Oil States Suffer Brunt of Downturn

The current downturn in the oil and gas industry slammed into parts of the United States like a locomotive.

For many oil and gas-producing states, the impact was immediate and substantial.

But for U.S. cities hit by the industry’s troubles, it’s been more of a slow-motion train wreck.

Severance taxes and other taxes on oil and gas production are typically collected at the state level, so falling oil and gas prices immediately impact energy-state budgets.

Alaska is heavily dependent on production prices and faces a budget deficit of $3-4 billion, depending on where oil prices go.

Oklahoma had a budget shortfall estimated at $1.3 billion. North Dakota projected a gap of more than $1 billion in its two-year budget cycle.

Even Wyoming, with a smaller budget and less dependence on oil and gas taxes, was planning to cut $300 million or more in spending.

U.S. cities, by contrast, draw their revenue from some combination of sales taxes, property taxes, income taxes, service charges and permit and use fees.

A severe oil and gas slump has an indirect effect on cities as tax revenues decline because of lower employment levels and reduced spending.

Former Oil Capital of the World

In Tulsa, “you don’t see a big impact yet because we are a much more diversified economy. We do have oil and gas companies, but not a big one,” said Tom Seng, applied assistant professor of energy business in the Collins College of Business at the University of Tulsa.

Tulsa government is, however, concerned about the potential loss of Williams Companies Inc., a major pipeline firm involved in a merger with Dallas-based Energy Transfer Equity LP.

Williams is a significant local employer and community contributor.

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The current downturn in the oil and gas industry slammed into parts of the United States like a locomotive.

For many oil and gas-producing states, the impact was immediate and substantial.

But for U.S. cities hit by the industry’s troubles, it’s been more of a slow-motion train wreck.

Severance taxes and other taxes on oil and gas production are typically collected at the state level, so falling oil and gas prices immediately impact energy-state budgets.

Alaska is heavily dependent on production prices and faces a budget deficit of $3-4 billion, depending on where oil prices go.

Oklahoma had a budget shortfall estimated at $1.3 billion. North Dakota projected a gap of more than $1 billion in its two-year budget cycle.

Even Wyoming, with a smaller budget and less dependence on oil and gas taxes, was planning to cut $300 million or more in spending.

U.S. cities, by contrast, draw their revenue from some combination of sales taxes, property taxes, income taxes, service charges and permit and use fees.

A severe oil and gas slump has an indirect effect on cities as tax revenues decline because of lower employment levels and reduced spending.

Former Oil Capital of the World

In Tulsa, “you don’t see a big impact yet because we are a much more diversified economy. We do have oil and gas companies, but not a big one,” said Tom Seng, applied assistant professor of energy business in the Collins College of Business at the University of Tulsa.

Tulsa government is, however, concerned about the potential loss of Williams Companies Inc., a major pipeline firm involved in a merger with Dallas-based Energy Transfer Equity LP.

Williams is a significant local employer and community contributor.

“We’re seeing oil and gas production cut back. That affects the midstream just in terms of throughput,” Seng observed. “The fact that we’re moving downstream (in economic effect) is not a good thing.”

Brien Thorstenberg is senior vice president of economic development for the Tulsa Regional Chamber of Commerce. Its region encompasses 11 counties in northeastern Oklahoma.

He agrees with Seng that the economic impact on Tulsa from the energy downturn has not been substantial, so far.

“The energy industry certainly has lost some jobs. Since January 2015, the region has lost 2,570 jobs in the oil and gas industry,” through the first quarter of 2016, he said.

But Thorstenberg compared that to 5,750 jobs added through the Chamber’s economic development program, mostly in information technology, health care, professional business services and transportation and aerospace.

“Those are actually from projects that our economic development program played a part in,” he said. “You’re still looking at full employment. At times in this region, unemployment has been 4 percent or lower.”

Houston

Unemployment rates in other energy-industry cities reflected the trend of moving higher, but only slightly so.

