Tag: Price of Oil

Colorado Job Growth is Solid – The Sky is Not Falling

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There has been a streak of bad economic news within the past ten days; however, the fundamentals of the U.S. and Colorado economies are solid and the sky is not falling!

The Colorado Department of Labor and Employment announced the release of data showing that on average there are 65,900 more jobs for the first seven months of 2015 than the same period in 2014. The rate of increase is about 2.7%. While this level of job growth is solid, activity on the streets is much stronger.

Internationally, concerns have temporarily shifted away from violence in the Middle East. Worries have shifted to a slowdown in the economic growth of China, the magnitude of that slowdown, and the impact it would have on the global economy.Job Growth - The Sky is Not Falling

Earlier declines in the price of oil have not had the negative impact on the state that was initially expected by some economists. Colorado is a second tier state in terms of production and companies have taken numerous steps to increase their efficiency and maintain their profitability. Layoffs in the industry may be inevitable if the price for a barrel of oil remains at its current level, in the low $40s, for an extended period.

Through seven months average employment in the extractive industries is about 700 greater than last year. That number will approach zero by the end of the year.

The recent volatility in the equity markets may be the sign of a long-overdue correction or the start of a bear market. Uncertainty in the equities market may cause consumers to remain cautious.

On a more positive note, Colorado new car registrations have been strong this year. On a YTD basis, more new cars have been registered in 2015; however, the rate of growth has slowed to about 5.0% this year, down from 11.2% growth in 2013, and 6.5% growth last year.

Net migration remains strong as people find Colorado an attractive place to live, work, and play. In part that is a driving factor for the construction industry.

On a year-to-date basis the top sectors for job growth are:
• Healthcare 14,000
• Accommodations and Food Services 13,200
• Construction 12,100

Combined these three sectors account for about 59.6% of the jobs added or 39,300 workers. Average wages for many of the occupations in these industries are well-below the state average.

There are concerns that an insufficient number of primary jobs are being added in Colorado. Primary jobs are important because they bring in money from the outside that is invested in the state economy. In addition, primary employers often have a local supply chain that supports the local economy.

To that point, the average number of manufacturing jobs is 3,900 greater than a year ago. Many of these workers have been added in the renewable energy sector and its supply chain and they are located in Weld County. The addition of new jobs in this area will offset job losses associated with the decline in the price of oil.

So far this year, the major disappointment is the Information Sector. Declines are expected to continue through the end of the year.

On a year-to-date basis, the Government sector has added about 4,900 jobs. On a percentage basis, the greatest number of jobs has been added in K-12 and higher education. After seeing cutbacks for two years, the Federal Government is on track to add about 400 positions this year.

In addition to this data, CDLE will release a report later this month showing that Colorado job growth for the first quarter may be revised upward by 15,000 to 20,000. The bottom line is that Colorado’s employment is  much stronger than currently being reported.  Unequivocally, the sky Is not falling.

Economic Risks at the National Level That Might Affect Colorado

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The U.S. economy is currently stronger than it was in 2014. The good news is the Colorado is outperforming the U.S. in three key areas:
• The Colorado rate of population growth in 2015 is projected to be 1.6% vs. 0.7% for the U.S.
• The Colorado rate of job growth in 2015 is currently projected to be 3.0% vs. 2.2% for the U.S.
• The recently released GDP data shows that Colorado outperformed the U.S. in the rate of growth, 4.7% vs. 2.2% in 2014.

Currently, the strengths of the national economy outnumber the economic risks. With that in mind this post reviews the manner in which the risks might impact the Colorado economy. For each risk the impact on Colorado is highlighted in italics.

The Economic Risks

The Fed – Janet Yellen indicated there are still issues with the labor market. These concerns include finding trained workers and weak wage growth.

Colorado’s low unemployment rate has caused companies to have difficulty finding trained workers in such industries as construction and the high tech sector. Areas of strong wage growth have occurred in occupations where there is high demand for workers.

Real GDP – The rate of growth in business investments is lackluster. Increased demand for goods and services will drive companies to invest in new equipment, software and buildings.

The decrease in the price of oil has caused Colorado companies in the Oil and Gas industry to curtail investments in their business.

The Dollar – The strong dollar has made U.S. goods/exports less competitive in foreign markets.

