Fill out the brief form below for access to the free report.
Energy Update January 2016: Pain and Patience
Times are tough in the oil patch.
For years, America’s oil and gas industry sprinted while the rest of the economy crawled. After the Great Recession, energy was one of the few American industries generating substantial employment and output growth. Fueled by hydraulic fracturing and horizontal drilling in shale plays, the U.S. doubled its production of oil between 2008 and 2015.
But starting in mid-2014, the industry became a victim of its own success. As the U.S., and the world, became flooded with an excess supply of oil, its price collapsed from over $100 per barrel in early 2014 to under $30 by January 2016.
Most experts expect prices to remain low for at least the next couple of years, due to persistent oversupply, OPEC’s refusal to cut production, sluggish economic growth in mature markets like Japan and Europe, and slowing demand growth in China and other emerging markets. As a result, nearly $400 billion in energy-related capital spending has been deferred worldwide since the price of crude began to decline.
The Baker Hughes U.S. active rig count, a leading indicator of demand for products used in drilling, completing, producing, and processing hydrocarbons, has declined by 61% over the past year. In 2015, U.S. investment in mining exploration, wells, and shafts fell 35%, the largest drop since 1986. The energy sector of the S&P 500 ended 2015 down 24%, and fourth quarter earnings for companies in the sector are expected to decline nearly 70% year over year, according to S&P Capital IQ.
Firms across the energy industry, from service provider Halliburton to integrated super-major Chevron, have announced layoffs in a mad scramble to cut costs. Globally, more than 258,000 energy workers lost their job in 2015, according to industry consultant Graves & Co. In Texas, America’s top producer of oil and gas, exploration and production companies have cut 60,000 jobs, or about one-fifth of their workforce.
The current U.S. unemployment rate for the oil, gas, and mining sector is 8.5%, compared to the overall jobless rate of 5%. Mineral royalty owners nationwide have seen their monthly checks cut in half. Restaurant and retail stores in boomtowns like Midland, Texas have seen customers vanish. States and municipalities that thrived for years on revenue from energy-related severance and property taxes have seen the proverbial well run dry.
However, all hope is not lost, especially for the companies with the financial flexibility to be patient. Those who have worked in the energy industry for decades know of its painfully cyclical nature. Fundamentally, it seems assured that the world will continue to consume oil and gas for decades to come. In its 2016 annual energy outlook, ExxonMobil predicts that oil and gas will supply the world with 60% of its energy in the year 2040. What is more, total global energy demand will grow by 25% between 2014 and 2040 as the emerging middle class in countries like India, China, Nigeria, and Thailand begins to buy cars, refrigerators, and electronics.
Even with oil and gas prices at their lowest level in more than a decade, it is an especially exciting time for the North American energy industry. All three countries contain abundant resources of oil, gas, and renewable energy. Thanks to the shale boom, North America has become far less dependent upon imported energy, with the U.S. reducing foreign oil imports by nearly 60% over the past seven years.
Mexico’s recent energy reforms have finally opened the country to private investment, which should reduce electricity costs, improve the competitiveness of the manufacturing sector, and reverse the country’s decade-long decline in hydrocarbon production. The recently passed repeal of the U.S. crude export ban will eliminate unnecessary bottlenecks and allow American producers to capture the full value of their oil on the world marketplace. By 2020, ExxonMobil expects that North America will become a net oil exporter.
Now is not the time to forget about the revolutionary success of the North American energy industry. Instead, North America should continue to integrate its energy transportation and transmission networks, share best practices amongst the three countries, and ensure that its energy workforce is educated, credentialed, and mobile across the continent.
Nicholas Saliba is a consultant for the George W. Bush Institute and a Fellow with the Maguire Energy Institute in the Cox School of Business at Southern Methodist University in Dallas, Texas. He graduated Magna Cum Laude with Honors from Southern Methodist University in May 2014, receiving a B.B.A. in Finance, B.S. in Economics with Financial Applications, and B.A. in Public Policy. He also received minors in History and Political Science, along with a concentration in Energy Management.
Mr. Saliba has been a writer and researcher for the 4% Growth Project, the North America Scorecard Project, and the North America Working Groups of the George W. Bush Institute. He has co-authored numerous studies, and spoken on issues pertaining to finance, economics, and public policy in the energy sector. In 2013, Mr. Saliba was the co-author of the book "The Energy Logjam: Removing Regulatory Obstacles to Fuel the Economy," published by the George W. Bush Institute. Additionally, he has consulted on issues pertaining to energy, economics, and public policy for organizations including Consumer Energy Alliance, Texas Education Service Centers, D Magazine, Bracewell & Giuliani LLP, the Ohio Oil & Gas Association, and Energy Future Holdings.
Mr. Saliba is a member of Delta Sigma Pi Professional Business Fraternity, Omicron Delta Epsilon International Honor Society in Economics, and Phi Beta Kappa.
TARIFFIED: Trade Talk with Matthew Rooney
This week, trade relations between the U.S. and India are continuing to escalate. Earlier this month, the U.S. stopped granting India special trade privileges by taking away the Generalized System of Preferences (GSP) program, and India has responded by enforcing more tariffs of its own. The George W. Bush-SMU Economic Growth Initiative Director Matthew Rooney breaks down the trade conflict: For more information on trade groups and the global economy, visit www.bushcenter.org/scorecard.
How Trade Spreads Holiday Cheer
It is projected that the average American household will spend more than $1,000 during the holidays this year.
Deporting Salvadorans May Lead to Economic Decline
We should think carefully about a policy whose major impacts are likely to be reductions in employment and economic activity here at home, and increased instability and lawlessness along our borders.
Bush Institute's Laura Collins Talks Immigration on Good Morning Texas
Last week, Deputy Director of Economic Growth at the George. W. Bush Institute Laura Collins spoke with Good Morning Texas about immigration myths. During the interview, Collins had the opportunity to set the record straight and address common misconceptions about legal immigrants living in America today. The segment was inspired from facts released earlier this fall by the Bush Institute in the third edition of America's Advantage: A Handbook on Immigration and Economic Growth. Watch the full Good Morning Texas interview here.