The Oil Market: From Boom to Gloom

Mine Yücel Senior Vice President and Director of Research Federal Reserve Bank of Dallas

April 8, 2016

Federal Reserve Bank of Dallas

Oil and gas prices plunge Nominal price, $, weekly 160 140 120

Oil price

100 80 60 $37.67

40 20 0 2000

Natural gas price* 2002

2004

2006

2008

2010

2012

2014

$1.83 2016

NOTE: * = Natural gas price is multiplied by 10. Oil is priced in $/barrel while natural gas is $/MMBtu. Federal Reserve Bank of Dallas SOURCES: Energy Information Administration; Wall Street Journal.

Current oil prices not a record low Real prices of crude oil (January 2016 dollars)

Dollars per barrel 160 140 120 100 80

Refiners' acquisition cost of crude

60 40 20 0 1977

1984

1991

1998

SOURCES: Bureau of Labor Statistics; Energy Information Administration; FRB Dallas calculations.

2005

2012

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Supply/demand mismatch Million barrels per day 100 Implied change in inventories

Million barrels per day 4

Petroleum consumption 95

3

Petroleum production

90

2

Forecasts

85

1

80

0

75

-1 2012

2013

SOURCE: Energy Information Administration.

2014

2015

2016

2017

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IMPACT ON U.S. ECONOMY

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Shale boosts U.S. oil production Million barrels per day 12 2015 9.43 mb/d

10 8 6 4 2 0 1920

1930

1940

SOURCE: Energy Information Administration.

1950

1960

1970

1980

1990

2000

2010

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U.S. shale oil production Thousand barrels per day 4,000

Texas

3,500

3,365

3,000 2,500 2,000

1,591

1,500 1,000

786

500 0 Jan 2010

Kansas Montana Utah Colorado Wyoming New Mexico Oklahoma

Jan 2016

SOURCE: Energy Information Administration.

North Dakota 1,108

1,098

236 Jan 2010

Jan 2016

Jan 2010

Jan 2016

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Rig count plunges, oil production drops Rig count 1,700

Million barrels per day 9.9

1,500

9.4 8.9

Latest estimate 9.02 mb/d (Mar 25)

Crude oil production

1,300 1,100

8.4

U.S. oil rig count

900

7.9

700

7.4

500

6.9 Jan-13

300 Jun-13

Nov-13 Apr-14

SOURCES: Baker Hughes; Energy Information Administration.

Sep-14

Feb-15

Jul-15

Dec-15

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Drilling investment falls with rig count Private fixed investment in mining/exploration

Bln chained 2009 $ 160

OPEC decision U.S. rig count

140

Rig count 2,200 2,000

120

1,800

100

1,600

80

Investment in mining/exploration

1,400

60

1,200

40

1,000

20

800

0

600 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

SOURCES: Baker Hughes; Bureau of Economic Analysis.

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Low oil prices boosted growth in final demand Contribution to real growth, percentage points, SAAR 4 Components of final demand 3

2013:Q1 - 2014:Q2 2.3

2

1.9

2014:Q3 - 2015:Q4

1.6

1

0.6 0.1

0 -0.3

-0.1

-1 -2 Final demand

Personal consumption

Residential investment

NOTE: Components do not sum exactly to final demand due to rounding. SOURCE: Bureau of Economic Analysis.

Business fixed investment

Government

Net exports

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Households benefit from low energy prices and a strong dollar

Contribution to real growth, percentage points, SAAR 4

Components of final demand

3

2013:Q1 - 2014:Q2

2.3 2

1.9

2.1 1.6

2014:Q3 - 2015:Q4

1 0.1

0

0.6

0.3

0.6

-0.3

-0.1

-1 -2 Final demand

Personal consumption

Residential investment

NOTE: Components do not sum exactly to final demand due to rounding. SOURCE: Bureau of Economic Analysis.

Business fixed investment

Government

Net exports

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Mining & manufacturing firms have scaled back cap-ex plans, and investment growth has slowed Contribution to real growth, percentage points, SAAR Components of final demand 4 3

2013:Q1 - 2014:Q2

2.3 2

1.9

2.1 1.6

2014:Q3 - 2015:Q4

1 0.1

0

0.3

0.6

0.3

-0.3

-1

-0.1

-2 Final demand

Personal consumption

Residential investment

NOTE: Components do not sum exactly to final demand due to rounding. SOURCE: Bureau of Economic Analysis.

Business fixed investment

Government

Net exports

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IMPACT ON STATE ECONOMIES

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Low oil prices benefit most states (Effect of a 50% decline in oil prices on employment)

-2.0 -4.3 -0.7

-0.7

-2.3 -1.2

-1.6

-1.7

SOURCE: “The Shale Gas and Tight Oil Boom: U.S. States’ Economic Gains and Vulnerabilities,” by Stephen P.A. Brown and Mine K. Yücel, Council on Foreign Relations, Energy Brief, Oct. 2013.

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Energy states did well in 2014 Percent Change (Dec/Dec) 4.5 4

Texas

3.5 3 U.S.

2.5 2 1.5 1

0

NV ND CO TX FL GA OR UT WA CA SC DE MA TN ID NC U.S. AR AZ RI LA OK MI NY OH KY WY WI NM IN IL MO MD AL PA MN SD KS CT NJ NH IA NE MS VA ME MT HI VT AK WV

0.5

SOURCE: Bureau of Labor Statistics.

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Energy states lose jobs in 2015 Percent Change (Dec/Dec) 5 4 3 U.S.

