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Houston Rides the Global Commodity Boom

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Higher prices justified for conventional oil. ... increase in oil and gold prices, And a more than one-percent increase in oil and gold prices as time passes. ... – PowerPoint PPT presentation

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Title: Houston Rides the Global Commodity Boom


1
Houston Rides the Global Commodity Boom
  • Robert W. Gilmer
  • Vice President and Senior Economist
  • Houston Branch
  • Federal Reserve Bank of Dallas
  • April 2008

2
Percent Change in Houston Employment, 1996-2008
Note December to December changes, except 2008
which is year-to-date
3
Houston Index of Coincident Economic Activity,
Jan 2000-Present
4
Purchasing Managers IndexUS and Houston Compared
5
Unemployment RateHouston vs. US, SA
6
Refiners Acquisition Cost of Crude Oil 1994 to
Present
7
Wellhead Price of Natural Gas1994 to Present
8
External Forces that Drive Houston
  • US Economy
  • Global Economic Conditions
  • Oil and Natural Gas Markets

9
OPECs Price Band and the Old Paradigm
  • In March 2000, OPEC established a price range of
    22-28 for crude oil
  • The lower band of 22 was to protect OPECs
    revenue at a sufficiently high level
  • The upper band of 28 was to keep price from
    going too high, to avoid offering exploration
    incentives to non-OPEC producers
  • Non-OPEC producers saw this as a range of
    moderate prices, with likely periodic collapses
    in price due to slack demand and OPEC-member
    cheating

10
Growth in the Demand for Crude Oil (Annual
Percentage Rate)
11
Excludes Iraq and Angola, and excludes Nigeria,
Venezuela and Indonesia from Spare capacity
calculations. IEA, Oil Market Report
12
Spare capacity in OPEC 10, West Texas
Intermediate price
13
Sources of Oil Supply(Million Barrels per Day)
Changes from second quarter to second quarter of
each year.
14
Why Havent Oil Supplies Responded?
  • Reluctance by producers to buy into this price
    cycle until 2004.
  • Global scarcity of equipment and oil-related
    skills once they did buy into the expansion.
    This raised the price of oil investment.
  • Reluctance to move into or expand exploration in
    politically unsettled regions. Geologic
    uncertainty preferred to political uncertainty.
  • Oil fields getting smaller, scarcer. Higher
    prices justified for conventional oil.
  • Oil is increasingly coming from unconventional
    areas that technical barriers in development

15
Baker Hughes rig count, seasonally adjusted
16
International Rig Count Highest Since 1982
Excludes Iran and the Sudan
17
Oil and Natural Gas Mining Jobs in Houston 1990
to Present
18
Houston Shows Growth in Both Producer and Oil
Service Jobs
19
Manufacturing Jobs in Houston1990 to Present
20
(No Transcript)
21
What Is Behind the Commodity Boom?
  • Primarily, it is the growth of the developing
    world. Since 2002, they account for 90 of the
    growth in consumption of oil, 90 of metals
    growth, and 80 of food.
  • Lower U.S. interest rates (other things equal)
    raise the price of commodities.
  • Dollar depreciation raises the purchasing power
    of other currencies, and stimulates the demand
    for oil.

22
Board of Governors, Federal Reserve System
23
2008 price for first quarter only refiner
acquisition cost of imported crude
24
Recent IMF Study Finds a One Percent Depreciation
of the Dollar Drives a
  • one percent short-run increase in oil and gold
    prices,
  • And a more than one-percent increase in oil and
    gold prices as time passes.
  • The effect on metals and most non-fuel
    commodities is smaller but significant.
  • The effect on grains in not significant.

25
IMF World Economic OutlookAnnual Percent Growth
Source IMF, World Economic Outlook Update
Projections, April 2008
26
Can Emerging Country Growth Really Decouple from
the US, Europe and Japan?
  • Strong internal growth dynamics
  • A rising share of global trade
  • More resilient policy framework
  • But spillovers from the developed world still a
    factor accounting for maybe 35 percent of
    growth for emerging economies, 45 percent for
    more commodity dependent

27
For Houston? Where Does the Chain End?
  • Slow growth in the US economy, and the rest of
    the developed world?
  • Possible slowdown in the developed world to
    follow?
  • A pull back in the commodity boom, and in oil
    markets?
  • Finally, a slowdown in Houston?
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