Petroleum Alliance Energy Index shows energy industry contracted in October
A general economic slowdown can be expected in Oklahoma during the first half of 2020, a banker predicts as part of the latest Oklahoma Energy Index report released this month.
Kyle McElvaney, IBC Bank’s Oklahoma City market president, noted ongoing weakness from the energy sector is beginning to fully spill into Oklahoma’s broader economy.
“The concerns for the state’s economic health are further stressed by the uncertainty facing the global and U.S. economies,” he said.
McElvaney and Russell Evans, executive director of the Steven C. Agee Economic Research and Policy Institute at Oklahoma City University, indicated it appears the current energy slowdown won’t be as significant as it was in early 2016. But, they attributed that to the fact the industry never fully recovered from its most recent pullback.
The index, a joint project of the bank, institute and Petroleum Alliance of Oklahoma, indicates the state’s oil and gas industry underwent a “significant contraction” in October.
The index compares a given month’s average prices for natural gas and oil, rig counts published by Baker Hughes, estimated numbers of employees for energy producers and support companies and average value of a portfolio of stocks for publicly traded energy companies inside of Oklahoma with an annual monthly average of all of those calculated by the institute for 2000, represented on the index with a base value of 100.
Ongoing monthly index numbers are compared to that base value. When a month’s average index number climbs, it indicates the industry grew. When a month’s average index number falls, the reverse occurs.
For October, the index number declined 3.7%, posting a monthly index rating of 198.9.
The index’s September calculation also was revised lower, from an estimate of a half-percent uptick in activity to just .2%.
The revised September 2019 index was 206.5.
The index rating in October 2018 was 232.2.
Evans attributed the October 2019 decline to sharp falls in average oil and natural gas spot prices, rig counts and equity valuations.
“Both primary and secondary employment were below September levels, down 4.2% and 3.8% respectively from a year ago,” Evans said. “The pace of job losses has been slower than previous contractions, reflecting the reality that employment in the industry never fully recovered to previous peaks. Without that excess employment, we have not yet experienced the same numbers of headline-making layoffs that characterized previous contractions.
“But as capital markets continue to punish the sector, we may yet see significant disruptions via bankruptcies, acquisitions, and major asset sales before this cycle reverses."
Evans observed many Oklahomans may not be aware of potential challenges a failing oil and natural gas industry could create on a broader scale.
“To argue that the state can navigate this level of contraction in the oil and gas industry with minimal disruption to statewide economic and fiscal activity is to argue that ‘this time is different,’ ” he said.
“It is less clear, however, what exactly would cause this time to be different."
McElVaney echoed those concerns, but added the state’s economy could rebound.
“Any unforeseen strength in global manufacturing activity and by extension global energy demand would be welcome news for Oklahoma’s economic outlook,” he said.
Chad Warmington, president of the Petroleum Alliance of Oklahoma, said the index helps provide state leaders tools they need to make sound decisions about how to fund governmental services.
“This report is our way of helping them do that objectively, and it serves as a warning that the budget is headed for some tough times,” Warmington said.
“They need to be extremely thoughtful about the decisions that they make during this coming legislative session that not only will impact the budget, but also will impact the state’s defining industry.”