In March, according to the U.S. Bureau of Labor Statistics, the Houston region had an unemployment rate of 4.9 percent, Tulsa 4.6 percent, Oklahoma City 3.9 percent and Dallas-Ft. Worth 3.8 percent. Unemployment in the greater Denver area was only 3.3 percent.

All of those were below the national average of 5.1 percent.

Diversifying away from reliance on the energy industry has helped cities avoid serious problems in the current slump. In the 1980s, about 84 percent of Houston’s economy was dependent on or affected by conditions in the energy sector. Today that number is 44 percent.

The Houston area had about 107,000 jobs in the “Mining and Logging” sector at the end of last year. The city probably doesn’t need many lumberjacks, so those are primarily upstream oil and gas jobs.

That comprises only about 3.5 percent of total employment in Houston, although jobs in other sectors can be affected by a slower energy economy.

It’s a mistake to consider Houston purely an oil-patch city, said Bill Gilmer, director of the Institute for Regional Forecasting in the C. T. Bauer College of Business at the University of Houston.

“Houston is different from Midland or Odessa in the sense that there’s no oil production in Houston. Houston is an engineering center,” he noted.

“The other thing that sets Houston apart is that it has a huge downstream component. We are a very large center for oil and gas processing,” he said.

Lower production prices actually benefit the refining and petrochemical industries. Lower natural gas prices have had a significant effect in Houston, according to Gilmer.

“Those low gas prices kicked off an enormous boom in petrochemical activity, with between $50 billion and $60 billion in projects under construction,” he said.

He described Houston’s economy as a “witch’s brew” of petrochemical expansion, strong medical and aerospace sectors and an upstream energy industry that’s been all but flattened.

“This was a brutal first quarter for American oil. It may have been the worst quarter we’ve ever seen in the American oil and gas industry,” he said.

Houston does have a timing problem, though.

Gilmer said construction employment from the petrochemical expansion will begin to decline next year as projects are completed. The city needs a reasonably near-term rebound in oil and gas to replace those jobs.

Without that, “we’re talking about, maybe, a mild recession in 2017,” Gilmer said.

Apples and Oranges

One challenge for cities is that relatively well-paid oil industry jobs are being replaced in part by much lower-paying service industry jobs.

“When we lose jobs in the oil and gas industry we lose high-paying jobs. Obviously, the disposable income is going to be quite a bit less,” Seng said.

Tulsa is well-positioned to ride out an energy industry downturn, Thorstenberg said, especially in quality of life. It is not an expensive place to live and it’s attracting millennials who often “find out where they want to live, then they find a job later.”

“We have a lot of high-growth industries. A lot of it is where information technology is embedded in an industry,” he noted.

The city also supports business incubators to “nurture small business that can grow into significant corporate headquarters in the Tulsa region,” he noted.

Thorstenberg said the best hope for Tulsa’s future growth is still “number one, the oil and gas industry rebounding. Really, just continuing the momentum we’ve been having.”

According to Bob Ball, economist for the Chamber, oil and gas prices remain below recovery levels that would help cities grow.

“With regard to oil prices, the perception is that they will need to be in the mid-$50s to completely stabilize things,” he said.

That would mean an increase of 25 to 30 percent in Oklahoma crude pricing, something not forecasted to occur for some time.

State Level

Meanwhile, several oil and gas producing states continue to struggle. Oklahoma has cut spending for education, social services and government employment. The state seemed strangely unprepared for a serious downturn in an industry known for serious downturns.

“In E&P companies it looked like they had no Plan B. And the state had no Plan B. There were no contingency plans out there,” said Seng.

Also, about that runaway oil-bust locomotive:

“Nothing’s putting the brakes on yet, let’s put it that way,” Seng noted.

“The fundamental underpinnings of all this are still very bearish,” he said. “The question will be, ‘How many people have left the industry and are willing to come back?’ And what’s the cash position of these companies? Do they have the money to resume drilling?”