Dallas Fed leader has oil on his mind
Industry has bigger worries than interest rates, he says
Energy companies bracing for a longer-thanexpected period of anemic crude prices have more pressing worries than whether the Federal Reserve will raise interest rates this year, the new head of the Federal Reserve Bank of Dallas said Wednesday in his first policy remarks.
“If I’m in the energy industry, there are a lot of things that I’m agonizing about right now and staying awake at night about right now,” Dallas Fed President and CEO Robert Kaplan said. “I don’t think Fed monetary policy should be one of them.”
In a speech at the University of Houston, Kaplan said that while U.S. monetary policy is important for businesses, it’s not among the top factors weighing on the oil and gas industry as a cooling global economy and surging crude production have left the world with more oil than it can use.
The industry has kept close tabs on a longexpected Fed rate hike because it could strengthen the dollar by making dollar-priced securities more attractive to investors. Oil
also is priced in the U.S. currency and tends to move opposite the greenback, so a stronger dollar could spur a further sell-off in crude, worsening a price slump that began more than a year ago because of a global oversupply.
Kaplan, who took over Sept. 8 as head of the Fed’s 11th District, said U.S. monetary policy probably will remain “accommodative” for some time, although he declined to weigh in on speculation that the Fed will hike interest rates at its December meeting.
The Fed has been prudent in delaying its decision to wait for more global economic data, Kaplan said, adding that any rise in rates will be gradual.
While he is not slated to have a vote until 2017 on the Federal Open Market Committee, which sets rates, Kaplan will be able to weigh into the official debate on the matter.
As the Fed prepares for a decision by monitoring national and international economic data, Kaplan said, the 11th District, which includes Texas and portions of New Mexico and Louisiana, has remained surprisingly strong despite the energy slump that has left tens of thousands across the state without jobs.
The oil bust has slowed the rapid clip of Texas’ economic expansion in recent years, but the state will likely still see job growth of 1.2 percent this year, despite layoffs across the energy sector, Kaplan said.
The state’s unemployment rate also appears healthy, sitting at 4.3 percent compared with a national average of 5 percent, even as oil and gas companies curtail spending plans and trim their payrolls, he said. The energy sector may be suffering from a dramatic slowdown and a shrinking workforce, but labor shortages persist in several other industries, including construction, nursing, truck driving, retail and restaurants, Kaplan said.
He credited the service sector with saving Texas from slipping into a recession, noting particular strength in health care and leisure and hospitality industries.
“The Texas economy is proving to be highly resilient, and I’m very optimistic about the future of this state,” he said.
The state also has benefited from a flurry of construction activity along the Gulf Coast, where a surge of cheap natural gas has fueled a massive expansion of the petrochemical industry. In addition, Texas in recent years has attracted an array of new companies that have relocated their headquarters and other offices to the state, including some outside of the energy sector, swelling the state’s population faster than the national average.
That trend will likely continue, even as the crude slump persists, he said. In trading Wednesday, U.S. benchmark West Texas Intermediate crude inched up 8 cents to $40.75 a barrel.
Crude prices have been pulled down by a glut of oil that has kept West Texas Intermediate stuck below $50 for months, a level too low for some producers to turn a profit. Oil companies have been laying down rigs and dropping plans for further exploration activity, but production has remained high, as crude producers figure out how to wrest more oil and gas from the ground faster and at lower cost than before.
Kaplan said he doesn’t expect daily oil production and consumption to reach a reasonable degree of balance until late 2016, or early 2017, a lengthy timetable that spells more immediate financial trouble for exploration and production companies and oil field services companies, which need a higher oil price to bolster their balance sheets.
“Anytime you see a market where prices are volatile up and down, it means participants are struggling to get a grip on supply and demand,” he said. “They’re trying to get a grip in particular on the speed of this balancing process. So while this is going on, we expect to see more price volatility, and in addition, we expect to see more bankruptcies, mergers and restructurings in the energy industry.”
Houston, especially, is feeling the repercussions of the crude slump, posting a 4.4 percent unemployment rate — higher than the rates in Dallas, San Antonio and Austin.