25 posts categorized "Energy"

Ninth District Beige Book: Signs of moderate economic growth in spring

Since early April, some key sectors in the Ninth District economy have varied, but overall growth has been moderate. Home sales and prices increased at a strong rate, although residential construction remained flat. Energy and mining activity continued to decline, contributing to a slowdown in spending and employment in the energy-producing region of western North Dakota and eastern Montana. While prices were relatively stable and wage increases remained mild, some signs of increased wage pressures appeared.

Residential real estate and consumer spending grew

Residential real estate activity showed strong increases in many parts of the Ninth District during April compared with a year earlier. For example, in western Wisconsin, home sales increased 25 percent and the median sales price rose 12 percent, while in Minnesota, home sales were up 20 percent with the median sales price up 12 percent. Home sales were buoyed in part by a relatively mild spring in many parts of the district. Meanwhile, residential construction was flat overall.

Retail and tourism spending also contributed to positive economic growth. According to a recent survey of district business leaders conducted by the Minneapolis Fed, 40 percent of respondents noted that retail spending increased over the past three months, while 12 percent reported that sales had decreased. An auto dealers association expects Minnesota vehicle sales in 2015 to exceed last year’s levels. Tourism activity was solid in many parts of the district in part due to seasonably warm weather. A travel agency in Minnesota noted that leisure travel bookings for March and April were up over 10 percent.

Meanwhile, manufacturing activity was level overall in April and May. The impact of the recent increase in the exchange value of the dollar likely had an effect on district manufacturers, as 29 percent of manufacturer respondents to the district business-leader survey reported that the dollar’s rise had decreased sales, though most reported that sales had not changed. “Increased value of the dollar has hurt our bottom line because of lower revenue from outside the U.S. on same volume,” commented a respondent. An index of manufacturing activity by Creighton University increased in April from the previous month in Minnesota and South Dakota; the index fell in North Dakota, but was at levels consistent with slight growth in all three states.

Natural resources sectors were slow

Natural resources sectors, including agriculture, energy and mining, had a depressing effect on the district economy. While progress in crop planting was well ahead of its five-year average and drought conditions were relieved by recent rains in several areas, the Minneapolis Fed’s first-quarter (April) survey of agricultural credit conditions showed that 79 percent of respondents said farm incomes fell in the previous three months, with a similar outlook for the second quarter. The avian flu has impacted a number of poultry producers and is expected to cost Minnesota turkey producers more than $300 million.

In the energy-producing area of the district, the drilling rig count dropped to 79 in mid-May, all in North Dakota (no rigs were active in Montana), down from almost 200 in September 2014. The continued decline in drilling activity led to layoffs of oilfield workers and reduced demand for support services. Nevertheless, oil production levels and transportation remained relatively high, albeit down from record levels set in December. The slowdown in oil drilling made its way to Wisconsin and Minnesota, where output at mines producing sand for hydraulic fracturing was expected to decline this year and one facility was idled. However, the overall economic impact of the reduction in oil and gas drilling has remained relatively contained to the energy-producing area.

Some tightening in labor markets and signs of wage pressures

As the district continued to show signs of moderate economic growth, hiring increased on balance and labor markets tightened further. According to a recent ad hoc survey by the Minneapolis Fed, 40 percent of respondents said their ability to retain employees has become harder over the past 12 months, while just 3 percent said it has become easier. “We are seeing a lot of employee turnover, as most see this as the best way to impact salary and opportunity,” noted a respondent to the professional business services survey. A Minnesota manufacturers survey found that hiring plans for the upcoming year are similar to a year ago. However, labor markets softened in the energy-producing area of the district; online job openings were down 23 percent in April compared with a year earlier in the North Dakota oil patch (see Chart 1).

Prices were relatively stable, except for a recent increase in gasoline prices. Wage increases remained mild in April and May, with some instances of increased wage pressures. For example, about a quarter of respondents to the aforementioned ad hoc survey were raising starting pay for most job categories to attract new hires (see Chart 2). Three health care systems in Minnesota have agreed to a minimum wage of $15 per hour under recent contract agreements.

Beige Book June 2015 -- 6-12-15

Bakken showing impact of oil price drop

Employment data are picking up on the impact of lower oil prices on labor markets in the Bakken. The price for West Texas Intermediate dropped from $90 per barrel in the beginning of October to $50 in January, hovering around that price since then. During this time, the number of active drilling rigs in North Dakota and Montana decreased by more than 50 percent, dropping below 100 rigs at the end of March and leading to layoffs of oilfield workers.

