|
August 2000
Federal Reserve Bank of Dallas
Houston Branch
Urban
Oil Consolidation: An Update
The April 1996 edition of Houston
Business took a detailed look at the geographic implications
of a shrinking number of oil workers, particularly among
cities
that traditionally have been centers of oil-related activity.
This article follows up on the earlier work, updating tables
that originally appeared in 1996. Readers interested in the
history of the consolidation process or the rationale for
large concentrations of urban oil workers are referred to
the Houston
Business April 1996 issue.[1] Data sources, as well as
the interpretation of data, are also discussed there. The
1993 County Business Patterns that provided much
of the basis for the 1996 article is updated here, although
the latest information available is for 1997 due to lags in
publication.
Summary Update
Table 1 shows U.S. employment in
the oil industry by sector and demonstrates that the industry
continued to shrink through 1999. For purposes of recent comparison,
the two most relevant dates are 1990 and 1997, peak years
in the oil cycle because the domestic rig count topped 1,000
working rigs during both years. Despite returning to peak
levels of activity in 1997, the industry had 50,000 fewer
workers than in 1990, reflecting productivity gains from technology
and improved management. The decline in the number of jobs
after 1997 may partly reflect long-term trends in consolidation,
but most of the shrinkage is the result of weak oil prices
and the collapse of drilling activity in 1998–99.
The 1996 article proposed a list of
29 oil cities derived from several sources, and we have since
narrowed that list to 12 cities that can be more easily tracked
over time. These 12 cities, shown in Table 2, consistently
account for well over 90 percent of the oil jobs of the original
29 cities. The most striking feature shown in the table is
the dominance of Houston in every segment of the industry.
For the first time since we have been doing these calculations,
Dallas fell out of the No. 2 position among oil cities, displaced
by both New Orleans and Oklahoma City. Midland-Odessa followed
Dallas at No. 5.
These 12 cities collectively have been
favored by the industry relative to the rest of the nation
(Table 3). The share of oil jobs in these 12 metropolitan
areas grew from 33.9 percent to 43.2 percent between 1990
and 1997, with the most important urban gains coming among
the knowledge-intensive industry segments—producers,
headquarters and exploration services.
Table 4 highlights Houston's continuing
rise among the 12 cities. Even compared with the other large
oil cities, Houston has dominated the job consolidation process,
growing from a 35.6 percent share to a 42.4 percent share
during 1990–97. Houston's role as the primary knowledge
loop for the oil industry and its large technical labor force
provide a significant lure for oil and natural gas companies.
Again, decision-making and knowledge-intensive segments have
been most prone to consolidate, and Houston has been by far
the preferred consolidation site.
Finally, Figure 1 plots the share of
U.S. employment held by Houston producers, oil services and
oil machinery industries under Bureau of Labor Statistics
definitions. The data are monthly after 1997, showing the
effects of the 1997–98 cyclical downturn in drilling
and the slow improvement in drilling activity through the
first quarter of 2000. In the spring of 1999, both domestic
and international drilling dipped to the lowest levels of
the last 60 years.
The downturn clearly hurt Houston's
oil machinery segment, with local machinery employment falling
faster than in the rest of the United States. Houston's share
of machinery employment fell from more than 40 percent to
less than 35 percent before beginning to recover. Both local
oil service and producer segments held up better than in the
United States overall, however, and gained significant market
share during the downturn.
Conclusion
The trends observed in the 1996
article remain quite strong. The industry's employment base
continues to shrink, driven over the long term by significant
advances in technology, such as three-dimensional seismic,
horizontal drilling and subsea completions. It is now possible
to do more work with fewer people. The consolidation process
continues to favor urban areas, especially Houston with its
large pool of workers and its knowledge base. Among oil cities,
Houston now dominates every segment of the industry by a very
wide margin. A second tier of oil cities consists of New Orleans,
Oklahoma City, Dallas and Midland-Odessa, but these are now
too small—measured as oil centers—to be regarded
as potential rivals to Houston.
