OIL AND GAS INDUSTRY UPDATE The lower energy price environment is affecting new production and may be dampening broader economic growth in Colorado. Our contention remains that lower energy prices are a net negative to the Colorado economy since the state is a top 10 producer of both oil and gas. The severity of the dampening depends on the duration of the low price environment. Counties with significant industry production and employment will experience the greatest impact, but economies that participate in the supply chain will also be impacted. The energy economy of 2014 and 2015 looks vastly different than even three years ago. A lag is observed between prices and economic activity.
Background
Oil and gas prices recorded a precipitous decline in 2014 that has extended into early spring 2015. As of mid-April, the West Texas Intermediate (WTI) spot price was 49% below the June 20, 2014, peak. Prices are 38% below the five-year average. Price volatility has stabilized compared to three months ago. The WTI has now recorded 10 months of yearover-year declines. Drilling permits and starts are down for the first three months of 2015 year-over-year in Colorado, and the rig count is down more than 40% year-over-year.
Natural gas prices are also off peak from 2014, down 44% in April. The average monthly price topped out at $6.00 per million BTUs in February before falling, to $2.63, in April (as of April 15).
The impact of gasoline prices is readily observable to consumers. Prices topped $3.71 per gallon on August 18, 2014, before falling 48%, to $1.93, in Colorado on January 19, 2015, according to the Energy Information Administration (EIA). Despite prices rebounding 25%, the average in Colorado of $2.41 on April 20, 2015, remains 34% below the same period a year ago, and 30% below the five-year average.
Employment
The Mining and Logging industry lagged the state entering the recession and led the state in its recovery. Employment in the Mining and Logging industry in Colorado is made up of mostly oil and gas workers (~80%). The industry continued to add jobs in 2008, a full eight months after the recession took hold on total employment in Colorado. However, the Mining and Logging industry quickly shed jobs as well, losing one-quarter of total employment in 12 months. As of March 2015, the industry was 18% above 2008 peak employment compared to 6% for total employment in the state.
Historical Perspective
Colorado’s oil and gas industry has changed dramatically over the past 10 years. In 2004, the value of natural gas production eclipsed oil production nearly 7 to 1, and the epicenter of Colorado energy production was in the gas-rich fields of La Plata, Montezuma, and Garfield counties. Garfield and Weld counties jockeyed for the top position in the number of drilling permits each year. The DenverJulesberg Basin quickly rivaled new drilling in the Piceance and San Juan basins. In 2014, oil production in Colorado totaled an estimated 93 million barrels, growing by 28 million barrels from 2013 (which is more than the total production in 2007). Natural gas production in 2014 was 9.2% below the 2011 peak.
During the last major price event in 2009, extraction jobs remained stable and pipeline transportation jobs increased (13%), but drilling (-49%), support activities (-19%), and pipeline construction (-27%) jobs decreased sharply. Industry wages declined by $604 million in a single year. However, employment rebounded strongly and led the state in the employment recovery following the recession.
Price Impact
While lower prices are a boost to the consumer (income effect), the downside risk of these lower prices is that Colorado’s energy economy slows, dragging down some of the strong growth that the state has benefited from postrecession. The energy industry pays above-average wages ($104,626 in 2013) and employs almost 34,000 workers upstream and midstream (30,000 employees, 4,000 sole proprietors). While many of these workers may not be affected by falling prices, the exploration and drilling jobs are among the first to be impacted. Monthly data through March show seasonally adjusted Mining and Logging employment decreasing month-over-month for the last two months, and the pace of growth slowing to 8.9% year-over– year, the slowest pace since February 2014.
Modeling the impact of lower oil and gas prices on the state economy, state GDP grows at a slower rate, but the impact of the lower prices is not recessionary. Total employment grows 1.1 percentage points slower in the state due to the oil price decline in 2015, but employment grows faster in 2016 and 2017 as oil prices rebound above $80 per barrel.
Richard Wobbekind Executive Director| Business Research Division [email protected] | 303-492-1147
Brian Lewandowski Associate Director | Business Research Division [email protected] | 303-492-3307
Leeds School of Business University of Colorado Boulder Direct: 303-492-3307 | http://leeds.colorado.edu/brd 420 UCB | Boulder, CO 80309