These job losses seemed to impact overall employment, as levels decreased from 102,600 in December to 95,000 in January for the 12-county area that makes up the core area of the Bakken (see definition below). Seasonality affects employment data, as levels are higher during the summer months and lower in the winter (see Chart 1). However, during the previous two years, employment increased slightly from December to January.

As employment slowed, the unemployment rate for the region increased from 1.5 percent in December to 2.1 percent in January (see Chart 2). While the Bakken unemployment rate also increased from December to January during the previous two years, the rate increased faster during the most recent period. For the whole state of North Dakota, the unemployment rate increased to 2.9 percent in February, losing its status as the lowest unemployment rate in the nation to Nebraska, which posted a 2.7 percent rate.

Bakken update Ch1-2 -- 4-6-15

The number of online job postings in the Bakken area also decreased from December to January, but increased slightly from January to February (see Chart 3). The number of job openings still remains at a relatively high level in the region, despite layoffs in the oilfields. Companies from a variety of sectors continue to actively look for workers. But with the loosening in labor markets, employers in and around the Bakken have reported an increased number of applicants to choose from.

  Bakken update Ch3 -- 4-6-15

12-county Bakken area: North Dakota counties: Billings, Burke, Divide, Dunn, Golden Valley, McKenzie, Mountrail, Stark and Williams. Montana counties: Richland, Roosevelt and Sheridan

Ninth District economy grew in January and February

Oil has dominated the headlines, but the Ninth District economy continued to expand in January and February, with many indicators exhibiting strength and labor markets appearing to have tightened. Several sectors, particularly energy and other commodities, are dealing with low prices. But counteractive, positive conditions for consumers and others helped limit the negative effects. Mild winter weather has had similarly mixed effects.

A wide swath of sectors saw growth. For example, a manufacturing index increased, indicating expansion in the Dakotas and Minnesota. A manufacturer of capital equipment reported that demand in January was stronger than expected. In the services sector, a merger and acquisition services firm noted increased consulting activity and a web design and programming firm noted increased interest from newer firms. In addition, railroads plan to invest more in capital equipment in 2015, and several retailers noted sales increases.

Labor markets continued to tighten, as unemployment rates dropped in many areas of the district. Business owners in South Dakota and western Montana noted difficulty finding workers to fill open positions. A Minnesota staffing firm reported that finding workers was difficult and that competition for those workers increased recently.

As labor markets have tightened, wage pressures appear to have increased in some areas. While data suggest that overall wage increases have been moderate, there were more frequent reports of wage increases above 3 percent during the past couple of months. A recent ad hoc survey by the Minneapolis Fed also found that more employers planned to increase starting pay. Nevertheless, overall wage increases generally remained moderate. Lower energy and other commodities prices affected different regions of the Ninth District.

Lower oil prices affected producers as they cut back on new development in North Dakota and Montana by nearly 30 percent from the beginning of the year, leading to reduced hours and layoffs of oilfield workers (see chart). The number of job postings in the region has also decreased, but several companies in various sectors are still looking for employees. Wage pressures and apartment rental prices have eased somewhat in the energy-producing region.

Beige book blog 3-10-15

Among other commodities, the evidence is mixed. For example, lower metal prices caused a Montana copper-silver mine to shut down. Even though iron ore prices have been dropping, an iron ore analyst expects production to increase slightly in 2015. Low crop prices have hampered farmers, but benefited animal producers due to lower feed costs.

While some sectors have suffered from lower commodity prices, district consumers have benefited. For example, Minnesota gasoline prices in mid-February were over a dollar per gallon lower than a year ago. This may have helped boost consumer spending, as district retailers noted growth in retail sales. For example, a North Dakota mall noted that sales were up in January compared with a year ago, and a bar and restaurant chain in Minnesota reported strong sales during January compared with last year. Recent light truck and car sales were relatively solid in Montana, according to a representative of an auto dealers association.

The increasing value of the dollar has made U.S. products more expensive for foreigners. For example, the stronger U.S. dollar and Canadian exchange rate dampened demand from Canadian tourists and shoppers as border crossings and related sales decreased in district states.

The winter has been relatively warm and dry, which aided commercial construction firms that were able to build more and required less heating. Ranchers benefited from less winter stress on their animals. However, not all benefited from mild weather. Several auto body shops complained they had less demand due to better driving conditions that reduced accidents. Some apparel stores had difficulty selling winter clothing due to relatively mild weather conditions during December and January. In addition, a lack of snow slowed winter tourism activity in several areas.

