The proliferation of hydraulic fracking to extract oil and natural gas has been one of the most profound drivers of regional-level growth prospects in recent memory. It revitalized the energy industry in traditional oil producers (Texas, Oklahoma) and opened up brand new industries in North Dakota and Pennsylvania, bringing an economic windfall to rural areas that otherwise would provide little interest for outside investment. It is hard to overstate the type of economic impact a hot energy play can bring to a region. The industry is prone to booms and busts, however, with the oil price correction in late 2014 serving as a stark reminder of how fickle these development dollars can be.
With Brent prices falling from above $100 in mid-2014 to the low $30s in early 2016, energy producers were forced to become leaner, slashing rigs and employment and reevaluating investment plans. State economies with large energy footprints were hit hard. Indeed, Louisiana, North Dakota, Oklahoma, West Virginia, and Wyoming entered varying degrees of recession.
This raises the question: How are energy producing states faring some four years after the initial correction? The answer is: resoundingly much improved from the bottom of the cycle, but not back to the pre-correction heights at least in terms of jobs and rigs. Production is another story, however. Efficiency gains and new technologies mean that operators can do more with less, with new-well oil and natural gas production per rig more than doubling compared to levels in late 2014. This lessens the need for new rigs and thus field workers.
Consequently, rig counts are down in almost every state compared with late 2014. New Mexico is the lone exception, supported by booming activity in the Permian. Indeed, the Permian has been the hottest play coming out of the oil downturn. It is now home to 46% of active US land rigs, up from 29% in late 2014.
Next door, Texas rig counts have performed relatively well but the overall numbers are softened by weakness in the Eagle Ford and Barnett plays. The Cana Woodford in Oklahoma has been another strong play coming out of the oil downturn.
The gas-dominated plays in Pennsylvania, Louisiana, and West Virginia did not see as hard a fall in rig activity during the correction, which along with increasing LNG export capacity is helping drive drilling activity in the Marcellus and Haynesville plays. Overall, the investment dollars for oil have been flowing to the Permian, with some of the more “fringe” plays not attracting the same amount of interest post correction. California, North Dakota, and Colorado, for example, have been slower to see rig activity climb back.
Mining jobs are well below the late-2014 levels in all the major energy-producing states. These jobs have a huge impact, paying wages more than 80% higher than average in Oklahoma, Texas, North Dakota, West Virginia, Louisiana, and Wyoming. These high wages have a large multiplier effect as they circulate through the economy. The good news is that in most cases mining jobs are trending back up, but again technological progress in the fracking industry is progressing quickly and changing the labor dynamic. These states will not return to the mining employment levels seen in late 2014 in the foreseeable future; however, the employment gap will close as production continues to ramp up.
The reach of the energy industry spans much farther than mining itself. It supports workers in transportation, manufacturing, construction, and professional services. The massive investments in refining, chemicals, LNG, and related export facilities along the Gulf Coast have been a product of the renewed strength in US energy production. Energy exports have been ramping up in recent years and further growth is on the horizon. Billions of investment dollars have been poured into LNG export capacity along the Gulf Coast that will be coming online in stages through the 2020s and into the 2030s.
The energy producing states will continue to benefit from renewed US production. Brent prices are forecast to reach $80/barrel in 2019 and average in the low $80s over the next five years, conditions that will spur further increases in US oil production. Levels of oil/gas mining employment and rigs will not get back to the previous 2014 peaks in most states, but the fact that they are on the rise again is a hugely positive economic force.
Texas was the most resilient state of the top energy producers and has led the recovery coming out of the downturn. Its economy is already firing again on all cylinders. In the hardest hit states, it will take time for overall employment levels to recover from the energy-induced recession. Total employment in Oklahoma got back to its 2014 peak levels in 2017. Louisiana will return in 2018. It is a longer road back for North Dakota, where it will take upwards of 10 years before employment levels approach their 2014 peak. The energy industry can be a source of tremendous growth for states and regions, but brings tremendous economic volatility as well.
One outcome of the rapid expansion in the Permian is that producers are running into capacity constraints in the form of pipeline bottlenecks and acute labor shortages. Additional pipeline capacity is being added but it will take time to build out, giving producers greater incentive in the short term to ramp up operations outside of the Permian. This spillover effect will help some of the fringe plays that are still in recovery mode build momentum again over the next year.
By Karl Kuykendall, principal economist, US Regional Economics, IHS Markit