Yucel gic energy update

Plunging Crude Prices: Impact on U.S. and State Economies

Mine Y端cel Senior Vice President and Director of Research

Federal Reserve Bank of Dallas February 2, 2015

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

120 100 80 60

Natural Gas Price *

$47.08

40

$3.06

20 0 2006

2007

*Natural Gas multiplied by 10.

2008

2009

2010

2011

2012

2013

2014

2015

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Outline • How did we get here?

– World oil supply/demand balance • Impact on U.S. economy • Impact on state economies • Where do we go from here?

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World Oil Consumption Growth Million barrels per day 6 World oil consumption growth 5

4

3

2

1

0 Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Source: Energy Information Administration.

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World Oil Consumption Growth

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World Consumption and Non-OPEC Production Growth Million barrels per day 6

World oil consumption growth Non-OPEC production growth

5

4

3

2

1

0 Q1 2013

Q2 2013

Q3 2013

Q4 2013

Source: Energy Information Administration.

Q1 2014

Q2 2014

Q3 2014

Q4 2014

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World Oil Consumption and Production Growth

Million barrels per day 6

World oil consumption growth Non-OPEC production growth

5

OPEC production growth

4 3 2 1 0 -1 -2 Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Source: Energy Information Administration.

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Demand/Supply Balance and Oil Prices Million barrels per day

Dollars per barrel 20 World oil consumption growth Non-OPEC production growth 15 OPEC production growth Change in WTI price (right axis) 10

6 5 4

5

3

0 -5

2

-10

1

-15

0

-20

-1

-25 -30

-2 Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Source: Energy Information Administration.

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Iraq and Libya ramped up output after June 2014 (Cumulative output )

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Energy prices fall more than other commodities

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In contrast to falling prices in 2008

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IMPACT ON U.S. ECONOMY

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U.S. oil and gas production

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Crude Oil Production From Shale

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U.S. rig counts decline

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Oil production holding up

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New rigs and wells very productive (New well oil production per rig)

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How low can prices go ?

• Breakeven costs for different areas: • Bakken – $28 - $85 per barrel

• Eagle Ford – $46 - $80 per barrel

• Permian Basin – $52 - $75 per barrel

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Impact on U.S. Economy • The U.S. benefits from lower oil prices • Boosts consumer disposable income – One penny decline in gasoline prices could increase disposable income by $1.4 billion per year

• Reduces the cost of energy to firms • Reduces profitability of producing oil • A 50% fall in oil prices may lead to a 0.3% to 1.0% increase in GDP (depending on the model) • Headline inflation falls Federal Reserve Bank of Dallas

IMPACT ON STATE ECONOMIES

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Energy Related Employment

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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

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

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WHERE DO WE GO FROM HERE?

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World Consumption Growth Forecast

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Crude Price Forecast

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Summary • Market will adjust – Lower prices will lead to a contraction of supply and increase in demand

• • • •

Global GDP growth is expected to rise over time Oil prices expected to rise U.S. supply response will be swifter than in the past Uncertainties abound

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