Minnesota consumers benefiting from a drop in gasoline prices

 As oil prices have plummeted, so have gasoline prices, since the price of crude oil represents more than half the cost of a gallon of gasoline (see Chart 1).

In Janaury, the price for regular Minnesota gasoline dropped below $2 per gallon, more than $1 per gallon lower than a year earlier. Through the first week of February, Minnesota gasoline prices have picked up by about 20 cents per gallon, but are still about $1 per gallon lower than last year. Gas prices haven’t been consistently below $2 per gallon (other than a six-month period during the Great Recession) since 2004 and earlier.

MN gas prices CH1

As gasoline prices drop, consumers have more disposable income to spend on goods and services other than gas. According the Bureau of Labor Statistics Consumer Expenditure Survey data, a $1 per gallon decrease in gasoline prices over a year’s time could provide consumers with an additional $400 to $1,200, depending on how much they typically spend on gasoline (see Chart 2). Consumers with lower income tend to spend less on gasoline than those with higher income.

As a share of total expenditure, consumers in the highest income quintile spend a smaller share on gasoline and motor oil than those in lower quintiles (see Chart 3).

Retail sales data are not yet showing an impact from low gasoline prices. According to U.S. retail sales data, while gasoline prices and sales at gasoline stations dropped notably in December and January, there were only mild increases in U.S. retail sales after removing sales at auto dealers and gasoline stations. Consumers could be spending their extra disposable income on items not recorded in retail sales figures, such as utility, cable or medical bills, or putting it into savings.

MN gas prices CH2-3

Beige Book recap: Modest growth in Ninth District

Over the past two months, the Ninth District economy has seen modest growth, according to the latest Beige Book information released by the Federal Reserve Bank of Minneapolis. Increased activity was noted in consumer spending, professional services, manufacturing and non-energy mining. Activity was level in tourism and mixed in commercial construction, commercial real estate and agriculture. Energy, residential real estate and residential construction were down. Labor markets continued to tighten since the previous report. While overall wage increases remained modest, there were examples of steeper increases in some regions and industries.

Consumer spending and tourism: Consumer spending increased moderately. Mall and retail representatives across district states reported solid traffic and sales. Overall tourism was about level with a year ago, according to a variety of sources. Construction and real estate: Construction activity was mixed in the district’s larger cities. In Sioux Falls, S.D., the value of November commercial permits increased from a year ago, but fell in Billings, Mont.

Residential construction: Activity was mostly lower. In the Minneapolis-St. Paul area, the value of December residential permits decreased 9 percent from a year earlier and also dropped in the Bismarck, N.D. area (November data). Residential activity was stronger in Billings and Sioux Falls, however. Home sales were generally lower from a year earlier (in November). In the Sioux Falls area, home sales were down 12 percent, inventory increased 1 percent and the median sales price increased 6 percent relative to a year earlier. Sales were also down in northwestern Wisconsin, and the median sales price was 6 percent lower. Minnesota home sales were down 13 percent, inventories of homes for sale increased 5 percent and the median sales price rose 3 percent. Home sales in the Bismarck area were about level with last year.

Manufacturing: Activity increased slightly. A manufacturing index increased in December from the previous month in Minnesota and South Dakota, but fell slightly in North Dakota. However, the index pointed to continued expansion in all three states. Through October, manufactured exports in district states were up 1 percent compared with the same period a year earlier.

Energy and mining: The energy sector slowed slightly in response to lower output prices. Oil and gas exploration activity decreased in late December compared with a month earlier in Montana and North Dakota. Mining activity increased slightly. District iron ore mines were operating at or near capacity, with November production slightly higher than a year earlier.

Agriculture: Conditions remained mixed, with livestock and dairy producers faring better than crop farmers. A Minneapolis Fed third-quarter survey found that a majority of farm incomes had fallen from a year earlier and that capital spending also decreased. The fourth quarter outlook was also weaker, according to the survey. Prices received by farmers in December decreased from a year earlier for corn, soybeans, wheat, hay and milk; prices increased for cattle, hogs, eggs and poultry.

Employment and wages: Labor markets continued to tighten since the previous report. Overall wage increases remained modest, but there were examples of steeper increases in some regions and industries. Some construction firms in the Minneapolis-St. Paul area noted that labor costs have increased recently. In addition, some managers at Minneapolis-St. Paul area restaurants indicated that they were increasing wages to attract employees.

