersfield Denver Longview–Marshall Corpus Christi Los Angeles Fort Worth San Antonio 28,398 8,321 7,580 7,350 6,939 5,207 4,080 3,824 3,545 3,535 3,383 2,438 1,914 1,576 1,475 1,382 15,159 2,801 4,930 3,276 586 2,980 2,500 486 1,027 1,004 2,815 763 596 714 976 700 5,377 2,448 265 700 459 401 675 1,680 842 500 103 601 394 37 115 499 7,862 3,072 2,385 3,374 5,894 1,826 905 1,658 1,676 2,031 465 1,074 924 825 384 183 Sixteen-city total 90,947 41,313 15,096 34,538 Percent change Metro area Houston Odessa Midland New Orleans Dallas Lafayette Oklahoma City Tulsa Houma Anchorage Bakersfield Denver Longview–Marshall Corpus Christi Los Angeles–Long Beach San Antonio NOTE: Noncentral establishments only. SOURCE: Census Bureau, County Business Patterns. United States Peak to trough (6/01–4/02) Trough to present (4/02–6/04) Peak to present (6/01–6/04) –6.1 –18.2 –17.4 –19.6 NR –6.1 –7.1 –5.0 –7.4 –17.3 –10.3 NR 3.6 –1.6 NR 1.2 7.0 17.8 4.0 –5.6 NR –14.8 22.7 –11.4 –10.2 –29.7 5.1 3.3 18.4 28.0 NR –2.4 1.0 –0.3 –13.3 –25.2 NR –20.8 15.7 –16.3 –17.6 –47.0 –5.2 NR 22.0 26.3 NR –1.2 – 9.9 6.6 –3.4 NOTE: NR = Not reported. Data are percentage change in natural resources and mining jobs. other cities listed above each had 2,500 to 4,000 oil and gas employees in central establishments, compared with 23,700 in Houston. Some back-of-the-envelope calculations comparing the data in Table 5 with more comprehensive employment measures suggest that the list of headquarters/central establishment cities has not changed much since 1997.9 Oklahoma City may have moved into the top group, while Tulsa and New Orleans probably have moved down. Houston has likely maintained or added to its lead over the other cities as a headquarters location. Table 6 shows gains and losses in metropolitan employment in oil and gas over the current drilling cycle. Compared with a 3.4 percent national loss through June 2004, cities that did notably better included Corpus Christi, Longview – Marshall, Oklahoma City and Houston. Among those faring worse were Anchorage, New Orleans, Lafayette, Houma, Tulsa and Midland. These results partly reflect SOURCES: Bureau of Labor Statistics Quarterly Census of Employment and Wages, except Bakersfield, Los Angeles and Odessa from Current Employment Statistics Survey. the shifts in drilling activity already noted. Improvement in Corpus Christi and Longview– Marshall reflect a substantial pickup in drilling activity throughout Texas. The pullback in Gulf drilling hurts Houma and Lafayette. However, because Table 6 combines central and noncentral establishments, we can see that shifts in headquarters activity also play a role. Given that many drilling and oil support activities tend to follow drilling activity from one place to another, central establishments (especially headquarters) are relatively “sticky.” Economists have recognized the glue that binds a headquarters to a particular city—and to other headquarters— since the 19th century. The principles apply as much to autos in Detroit and financial services in New York as they do to oil in Houston. Companies find it attractive to locate near many similar businesses in order to lower their cost of doing business. 5 This is because of the industryspecific knowledge generated by headquarters cities and shared through daily interactions such as conferences, professional meetings and even cocktail gossip. Also, such cities offer a large supply of specialized labor and skills. And industry suppliers are drawn there to be close to many large customers. These characteristics —called economies of localization — make it easier and cheaper to operate in large urban clusters of oiland gas-related activity than elsewhere. Houston has dominated headquarters activity in recent years, with many of its gains often coming on the downside of drilling cycles as companies seek lower costs to survive.10 Specific mergers can quickly move large numbers of headquarters jobs from one city to another. There is almost certainly a strong element of shifting headquarters activity in the recent success of Oklahoma City, where local companies like Devon Energy Corp., Chesapeake Energy Corp. and KerrMcGee Corp. have been active in mergers. The same may be said of the losses in Tulsa as a result of Phillips Petroleum Corp.’s merger with Conoco into Houston and Citgo Petroleum Corp.’s move to Houston. Midland, a producer/headquarters city, fails to keep up with national employment trends, while Odessa, a service center, stays ahead of the U.S. employment pace as drilling expands. Conclusion Oil and gas extraction employment in the United States has been dominated by productivity gains in the producer sector since the 1980s. Although drilling and oil services still show a strong pattern of movement as the rig count rises and falls, productivity has exerted strong downward pressure on producer jobs since the 1980s. Recent increases in oil and gas employment have been dominated by drilling and oil services as the rig count has risen to the highest levels of domestic activity since 