The falling price of oil will compete for economic story of the year in 2014, but what does it mean for economic developers heading into 2015? Most of the attention so far has been paid to oil-producing states like Texas and North Dakota, but for economic developers in non-production states, could lower oil prices create opportunities for leveraging their own competitive advantages?
Economic developers have access to many tools that can help frame the situation for their communities. The first step is to understand how oil and gas impacts your economic geography. Using the fabulous new and improved U.S. Cluster Mapping Project, developed by Michael Porter’s team at Harvard Business School and funded by the U.S. Economic Development Administration, and 2014 estimates from EMSI, I ranked the top fifteen counties by jobs in the Oil & Gas Production & Transportation Cluster in Table 1.
Harris County (Houston) is the obvious outlier, but falling oil prices will have even more severe impacts on smaller counties where the oil and gas cluster makes up a larger share of total employment and carries a huge multiplier effect, such as in Midland and Ector County, Lafayette Parish, Williams County (Williston), and Lea County. Larger and more diversified counties, such as Dallas, Tarrant, and Los Angeles, will no doubt feel the impact of lower oil prices through declines in corporate profits, lower earnings, and reduced consumer spending, but the shock should be absorbed to some extent by virtue of having other industries to lean on.
So how strong might that shock be? Oil and gas industry market forecasts seem to be all over the place, but some analysts are projecting declines of up to 30 percent:
@civicanalytics From Raymond James: U.S. E&P cash flows (industrywide) will fall by 29% in 2015, then stabilize to relatively flat in 2016.
— Robert Grattan (@rpgrattan) December 16, 2014
According to Porter’s team at Harvard, there are twelve industries in the oil and gas cluster. Let’s assume that lower oil prices result in a 20% decline in earnings across all industries in the oil and gas cluster. That’s probably a bit steep in terms of how lower corporate earnings would translate to wages and salaries of workers, and it’s unlikely that lower oil prices would produce the same 20% decline across different industries in the cluster (e.g., extraction vs. oilfield machinery manufacturing). But we’ll use it here for the sake of illustration.
Table 2 (second tab if you’re using the link) shows how a 20% decrease in earnings may impact the counties in Table 1, based on my analysis of EMSI data and accounting for direct and multiplier effects.
Whatever your experience and/or intuition says about oil prices in 2015, economic developers working on behalf of communities with strong oil and gas clusters should be doing scenario analysis like this right now, evaluating a range of potential impacts of lower oil prices and how public services, such as the workforce development system, may be affected. Further, many community colleges and technical schools have added new programs or expanded capacity to meet the strong demand for oil and gas workers during times of higher prices. Seek out and collaborate with your education partners, too, so they can weigh in and benefit from the results of your analysis. Many of them have likely been through this before.
Economic developers everywhere would be wise to follow suit, even in communities with little or no obvious oil and gas industry presence. Austin, for example, is known for technology, not oil and gas. But as Dan Zehr, who covers finance and the economy at the Austin American-Statesman, explains in his excellent deep-dive on Austin’s oil and gas industry, the “Blueberry in the Tomato Soup” will not escape the downsides of falling oil prices because earnings from oil and gas holdings are a key driver of the regional economy.
Earnings are wages, salaries, supplements (employee benefits), and proprietor income. As Zehr points out, investors, owners of holding companies, and the like derive significant income from oil and gas while living in Austin–with very few oil and gas jobs showing up in an analysis of the local economy. In fact, according to EMSI estimates, oil and gas extraction is the eleventh largest contributor to Austin’s GDP at $1.63 billion per year in value added, but only accounts for approximately 1,300 jobs (0.1% of total employment). Yet, the same 20% decline in earnings modeled above for the oil and gas cluster results in a loss of an estimated $307 million in earnings and 5,700 jobs for the Austin-Round Rock MSA, according to my analysis of EMSI data.
And it’s not just places in major production states. The oil and gas cluster accounts for at least $200 million in earnings in Contra Costa County, CA, Lake County, IN, Salt Lake County, UT, Jackson County, MS, Yellowstone County, MT, Dakota County, MN, Orange County, CA, Lucas County, OH, and Duchesne County, UT, as well as several higher-profile counties in Pennsylvania, according to EMSI estimates.
What about the upside of lower oil prices? Indeed, lower oil prices may present an opportunity for some economic developers. According to other data from EMSI, approximately 85 percent of total sales in oil and gas extraction go to petroleum refineries, which are part of the oil and gas cluster as defined by Porter’s team at Harvard. Sorting out and measuring the feedback loops within the same cluster is complicated. However, there are several industries not in the oil and gas cluster that use oil and gas extraction products as inputs that may benefit from lower prices.
Economic developers in places such as Salem County, NJ, Orangeburg County, SC, and Morgan County, AL (petrochemicals), Clayton County, GA (air transportation), Sarpy County, NE (trucking), and McCracken County, KY, and Unicoi County, TN (chemicals) all have major employers in industries that represent $200 million or more in sales nationally for the oil and gas extraction industry.
I have no idea what lower oil prices may mean for those industries, but it’s a good conversation starter for economic developers who want to approach local industry representatives about business retention and expansion, getting a cluster initiative up and running, recruitment and/or entrepreneurship possibilities through supply chain analysis and import substitution, etc.
Economic developers are in a unique position as experts on their local economies. They stand at the intersection of the public and private sectors, and the best economic developers can leverage their expertise on the local economy to identify opportunities for public-private partnerships.
For economic developers in regions with strong oil and gas clusters, now is the time to evaluate what sustained lower oil prices may mean for your economic geographies. Economic developers in non-oil and gas regions should take advantage of the tools at their disposal, as well, to explain to community leaders how lower oil prices may impact their local economies, aside from the price at the pump.
Most seasoned economic developers I’ve worked with have at least one success story that began with a seemingly trivial conversation, perhaps about something like gas prices. But armed with the right information, you never know where those conversations may lead.