See the full Beige Book report for more details on the national and Ninth District performance.

Online job ads still high in North Dakota

The economic effect of low oil prices is a hot topic in oil-producing states like North Dakota. While many fear a big slowdown in the Peace Garden State, so far it’s not showing up in online job ads, according to the most recent figures published by Job Service North Dakota.

December online job ads showed a couple of interesting twists. First, while overall ads declined steadily in recent months, they were nonetheless 21 percent higher on a year-over-year basis (see Chart 1). Similar to 2013, a seasonal decline can be seen in the last half of 2014. Job openings in the energy production counties of the Bakken followed a similar trend, with a decline from August to December, yet December’s online job total was 18 percent higher than a year earlier.

ND online jobs CH1 -- 1-15-15

Despite continued strong job demand overall, some shifts in advertised jobs at the state level align with the notion of slower oil activity. For example, job ads in the construction and extraction sector grew less than 1 percent over the previous 12 months (see Chart 2). Meanwhile, health care, food service, management, and architecture and engineering increased more than 30 percent. On the other end, production job postings decreased about 10 percent.

It’s difficult to say how these sector changes played out geographically (county level data were not available for job sectors). Some of this shift is likely driven by growth in health care and other professional jobs in the state’s metro counties, especially Fargo’s Cass County, which saw online job postings increase by 40 percent over the past 12 months. There might also be transitional shifts in Bakken counties as communities there grow.

ND online jobs CH2 -- 1-15-15

U.P. electricity prices tops in district

Households and firms in the Upper Peninsula of Michigan have long complained about expensive power. Civic and business leaders say high electricity rates squeeze family budgets and hamper efforts to foster industrial development in a region plagued by high unemployment.

Angst over the price of U.P. electricity has come to a head this fall. A regional power grid authority has ordered Wisconsin-based We Energies to continue operating an aging coal-fired power plant near Marquette, with costs passed along to U.P. ratepayers. If federal energy regulators approve, U.P. utility customers could see average rate increases of $100 annually to fund operating subsidies for the Presque Isles plant and two other coal-fired power plants in the U.P.

The Michigan Public Service Commission and big U.P. power consumers such as Cliffs Natural Resources—owners of the Empire and Tilden iron mines—have objected to the proposed rate hikes, saying they would further burden utility customers already paying dearly for electricity.

Federal price data show that U.P. residents pay higher electricity rates than those in other parts of the Ninth District and the nation as a whole (see Chart 1). Electricity costs about 20 percent more in the U.P. than it does in Minnesota and about 35 percent more than in North Dakota. But Yoopers pay less than Michiganders overall, and U.P. power is a bargain compared with utility rates in some parts of the country, such as New England.

However, the U.P. average rate obscures wide disparities across the peninsula; residents of some U.P. communities pay significantly more than others to keep the lights on, the result of differing customer densities and, in some cases, reliance on imported power rather than local generation sources. State PSC figures for 2013 show that power producers such as Upper Peninsular Power Co. and the Alger Delta Cooperative Electric Association, which primarily serve customers in the western and central U.P., charge much higher rates than other utilities (see Chart 2).

UP power -- 11-3-14

Global factors influence Bakken oil boom

Rapid energy development in the Bakken and Three Forks shale formations, also called tight oil formations, in North Dakota and Montana has led to production levels of over 1 million barrels of oil per day. The Bakken and other tight oil formations in the United States have contributed to overall gains in oil production domestically and worldwide. While tight oil production in the Ninth District has been spurred by advances in drilling and production technology, it also has been influenced by a number of global factors, as described in James Hamilton’s recent paper, “The Changing Face of World Oil Markets.”

Global demand for oil has increased over the past decade. However, global demand has not been fueled by developed countries, but rather by developing countries. From 2005 to 2013, oil consumption in the United States, Canada, Europe and Japan fell at an average of 700,000 barrels per day every year. Meanwhile, oil consumption has grown rapidly in developing countries, which now account for 55 percent of global oil consumption. China alone contributed 57 percent of the global increase in oil consumption since 2005.

On the supply side, Hamilton points out that between 2005 and 2013, oil production did not keep pace with pre-2005 trends. One factor was geopolitical disturbances, such as the overthrow of Muammar Gaddafi in Libya and subsequent sharp drop in oil exports. In addition, conflicts in Syria and Sudan, sanctions in Iran and attacks on Nigeria’s oil infrastructure have suppressed oil production.

