Transcript Houston Rides the Global Commodity Boom

Houston Rides the Global
Commodity Boom
Robert W. Gilmer
Vice President and Senior Economist
Houston Branch
Federal Reserve Bank of Dallas
April 2008
Percent Change in Houston
Employment, 1996-2008
6
5
4
3
2
1
0
-1
19961997 199819992000 2001200220032004 2005200620072008
Note: December to December changes, except 2008 which is year-to-date
Houston Index of Coincident Economic
Activity, Jan 2000-Present
188
Index: July 1992=100
184
180
176
172
168
164
160
156
2000
2001
2002
2003
2004
2005
2006
2007
2008
Purchasing Managers’ Index
US and Houston Compared
80
70
60
50
40
Houston
US
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
30
Unemployment Rate
7.5
7
6.5
6
5.5
5
4.5
4
3.5
3
Houston
20
08
20
06
20
07
20
05
20
04
20
03
20
02
20
01
US
20
00
Percent
Houston vs. US, SA
Refiners’ Acquisition Cost of Crude Oil
1994 to Present
75
65
55
45
35
25
15
20
08
20
07
20
06
20
05
20
04
20
02
20
00
19
98
19
96
5
19
94
Dollars per Barrel
85
Wellhead Price of Natural Gas
Dollars per Thousand Cubic Feet
1994 to Present
11
9
7
5
3
1
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
External Forces that Drive
Houston
• US Economy
• Global Economic Conditions
• Oil and Natural Gas Markets
OPEC’s Price Band and the Old
Paradigm
• In March 2000, OPEC established a price range
of $22-$28 for crude oil
• The lower band of $22 was to protect OPEC’s
revenue at a sufficiently high level
• The upper band of $28 was to keep price from
going too high, to avoid offering exploration
incentives to non-OPEC producers
• Non-OPEC producers saw this as a range of
moderate prices, with likely periodic collapses in
price due to slack demand and OPEC-member
cheating
Growth in the Demand for Crude Oil
(Annual Percentage Rate)
1989-2001 2001-2007 1989-2007
OECD
North America
1.8
1.1
1.6
Europe
1.5
0.1
1.0
Pacific
3.5
-0.8
2.1
Former Soviet Union
-7.0
0.9
-4.4
China
5.8
8.1
7.5
Other
1.9
3.3
2.4
1.3
2.2
1.6
…
NonOECD
…
World
Total
OPEC Spare Capacity Rose in 2006-07
(Percent Sustainable Production)
11
9
7
5
3
1
-12004
2005
2006
Excludes Iraq and Angola, and excludes Nigeria, Venezuela and
Indonesia from Spare capacity calculations. IEA, Oil Market Report
2007
2008
$/bbl
Oil Prices Rise as OPEC Spare
Capacity Falls, 2001-2007
85
75
65
55
45
35
25
15
0
5
10
15
20
25
Spare Capacity (% )
Spare capacity in OPEC 10, West Texas Intermediate price
Sources of Oil Supply
(Million Barrels per Day)
Total
OPEC
Non-OPEC
1999
74.2
29.4
44.8
2004
83.4
33.1
50.3
2007
85.5
35.4
50.1
Changes from second quarter to second quarter of each year.
Why Haven’t Oil Supplies
Responded?
• Reluctance by producers to buy into this price cycle until
2004.
• Global scarcity of equipment and oil-related skills once
they did buy into the expansion. This raised the price of
oil investment.
• Reluctance to move into or expand exploration in
politically unsettled regions. Geologic uncertainty
preferred to political uncertainty.
• Oil fields getting smaller, scarcer. Higher prices justified
for conventional oil.
• Oil is increasingly coming from unconventional areas
that technical barriers in development
Working Rigs
Drilling in the U.S. Slowly Returns to
Highest Levels Since 1986
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1997
1998
1999
2000
2001
2002
Baker Hughes rig count, seasonally adjusted
2003
2004
2005
2006
2007
2008
International Rig Count Highest
Since 1982
1100
1000
900
800
700
600
500
1990
1992
1994
1996
Excludes Iran and the Sudan
1998
2000
2002
2004
2006
2008
Oil and Natural Gas Mining Jobs in Houston:
1990 to Present
86
76
71
66
61
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
56
19
90
Jobs (000's)
81
Houston Shows Growth in Both
Producer and Oil Service Jobs
50
40
35
30
25
20
Producers
Services
20
06
20
07
20
08
20
04
20
02
20
00
19
98
19
96
19
94
19
92
15
19
90
Jobs (000)
45
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Employment (000's)
Manufacturing Jobs in Houston
1990 to Present
260
250
240
230
220
210
200
190
180
170
160
Chart 4. Commodity Price Indexes, IMF
Index, 2000=100
350
Metals
300
250
Energy
200
Food
All commodities
150
100
50
2002
Agricultural raw
materials
2003
2004
2005
2006
2007
2008
What Is Behind the Commodity
Boom?
• Primarily, it is the growth of the developing
world. Since 2002, they account for 90%
of the growth in consumption of oil, 90% of
metals’ growth, and 80% of food.
• Lower U.S. interest rates (other things
equal) raise the price of commodities.
• Dollar depreciation raises the purchasing
power of other currencies, and stimulates
the demand for oil.
Dollar Indexes, 1973 - present
150
120
90
60
Jan 5 1973
Jan 4 1980
Jan 2 1987
Dec 31 1993
Major Currencies
Broader Range of Currencies
Board of Governors, Federal Reserve System
Dec 29 2000
Dec 28 2007
Price of a Barrel of Crude Rises Less Steeply in
Euros Compared to Dollars
100
80
60
In Dollars
In Euros
40
20
0
1999 2000 2001 2002 2003 2004
2005 2006 2007 2008
2008 price for first quarter only; refiner acquisition cost of imported crude
Recent IMF Study Finds a One Percent
Depreciation of the Dollar Drives a …
• …one percent short-run increase in oil and
gold prices,
• And a more than one-percent increase in
oil and gold prices as time passes.
• The effect on metals and most non-fuel
commodities is smaller but significant.
• The effect on grains in not significant.
IMF World Economic Outlook
Annual Percent Growth
2006
2007
2008
World
5.0
4.9
3.7
Revised Outlook
Since January
-0.5
US
2.9
2.2
0.5
-1.0
9.6
(11.1)
9.6
(11.4)
8.2
(9.3)
-0.4
(-0.7)
Euro Area
2.8
2.6
1.4
-0.2
Japan
2.4
1.9
1.4
-0.1
Devel. Asia
(China)
Source: IMF, World Economic Outlook Update Projections, April 2008
Can Emerging Country Growth Really
Decouple from the US, Europe and Japan?
•
•
•
•
Strong internal growth dynamics
A rising share of global trade
More resilient policy framework
But spillovers from the developed world
still a factor – accounting for maybe 35
percent of growth for emerging
economies, 45 percent for more
commodity dependent
For Houston? Where Does the
Chain End?
• Slow growth in the US economy, and the
rest of the developed world?
• Possible slowdown in the developed world
to follow?
• A pull back in the commodity boom, and in
oil markets?
• Finally, a slowdown in Houston?