2

Texas

1 0 -1 -2 -3 -4 -6

ID UT FL OR AZ CA TN CO GA SC WA VA DE NV AR HI NJ NC U.S. KY MI IN MD NH NE MN TX OH MS NY MT IA MA RI SD WI AL VT IL MO PA CT ME NM KS AK OK LA WV WY ND

-5

Federal Reserve Bank of Dallas SOURCE: Bureau of Labor Statistics.

Rig count 1,000

Texas rig count and oil production continue to decline Million barrels per day 4.0

900

3.5

800

3.0

700 600

2.5

Texas oil production

500 400

2.0

300

Texas rig count

200 100

1.5 1.0

2013 SOURCES: Baker Hughes; Energy Information Administration.

2014

2015 Federal Reserve Bank of Dallas

$0

SOURCE: Bloomberg. $80

Wolfcamp - Irion (TX)

Eagle Ford - Dimmit (TX)

Wolfcamp - Reagan (TX)

Eagle Ford - Lavaca (TX)

$64 $64 $64

Spraberry - Irion (TX)

Eagle Ford - McMullen (TX)

Eagle Ford - LaSalle (TX)

Eagle Ford - Atascosa (TX)

$60

Eagle Ford - Zavala (TX)

Wolfcamp - Play Average

Eagle Ford - Live Oak (TX)

Spraberry - Reagan (TX)

$50 $51 $51 $51

Eagle Ford - Play Average

Spraberry - Upton (TX)

Spraberry - Andrews (TX)

Eagle Ford - Gonzales (TX)

$50

Spraberry - Play Average

Bone Spring - Lea (NM)

Wolfcamp - Ward (TX)

Bone Spring - Eddy (NM)

$42 $40 $41 $39 $39 $40

Bone Spring - Play Average

Wolfbone - Play Average

Eagle Ford - Karnes (TX)

Bone Spring - Loving (TX)

Wolfcamp - Loving (TX)

$37

Wolfbone - Reeves (TX)

$40

Spraberry - Howard (TX)

$35 $36

Spraberry - Glasscock (TX)

Bone Spring - Ward (TX)

Wolfcamp - Reeves (TX)

Eagle Ford - DeWitt (TX)

Spraberry - Martin (TX)

$30

Spraberry - Midland (TX)

Regional breakeven prices vary (20% rate of return)

$90 Sum of WTI Break-Even

$83

$70 $78

$66 $69 $69

$58 $61

$55 $53 $54

$43 $46 $47 $47 Play

$30 $30 $31

$20

Eagle Ford Spraberry Wolfcamp Bone Spring Wolfbone

$10

Play/County

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Rig counts still falling Rig count, weekly 1,000

Rig count, weekly 240 Texas

900

200

800 700

160

Oklahoma

Louisiana

600 500

120

400

80

300

North Dakota

40

200 100 0

0 2012 NOTE: Last data point is April 1. SOURCE: Baker Hughes.

2013

2014

2015 Federal Reserve Bank of Dallas

Initial jobless claims still high Index, Jan. 5 '13 = 100, 4 WMA 180

North Dakota

160 140 120

Oklahoma

100

Texas

80

Louisiana U.S.

60 40 20 0 2013 SOURCE: Bureau of Labor Statistics.

2014

2015 Federal Reserve Bank of Dallas

Some states rely heavily on oil and gas severance taxes (Share of 2014 state tax revenues)

Percent 80 70

72.4

60

53.8

50

% Taxes Collected

39.0

40 30

18.5

20

10.9

10

8.9

7.5

0 AK

ND

WY

NM

TX

SOURCE: U.S. Census Bureau, 2014 Annual Survey of State Government Tax Collections.

LA

OK

2.1

0.0

CO

CA

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WHERE DO WE GO FROM HERE?

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Much uncertainty in crude price forecasts

Dollars per barrel 120 Historical spot price 100 80

STEO price forecast NYMEX futures price 95% NYMEX futures confidence interval

60 40 20 0 Jan-15

Jun-15

Nov-15

SOURCE: Energy Information Administration.

Apr-16

Sep-16

Feb-17

Jul-17

Dec-17

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Outlook • “Lower for longer” outlook for oil prices • Oil demand growth is expected to rise over time • Oil price risks : – Downside risks: China, Iran, high inventories – Upside risks: Geopolitical turmoil, low investment, “Production freeze”

• Energy importers such as the U.S. should continue to benefit from lower oil prices. • Rough patch for energy-producing countries and states. • Reform makes Mexican energy sector more open and nimble • Increased opportunities for energy partnership

Federal Reserve Bank of Dallas

The Oil Market: From Boom to Gloom

Mine Yücel Senior Vice President and Director of Research Federal Reserve Bank of Dallas

Federal Reserve Bank of Dallas

Gas production still robust Billion cubic feet per day

Rig count 1,200

90 85

Marketed natural gas production

1,000

80 800

75 70

600

65

400

60

Gas rig count 200

55 50 2010

0 2011

2012

SOURCES: Baker Hughes; Energy Information Administration.

2013

2014

2015

2016

Federal Reserve Bank of Dallas

Households benefit from low energy prices Contribution to real growth, percentage points, SAAR Components of final demand 4 3 2

1.9

2.3 1.6

2.1

2013:Q1 - 2014:Q2 2014:Q3 - 2015:Q4 0.6 0.3 0.3 0.1

1 0

0.2 -0.3

-1

-0.1

-0.5

-2 Final demand

Personal consumption

Residential investment

NOTE: Components do not sum exactly to final demand due to rounding. SOURCE: Bureau of Economic Analysis.

Business fixed investment

Government

Net exports

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