A second factor contributing to stagnant oil production is geological limitations. While oil production in the Middle East increased modestly since 2005, the number of active drilling rigs increased at a faster pace. Meanwhile, oil production among major international energy companies decreased somewhat since 2005, despite tripling capital expenditures. Both observations indicate that the difficulty and cost of producing oil have generally increased.

With global demand increasing and growth in supply constrained, oil prices have remained near $100 per barrel since 2011. In response to new technology, but also relatively high oil prices, drilling in tight oil formations like the Bakken has contributed to a 2.9 million barrels per day increase in U.S. production since 2005. The growth in tight oil extraction more than offset the 0.6 million barrels per day drop among conventional wells in the lower 48 states, Alaska and offshore production, and has reversed the declining trend in U.S. oil production (see Charts 1 and 2). The net gain in U.S. production since 2005 equals the net increase in oil production worldwide.

Bakken tight oil -- 9-16-14

One more call for ethanol

Ethanol’s popularity has swung dramatically over the past decade. It went from being touted as the answer to oil dependency and a savior for rural economies to getting derided as a waste of corn that drove up the price of food while providing questionable environmental benefits. One criticism directed at ethanol was that it wouldn’t be as competitive an energy source if it didn’t benefit from hefty government subsidies.

The latter criticism got put to the test beginning in 2012. That was when the federal blenders’ tax credit, the primary subsidy to ethanol production, was discontinued after Congress opted not to renew it. And indeed, national production of ethanol peaked in late-2011 and went into decline after the credit expired (see Chart 1).

Ethanol CH1 -- 7-24-14

However, production has been on the increase during the last year, nearly returning to the pre-expiration peak over the three months from December 2013 through February 2014 (the USDA tracks quarterly ethanol production by marketing year, which goes from September through August).

The likely reason for this rebound is that, in spite of the end of the tax credit, other market conditions have turned favorable for ethanol producers. In particular, the price of corn used to produce ethanol has dropped sharply from its late-2012 peak (see Chart 2). The price of the fuel itself hasn’t dropped nearly as much as this input cost, pushing up profit margins for distillers, while the price of gas—a substitute—has remained elevated over the same period.

This all adds up to happy news for distillers, and the good times are likely to continue; the USDA forecasts corn prices to stay down this year and also projects that more corn will be used to produce ethanol than in any previous year.

Ethanol CH2 -- 7-24-14

 

Coal producers fire up exports

District coal producers are fighting to retain market share in a national power generation industry that derives an increasing share of its energy input from alternative sources. One survival strategy that has gained traction recently is exporting to Asian countries with a large and growing appetite for coal.

Over the past half-decade, coal’s position as the dominant feedstock for power plants has been eroded by cheap natural gas, increasingly competitive renewables and stringent federal air quality regulations that have rendered many coal-burning plants too costly to operate. In 2008, 48 percent of U.S. power generation was coal-fired, according to the Energy Information Administration; in 2013, coal’s share was 37 percent.

Many coal producers have turned to foreign markets to offset an overall drop in domestic coal consumption. In Montana, the go-to export destinations are South Korea, Taiwan and Japan. “There’s huge demand for coal in southeastern Asian countries for power generation,” said Bud Clinch, executive director of the Montana Coal Council, an industry trade association.

Subbituminous coal from southeastern Montana is cheaper than coal from many other parts of the country, and its high energy content makes it economical to ship overseas via rail and cargo ship. (No coal is exported from North Dakota; the total output of the state’s lignite mines goes to local power plants.)

Since 2009, Montana coal exports have increased sharply, mostly due to shipments from the Spring Creek mine outside Decker, near the Wyoming border (see chart). Over 40 percent of Montana coal comes from this mine, owned by Cloud Peak Energy of Wyoming. In 2013, Spring Creek exported 4.7 million tons to East Asian customers—triple the amount from 2009—mainly through a coal terminal in the Canadian port of Vancouver.

Signal Peak Energy’s Bull Mountain mine near Roundup, Mont., also exports coal, and developers of the proposed Otter Creek coal mine southeast of Ashland, Mont., plan to ship coal to Asia via a new rail link to BNSF’s Colstrip terminal.

But limited port capacity on the Pacific Coast constrains coal exports from Montana and other western states. Ramping up shipments depends on the opening of new coal export terminals in Oregon and Washington state—projects that face opposition from environmental groups concerned about global warming and the impact of coal handling on local air and water quality.

For more on other mining activity in the district, look for the upcoming July issue of the fedgazette

Coal exports -- 7-3-14