The strong dollar is one of many factors that could challenge Colorado exporters in 2015.economic risks

Industry Sentiment – Manufacturing may remain sluggish through the end of the year.

The growth of Colorado manufacturing output was disappointing in 2014. That is unlikely to change in 2015.

Housing – In some parts of the country the rate of housing price appreciation may be problematic.

It will be more difficult to find attainable and affordable housing as a result of the sharp increases in housing prices. These rising prices will cause the state’s rate of inflation to increase.

Price of Oil – Low oil prices have benefited consumers (lower prices at the pump) and some industries, but they have hurt the extractive industries.

Through the first half of the year, consumers have saved about $480 with lower gasoline prices. Currently, it is not possible to measure the impact of cheaper oil on the Oil and Gas industry.

International Situations – The current global situational and foreign policy challenges to the U.S. economy currently include Iran, Syria, China, Russia, Greece, Israel, Cuba, the EU, and Ukraine.

At the moment Colorado shares a level of risk similar to the U.S. as a result of situational and foreign policy challenges.

The strengths of the national economy have created momentum that will further strengthen the U.S. and Colorado moving into 2016; however, if several of these economic risks materialize at the same time, then the health of the U.S. and Colorado economies might be jeopardized.

Gas Prices – Lower Costs at the Pump

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About a year ago, the price for a barrel of oil dropped like a rock. Consumers salivated because they knew lower gas prices were on the horizon. In the 2015 cber.co Colorado Economic Forecast it was projected that consumers would save an average of one dollar a gallon from lower prices at the pump, or a total of $780.

The following calculations were made to determine the difference in cost to purchase gasoline for the periods July to June (2013-14 and 2014-15). The annual cost assumes that a person fills a car with 15 gallons of gas per week, or 780 gallons per year.

The costs and the savings for the United States are listed below.
2013-14
• 780 gallons, average price per gallon $3.51
• Total cost = $2,774.69
2014-15
• 780 gallons, average price per gallon $2.88
• Total cost = $2,281.63
• The 2014-15 costs were $493.05 less than 2013-14.

gas prices

The costs and the savings for Colorado are listed below.
2013-14
• 780 gallons, average price per gallon $3.41
• Total cost = $2,692.02
• The costs in Colorado were $82.67 less than the U.S.
2014-15
• 780 gallons, average price per gallon $2.80
• Total cost = $2,213.51
• The costs in Colorado were $68.12 less than the U.S.
• The 2014-15 costs were $478.51 less than 2013-14.

Check back in six months to see if gas prices remained low and how much lower they were than last year.

Source: EIA.gov – All Formulations and All Grades.

The Impact of the Decline in the Price of Oil on Colorado

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The recent release of BLS wage and salary employment data for Colorado showed that after four months the state is on track to add 71,400 workers. This is slightly below the cber.co forecast range of 73,000 to 79,000.

The softness in job growth may be attributed to the decrease in the price of oil, which bottomed out at $43 per barrel on March 17. A prominent Boulder economist has stated that average annual state employment for the year would fall to 40,000 because of the decline in oil prices. So far, the impact has been minimal.

In April there were 34,400 jobs (NSA) in the Mining and Logging Sector, which includes the mining and oil and gas industries. This is down about 1,300 jobs from December but about 1,800 jobs above the April 2014 total. The sector had record employment this past December.

Some of the factors that have affected demand are:
• Over time global demand for oil has declined, in part because of increased energy efficiency and an increase in the number of alternate sources. That decrease is expected to continue in the future.
• The number of Colorado rigs in operation has dropped sharply in the past six months.

price of oil
• Oil production in Colorado reached a record high in 2014. Despite the decline in oil prices, monthly production has remained near record levels; however, at some point reduced production is expected if prices remain suppressed for an extended period.

crude oil production
• Nationally, Colorado is a second-tier state for production; however, the oil and gas industry is a significant contributor to the state’s Gross Domestic Product. Today, the U.S. is producing about 80% of the oil used domestically, a significant change from five years ago. This means that Colorado producers will continue to drill, although production may be at lower levels.
• The price per barrel and the breakeven point are less critical than they were five years ago. Producers have become more efficient by reducing overhead and adopting improved technology such as super-fracking. In addition they have capped wells that are older or less efficient. Through increased efficiencies, companies have been able to lower the break-even point for many of their plays and adjust to lower prices per barrel.
• Since March 17th, the price per barrel has risen and reached $60 per barrel in early May. The consensus is that it will remain around that level for the remainder of the year.

