Resources

Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Early slowdown signs emerge for U.S. oil states after crude slide

(Reuters) – After leading the U.S. economic recovery out of recession, some of the nation’s top oil states are showing early signs of a slowdown as a result of the plunge in crude prices.

In Houston, Texas, the first oil industry layoffs have been announced, with realtors there predicting a sharp decline, up to 12 percent, in home sales next year.

Alaska’s 2015 fiscal year budget revenue forecast will have to be lowered by almost $2 billion, according to Fitch Ratings, because of the sharp drop in the state’s forecast crude prices. That will widen Alaska’s budget gap to almost $3.4 billion, Fitch said in a Dec. 11 report.

States such as Texas, North Dakota, Alaska, Oklahoma and New Mexico are all likely to feel strains next year, Wells Fargo Securities municipal analyst Roy Eappen said in a recent report.

Meanwhile, household sentiment in Texas, Louisiana, Oklahoma and Arkansas where memories of the catastrophic 1980s oil crash are still fresh, weakened in October more than any other region, according to a report by Decision Analyst Inc. The Texas-based research company surveys monthly thousands of homeowners in the Census Bureau’s nine regional divisions.

The West South Central division, comprising those four states, had seen the strongest growth for four years, but in October survey lagged the rest of the nation, with economic gauges improving in six regions and two recording no change.

“The fact that the economic index is in decline in this region signals that the economy in these oil states is heading for an economic slowdown,” said Jerry Thomas, president of Decision Analyst.

Responding to a more than 40 percent drop in crude prices since June, at least a dozen U.S. energy companies have cut spending plans for next year – bad news for states that rely on jobs, wealth and tax income they provide.

As a result, while most states expect a tailwind from cheaper oil and its boost to consumption, it is the oil states’ turn to act as a drag on the nation’s overall economic growth.

GROWTH DRAG

Thanks to the shale oil boom North Dakota’s economy grew by a fifth in 2012 and almost 10 percent last year. Texas economy expanded by nearly 7 percent in 2012 and 3.7 percent in 2013 compared with nationwide rates of 2.5 percent and 1.8 percent, respectively. That is about to change.

In a sign of things to come, Houston-based Hercules Offshore Inc <HERO.O> recently notified the authorities of planned “mass layoffs.” In an Oct. 30 letter, a copy of which has been obtained by Reuters, the company said it would be permanently laying off 324 workers in its Gulf of Mexico operations due to the anticipated closure of four rigs. According to company filings, it has 2,200 employees.

Hercules Offshore did not respond to a request for comment.

The number of well permits fell almost 40 percent nationwide in November, according to industry data firm Drilling Info Inc., which means fewer jobs and less related business.

Bud Weinstein, an energy economist at Southern Methodist University in Dallas, said the downturn in production will affect related industries such as transportation, cement, metal parts and food suppliers.

For example, it takes up to 2,000 truck trips to build one new well, Weinstein said.

An informal tally by Reuters of announced plans for U.S. drilling rig operations shows at least seven firms plan to cut the number of rigs they operate now by a total of more than 50 in 2015, with each rig estimated to employ 50-60 workers.

Another concern is dwindling sources of funding that would help companies ride out the downturn. Prices of some of the junk-rated bonds that helped energy companies finance their expansion during boom years have been tumbling and banks in oil-producing regions are expected to curb lending to the energy sector.

Russell Evans, an Oklahoma City University economist, said the 1982 oil crash has left deep scars in Oklahoma where oil and gas industry accounts for about 20 percent of all jobs and two-thirds of those created since 2008.

Evans expects Oklahoma to weather the current price slide better because of a strong long-term outlook for the industry, but the history of booms and busts keeps many on edge.

“There is a fair amount of anxiety here,” he said.

For Karr Ingham, whose firm Ingham Economic Reporting monitors rig counts, permits and the oil economy in Texas, there is no doubt that hard times are just round the corner.

“A slowdown is coming, period. It’s just a matter of time.”

(Reporting by Tim Reid in Los Angeles; Additional reporting by Edward McCallister in New York; Editing by Dan Burns and Tomasz Janowski)

Tagged with →