1986. Over the longer term, as drillling activity recedes to levels more typical of the last decade, it seems likely that productivity will reassert downward pressure on oil-related jobs. As this happens, it is important not to confuse declining employment with a declining industry. Oil and gas extraction has maintained its share of gross domestic product at near 1 percent of output since the late 1980s, and declining employment is best seen as a sign of technological success. This drilling cycle has also been marked by strong regional trends, favoring Texas, New Mexico and the Rocky Mountain states but working against Louisiana, Kansas and Okla- homa. Specific metro areas tied closely to rising activity in the oil fields have done well, while those with headquarters generally have been hurt by shrinking producer employment. Industry merger activity may also have helped or hurt some metro areas. 7 8 — Robert W. Gilmer Jonathan L. Story Gilmer is a vice president of the Federal Reserve Bank of Dallas. Story is an analyst at the Bank’s Houston Branch. 9 Notes 1 2 3 4 5 6 The Rocky Mountain states include Colorado, Montana, Utah and Wyoming. Mid-continent states include Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska and Oklahoma, but the bulk of production originates in Kansas and Oklahoma. Nationwide data on oil and gas extraction and oil and gas support have been reported monthly since 1990 by the Bureau of Labor Statistics. Data on drilling are reported only with a lag in the Quarterly Census of Employment and Wages. As a result, we projected drilling employment as a function of the rig count for the final six months of 2004. “U.S. Upstream Jobs Rose in 2004, Data Show,” by Nick Snow, Oil & Gas Journal, January 14, 2005, p. 34. “The New Old Economy: Oil, Computers, and the Reinvention of the Earth,” by Jonathan Rauch, The Atlantic Monthly, January 2001, p. 42. In 1997, the Department of Energy created a separate category for Federal Offshore. Before that, offshore data were included in data for individual states. Data for 2004 by state are only available through October. The data in Table 3 from County Business Patterns remain the latest available, and because of changes in industry definitions, comparisons cannot be made to dates before 2001. The 2001 release also marked the end of central establishments being reported for individual sectors, so only noncentral establishments are reported. In Table 4, disclosure limitations mean that only total mining can be reported by state, not oil and gas specifically. For the large oil states in the table, oil and gas dominate the mining sector, 6 10 and the reported percentage changes are a reasonable estimate of swings in oil-related activity. The exclusion of central establishments affects Houston, Odessa–Midland, New Orleans, Dallas and Lafayette the most because these cities lead the way in totals for such establishments. “The Oil Industry and the Cities: Consolidation in the Oil Extraction Industry,” by Robert W. Gilmer and Jun Ishii, Federal Reserve Bank of Dallas Houston Business, April 1996; “Urban Oil Consolidation: An Update,” by Robert W. Gilmer and David G. Kang, Federal Reserve Bank of Dallas Houston Business, August 2000. The calculation referred to is a comparison of a comprehensive measure of employment in oil and gas extraction prepared by the Bureau of Economic Analysis to the number in Table 5. The difference between the measures includes a broader definition of establishment employment and the self-employed. However, half or more of the difference can be attributed to jobs in central establishments. The differences were largest in those cities where central establishments have been found to be important in past studies. According to the list of the largest 100 oil producers in 2003, only six cities today are home to the headquarters of more than two of these producers: Houston (28), Denver (11), Dallas (9), Oklahoma City (6), Tulsa (5) and Fort Worth (4). Dallas has the most producer assets ($182.1 billion), although 95.7 percent of them belong to one company, ExxonMobil. Houston ($170.6 billion) and Oklahoma City ($42 billion) follow. See “OGJ 200/100,” by Laura Bell and Marilyn Radler, Oil & Gas Journal, September 13, 2004, pp. 36 – 41. Heads Up at the Dallas Fed Nearly every day, the Dallas Fed publishes a wealth of economic research and data. You can get a heads up on this valuable and timely information through the Dallas Fed’s e-mail subscription services. Whether you are an executive, business owner, banker, economist, teacher or student, you will find much to interest you. Publications The latest research from the Dallas Fed—Southwest Economy, Houston Business, Regional and National Economic Updates, Hot Stats, Economic Insights, and many others. Coming soon: Metro Business Cycle Indexes! Beige Book A summary of anecdotal information about recent economic conditions and trends in the Eleventh District. Events Conferences, workshops and other Dallas Fed events. Community Affairs Publications related to the