These factors will have the following implications on the state:
• Colorado has a diverse energy industry. It is a strong second tier oil and gas state, it has companies that manufacturer solar and wind energy equipment, and significant energy research is conducted locally. Because energy is critical to the security of the U.S., the state will benefit from having a balanced energy portfolio.
• The reduction in the number of rigs will result in a fewer workers in the industry and its supply chain.
• Because production has remained at a high level, the industry’s contribution to the state GDP may not be as adversely impacted as originally thought.
• Oil and gas companies are evolving in a manner similar to manufacturing and other industries – they are becoming much more efficient. Increased efficiencies are expected to continue and many of the jobs that are being eliminated will not return.

Increased efficiencies will allow American companies to continue to be competitive, which in turn will help the U.S. be an “energy independent” nation. In a convoluted way, the Colorado oil and gas industry may actually benefit in the long run from the recent drop in the price of oil.

Healthcare, Extractive Industries, and Wages

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Looking ahead to 2015 there are three issues that will impact the economy in 2015: healthcare, extractive industries, and wages.

Healthcare
The healthcare industry may play an important role in the economy in 2015.
• First, there are shortages of workers in many key positions. This may affect the care consumers receive from their service providers and it may increase the costs of doing business.
• Second, providers are being pushed by Obamacare and insurance companies to reduce the fees they charge. In turn, this may reduce their margins.
• Third, it was recently announced that Colorado employers will face an 8% increase in the cost of insurance. Likely, a portion of that increase will be passed on to workers. That could reduce that amount of discretionary income, which in turn could reduce retail consumption.
• In addition, it has been announced that Connect for Health Colorado, will reduce subsidies. In other words, many Coloradans will have to pay significantly more for coverage, go without healthcare, or pay a fine to the government. Coloradans will face sticker shock when they get their health insurance bills in 2015.

Extractive Industries and Prices of Oil and Gasoline
The extractive industries will continue to face challenges in 2015. Fracking is still an issue in Colorado that will not go away. Local governments are pushing to have greater control over the way the extractive industries operate in their jurisdiction.

In addition, the price of oil has trended downward for the past six months. If these trends continue, it may impact production in Colorado, which will hit the smaller companies first. It will also impact severance taxes paid to the state government.

At the same time consumers have enjoyed lower prices at the pump. Their gasoline bills for 2013 and 2014 will be similar. If lower prices continue into 2015, consumers may notice a reduction in their annual gasoline bill in the range of $400 to $800 for the year.

If prices at the pump continue to decline Colorado consumers will be the benefactors, but state coffers suffer. Typically the negative impact for the state outweighs the positive impact on the consumer.

Wages
Typically, when unemployment dips below the natural rate of employment, 4.5% to 5.0%, there is usually upward pressure on wages. Overall that has not been the case in Colorado.

Between 2007 and 2014
• The Denver Boulder Greeley CPI  (DBG) increased at an annualized rate of 2.4%
• The Private Sector Average Weekly Wages (AWW) increased by an annualized rate of 1.7%.
Inflation for this period grew at a faster rate than private wages for this period.

Between 2013 and 2014
•  The DBG CPI is projected to increase by 2.8%/
• The Private Sector AWW will increase by 2.0%.

The Construction and Financial Activities are isolated sectors that have seen strong wage growth in the last couple of years because the demand for qualified employees has exceeded the supply of workers.

Construction Wages
• Between 2008 and 2012 AWW declined. In 2013 it increased by 11.0% followed by an increase of 11% in 2014. Construction businesses have found that it has been necessary to raise wages this amount to attract workers. Ultimately these labor costs will be passed on to consumers.
Financial Activities
• The financial activities sector has also had strong wage growth, 5.0% annualized growth, from 2007 to 2014. Between 2007 and 2010 Average Weekly Wages decreased, but they have increased significantly since.  AWW will increase by 7.3% in 2014

On the other hand, 2014 inflation growth will exceed the change in wages for Manufacturing, Tourism, and Professional and Business Services. These three industries are critical to the state economy for different reasons.

Watch for healthcare, extractive industries, and wages to impact the Colorado Economy in 2015 – and the impact may not always be positive.