—Robert W. Gilmer and David
G. Kang
Houston
Beige Book
July 2000
The Houston economy continues to expand,
with job growth running at a 2.6 percent annual rate for the
first half of this year. Oil and manufacturing employment
have yet to pick up strongly, a normal lag behind rising drilling
activity, but these sectors should contribute strongly to
job growth in the second half of the year. The Houston Purchasing
Managers Index has been over 60 throughout the second quarter,
indicating solid growth and particularly reflecting strength
in oil and manufacturing.
Crude Oil and Natural Gas Prices
The price of West Texas Intermediate
crude held steady near $30 per barrel for most of the last
two months, with OPEC having committed to increase crude supplies
if prices stayed above that level for 20 days. OPEC reneged
on that commitment in early June, then provided only 710,000
barrels per day of additional production following its June
meeting. Prices bounced up to $32–$33 per barrel, then
fell back to $28 as Saudi Arabia surprised the market with
a unilateral offer to raise production by another 500,000
barrels per day.
Natural gas prices fell below $4 per
thousand cubic feet, as cool weather in the Midwest and Northeast
reduced the need for natural gas to generate electricity.
Fears of electrical power outages and brownouts this summer
have been greatly reduced. Although natural gas storage is
20 percent below last year's levels, storage has been steadily
refilling over the past several weeks.
Gasoline and Refining
Spot wholesale gasoline prices
peaked at $1 per gallon in mid-June and have since fallen
back to 87 cents. Gasoline inventories are still low, but
the driving season has not been as strong as expected, perhaps
due to consumer resistance to higher gasoline prices. Growing
inventories of gasoline, along with crude and natural gas,
led some respondents to point to the end of the current bull
market for petroleum.
Refiners enjoyed excellent margins
throughout the last two months, and they operated at high
levels to take advantage of the profits.
Petrochemicals
Ethylene and propylene producers
have enjoyed strong demand and low inventories for several
months, allowing them to pass through much of the higher feedstock
costs and to protect their margins. Plastics producers farther
downstream have had less success in passing along their higher
costs. In the past few weeks, however, growing inventories
have changed the picture for ethylene and propylene producers,
limiting their ability to pass through price hikes. Increased
production capacity and slower economic growth were both cited
as reasons for higher inventory levels.
Oil Services and Machinery
Domestic drilling is growing faster
than was generally anticipated. The domestic rig count recently
hit 950, and offshore drilling in the Gulf of Mexico now exceeds
the last peak period in early 1998. International drilling
has been expanding since January but remains at relatively
low levels. The weak international drilling market means that
U.S. capacity geared to supply overseas markets remains idle.
The weak market also hurts pricing. For example, day rates
for offshore rigs in the Gulf remain relatively low because
foreign rigs stand ready to move to the United States for
work. Finding enough capable workers is cited as the biggest
constraint on further activity.
Financial Services
Respondents continued to be optimistic
based on their performance so far this year and on the near-term
outlook. Several noted that the recent dip in interest rates
had increased activity, as borrowers rushed back into the
market to take advantage of lower rates. Most comments, however,
centered on the strong continued consumer demand, the ability
to lend in the face of rising rates and the lack of deterioration
in loan quality. Real estate lending experienced the slowest
growth, but overall loan growth is very favorable.
| About Houston
Business
For more information or
copies of this publication, contact Bill Gilmer
at (713) 652-1546 or bill.gilmer@dal.frb.org,
or write to Bill Gilmer, Houston Branch, Federal
Reserve Bank of Dallas, P.O. Box 2578, Houston,
Texas 77252. This publication is available on
the Internet at www.dallasfed.org.
The views expressed are
those of the authors and do not necessarily reflect
the positions of the Federal Reserve Bank of Dallas
or the Federal Reserve System. |
|
|