Community Reinvestment Act, community and economic development, access to credit for small businesses, affordable housing and fair lending, plus upcoming events. District Notices The latest on regulatory and financial services matters for financial institutions. Economic Education News and events related to the Dallas Fed’s active economic education program. Economic and Financial Policy Review The latest issues plus upcoming research-oriented conferences and events sponsored by the Dallas Fed. To subscribe to any of these services, simply go to the Dallas Fed web site at www.dallasfed.org and click on “Tools, E-mail Alerts.” Then select the e-mail subscription services you need and follow the instructions. It’s free and easy. www.dallasfed.org Your Information Source 7 Houston W ith Houston’s energy sector stretched to the limit, both upstream and downstream, it was a surprise to see 2004 job growth estimates for Houston revised downward. With U.S. and global growth running strong and the rig count at its highest levels since 1986, total employment growth for Houston was revised down to only 1.2 percent over the past 12 months. The local unemployment rate stands at 6 percent, (seasonally adjusted), the same as the state and highest among the big Texas Triangle metros. The split between rapid production growth and a sluggish job market continues. Retail and Auto Sales Discount retailers report excellent sales, but the rest of the market continues to struggle to meet their plans for the year. Department stores were generally running below plan through the first quarter, with at least one important exception. Furniture stores report sales below expectations, despite rapid sales of new and existing homes. Independent retailers must have a solid niche in the market simply to survive. Auto sales remained in decline through the first two months of 2005 after ending 2004 more than 15 percent below the 2001 peak in local auto sales. Incentive programs and a surge of buying forced by Tropical Storm Allison in 2001 stole at least part of current sales. Crude Oil and Natural Gas Markets Crude oil rose from $46–$47 per barrel to $57 and fell back BeigeBook April 2005 quickly to $53. The price increases come in the face of domestic crude inventories building rapidly toward fiveyear highs and evidence from the spot market that adequate oil is available. Another increase in OPEC’s quota (by 500,000 barrels per day) did little to cool prices. Driving crude price is fear of the unknown: a rapidly approaching summer driving season, limited refinery capacity and no space capacity in OPEC. Crude demand was seasonally weak because of scheduled refinery maintenance. Natural gas also saw its price increase against a backdrop of rising inventories. Gas prices moved from near $6 per thousand cubic feet in early February to near $7.25 in early April. Natural gas inventories are now 22 percent higher than the five-year average, with the heating season rapidly coming to an end. Apart from cold weather, natural gas prices moved up along with crude. Refining and Petrochemicals Refiners were taking capacity off-line until mid-March but added it back slowly as the turnaround season ended. Despite the large increases in crude feedstock prices, refiners were able to double margins in March from levels that were already good. Strong product demand and limited capacity allowed profits to increase for both sweet and sour crude. Demand for basic petro- chemicals was reported as robust, except for some normal first-quarter weakness in a few products such as ethylene and PVC. Pricing is clearly in the hands of chemical producers, and margins are strong. PVC, styrene monomer (ABS), benzene, butadiene, polycarbonate and chlorine are among products whose prices have risen recently. Oil Services and Machinery Producer drilling plans have moved upward faster than anyone forecast early in the year. The U.S. rig count has surpassed the last 2001 peak and is now at its highest point since 1986. International drilling rose by more than 30 rigs during the past two months. Pricing power for oil services moved in favor of services over operators late last year, and the service providers’ bargaining position continues to strengthen. The discussion in the service industry has moved to speculation about how long the cycle will last — normal is two years — as firms begin to consider capacity expansion. An order was placed recently for construction of 10 new land rigs, and some capacity was added incrementally in pressure pumping. Labor remains a constraint for the industry, with operators and service companies now actively stealing employees from each other — rig hands, truck drivers, engineers and others. For more information or copies of this publication, contact Bill Gilmer at (713) 652-1546 or bill.gilmer@dal.frb.org, or write Bill Gilmer, Houston Branch, Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is also available on the Internet at www.dallasfed.org. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System..
@FedFRASER