On the rise
Oklahoma’s energy sector continues to recover
Eleven months after the oil and natural gas industry bottomed out in the deepest downturn in a generation, prices are climbing and oil field activity is recovering.
The trends are leading to modest recovery for the state economy, but the situation is far from cured, according to economic and industry leaders.
"We're on a positive trajectory, both from an energy perspective and from the continuing growth of the national economy," said Robert Dauffenbach, director of the University of Oklahoma's Center for Economic and Management Research. "I think the trouble we've been having on the revenue front has bottomed out and is coming back. The numbers still are negative on a year-over-year basis, but it's a little less negative as we proceed through time."
The number of rigs drilling oil and natural gas wells throughout the state has nearly doubled from February lows, and production companies are boosting drilling budgets for 2017. The energy sector's job losses appeared to have leveled off, but a surprise dip in December indicates the sector still may not be healthy.
Oklahoma's mining sector — which includes oil and natural gas operations — lost 21,200 jobs, or 33 percent, from November 2014 through December 2016, according to the Oklahoma Employment Security Commission.
The sector had modest gains of 900 in August and 600 in September, before shedding about 400 each in October and November and then tumbling 1,200 according to preliminary December numbers.
"I wasn't expecting that type of loss given the rebound in prices we've seen," said Lynn Gray, director of economic research and analysis for the Oklahoma Employment Security Commission.
Stronger prices and growing optimism throughout the industry has led companies to boost their plans for 2017.
Oklahoma City-based Continental Resources this week said it is more than doubling its 2017 drilling budget to $1.95 billion. Other companies are expected to announce their spending plans over the next few weeks.
Increased drilling could boost employment throughout the state, Gray said.
"It should line up with my prior expectations that at the very least,
we’re going to see a stabilization of employment in this sector and that there’s a reasonable expectation that employment would grow at least slightly,” he said. “But again, I was taken back by the estimates from December.”
While the mining sector is down, December was a strong month for manufacturing, which includes producing equipment for the oil and natural gas industry.
The month’s non-seasonally adjusted numbers saw an increase of 1,500 jobs in manufacturing in December. Of that, 900 jobs were added in durable goods manufacturing, including 500 in fabricated metal products.
“There’s going to be strong ties there with oil and gas equipment,” Gray said.
Increased drilling
Oil and natural gas prices have strengthened in recent months as companies have lowered their costs, making drilling profitable at lower prices.
Oklahoma’s SCOOP and STACK plays are among the most active in the country, following the prolific west Texas Permian Basin, where many Oklahoma companies have operations. Those fields are among the lowest-cost producing areas in the country.
“I think that bodes well for us as prices firm up in the year ahead,” said Russell Evans, executive director of the Steven C. Agee Economic Research & Policy Institute at Oklahoma City University.
Oklahoma’s rig count increased to 96 this week, up from 54 in February 2016, but still well off the 215 rigs that were active in November 2014.
“Each rig creates traffic flow in rural Oklahoma,” Evans said. “That leads to increased dining and retail. A lot of services produced in those rural economies get exported out by virtue of that activity.”
Oklahoma and the surrounding region also again are attracting interest from major integrated oil companies, including BP PLC and ExxonMobil.
“I think that will be a net gain for rig activity,” Evans said. “I have to think that changes some of the paradigm going forward as we see a different mix in the companies and the size of companies.”
Drilling has picked up so rapidly in recent months that some drilling companies are having trouble filling crews, Evans said.
“Anybody with experience in the field wants to see that if they make a commitment to go back, that the job will be there for several years,” he said. “Having been burned so recently, there’s going to be a hesitance for people to come back, especially if they’re employed in another sector.”
Oil price growth
Drilling activity is heavily dependent on oil prices. The price has more than doubled from a 17-year low in February, but is still less than half of levels three years ago.
The price has jumped over the past two months as the Organization of Petroleum Exporting Countries and other large exporters have pledged to cut back on production. But at the same time, U.S. producers have signaled they will take advantage of higher prices by increasing drilling.
“I think we’re in a steady state here on a fairly even keel,” Dauffenbach said. “There’s not much reason for oil prices to go one way or another.”
Actions by the Trump Administration, however, could cause volatility and push prices higher, he said.
“If you start talking about taxes on imports to the country, that could lead to a lot of demand for the United States oil patch,” Dauffenbach said. “We have an administration very favorably impactful to energy markets and chock full of personnel associated with the industry. We’ll see where all that leads.”
A pro-business perspective on regulations could cause increased demand for oil, while border taxes and tariffs could drive up the price of foreign oil, boosting demand for domestic crude, Dauffenbach said.
Improving state economy
While the improving energy sector could help the state, other issues still are weighing on the broader economy, Dauffenbach said.
“We seem to always have a seasonal Christmas spike that has gone away,” he said. “That might be a measure of the online sales effect. We definitely have a Grinch who stole Christmas as far as sales are considered.”
Oklahoma’s economy faced a double punch over the past two years as the oil downturn was followed immediately by a slowing national economy, Evans said. The country did not experience a recession, but the economy slowed as the country worked through a buildup in excess inventory throughout much of the economy.
“We found ourselves with an excess of goods, so new production was postponed,” Evans said.
As a result, the broader national economy slowed when Oklahoma’s economy already was suffering. Both appear to be improving, he said.
“We’re at a point now as we turn into 2017 where both of those seem to have subdued a little bit,” Evans said. “I’m fairly optimistic that if that continues, our economy and tax collections both will feel much better by this summer.”