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October 24, 2013

The Energy Industry's Positive Contribution to the U.S. Economy

By Paul Traub

The U.S. Census Bureau announced in August in its U.S. International Trade in Goods and Services Report for June 2013 that the petroleum[1] deficit had fallen to its lowest level ($17.4 billion) since August 2009 ($17.9 billion). This decline was the result not only of declining imports but also of an increase in exports. The petroleum trade deficit was reported to be down $34 billion dollars, year over year, through June. The use of new technology and techniques to extract natural gas and other petroleum products has allowed the U.S. to go from being a net importer of refined petroleum to being a net exporter. What impact will this new technology have on U.S. economic growth in the years to come?

According to an August 18, 2013, Financial Times article, “the value of petroleum and coal exports more than doubled from $51.5 billion in the year to June 2010 to $110.2 billion in the year to June 2013.” To look deeper into the role the U.S. will play in the future in the global energy markets, we constructed a combined energy trade category using U.S. Census Bureau’s trade data by North American Industry Classification System (NAICS), among other sources.[2] Chart 1 shows just how much the balance in energy related trade has changed since 2002 by quarter.

Based on this total energy trade category, the United States imported about 10 times more petroleum related products than it exported in 2002, as indicated by the bars in the chart. This ratio of imports to exports grew to as high as 14 in the fourth quarter of 2005. The lines in the chart show that this happened while exports and imports grew by relatively the same ratio compared with 2002. However by 2006:Q4, this relationship started to change. Even with the sharp decline in both imports and exports during the recession in 2008, the ratio of imports to exports continued to decline. The latest data for 2013:Q2 indicate that the U.S. is exporting about 12 times more energy related products than it did in 2002, bringing the import to export ratio down to 2.8. This represents a 360% reduction in the trade deficit for these combined categories, with almost all of that achieved in the past six years.

According to the U.S. Energy Information Administration (EIA), the U.S. is one of the world’s leading producers of crude oil and petroleum products. Table 1 below shows the total value of exports and imports by NAICS classification and their share by category for calendar years 2002 and 2012.

Although the deficit did grow from 2002 to 2012, in 2002 crude petroleum and natural gas accounted for almost 85% of the total trade deficit, while petroleum refinery products accounted for about 70% of exports. Also in 2002, coal[3] was the only product of the four NAICS classifications that made a positive contribution to the trade balance. By 2012, crude petroleum accounted for almost the entire energy-related trade deficit, while the contribution to the deficit from liquid natural gas had fallen to just 0.3%. In addition, petroleum refinery products’ positive contribution to the trade balance jumped past coal’s to reach 81% of the total energy-related export products.

So far in 2013 the picture has improved even more. The following charts show just how much faster the exports of each of these energy-related products have grown relative to imports to the degree that three of the four categories shown here had a positive contribution to the trade balance in Q2 2013 evidenced by the exports to imports ratio of less than one. In fact, in Q2 2013 the U.S. exported three times more liquefied natural gas than it imported. In addition, the exports of petroleum refinery products have grown by an astonishing 1,380% since 2002.

Coal exports, which had grown 1,000% by 2011, have slowed more recently, likely reflecting slowing economic growth in China and falling prices in Asian markets.[4] As the chart 6 suggests, U.S. energy exports and the pace of emerging market growth have gone hand in hand in the past.

Given the somewhat slower global growth expectations for this year and next, it is reasonable to assume that U.S. energy exports are being somewhat limited by the global slowdown of emerging economies in particular, implying that the U.S. trade deficit reduction might otherwise have been even greater this year.

For January through June 2013, the petroleum trade deficit was reported to be down $34 billion dollars, year over year. If we include coal and refined petroleum products, the trade deficit decline was somewhat smaller at $31 billion, when adjusted for inflation, mostly due to a slowing global demand for coal. However, this trend is expected to reverse itself in the near future, according to the EIA International Energy Outlook for 2013. The EIA forecasts that global demand for all types of energy[5] will continue to grow at an annual rate of 1.5% for the next 30 years; and that, by 2015, the world’s demand for energy will increase by 9.1% compared with 2010 and an additional 10.1% by the year 2020. Also, by 2015, global demand for natural gas and coal is expected to increase by 9.3% over 2010 levels and an additional 9.5% by 2020. All of this is good news for the U.S. trade balance, because most of the growth in demand is expected to come from other countries. Based on EIA’s 2013 projections, non-OEDC countries will account for 86% of the total increase in energy consumption between 2015 and 2040.

Through the first two quarters of 2013, the U.S. economy is thought to have grown by just $227.2 billion compared with the first half of last year, while energy trade accounted for a $31 billion reduction in the trade deficit for the same period. This means that through the first half of 2013, while the total U.S. economy is estimated to have grown by just 1.5%, the increase in energy exports accounted for 13.6% of total growth in this period by significantly reducing the trade deficit.

Since 2008, the global demand for energy has continued to increase; it is presently expected to grow by 1.2% in 2013 compared with just 0.7% in 2012. This projected increase in global demand for energy should contribute further to economic growth in the U.S. through additional reductions in the trade deficit.

[1]The petroleum products aggregated in the end-use commodity classification system include virtually the same energy related products as those aggregated in the Standard International Trade Classification (SITC). The end-use petroleum products, however, include some products such as ethane, butane, benzene, and toluene which are included in “Manufactured Goods” in the SITC. (Return to text)

[2]The “Total Energy Trade” category contains the following NAICS series: Crude Petroleum and Natural Gas (211111), Liquid Natural Gas (211112), Coal (excluding Anthracite) and Petroleum Gases (212112), and Petroleum Refinery Products (324110). (Return to text)

[3]Coal (excluding Anthracite) and petroleum gases will be referred to as coal throughout the remainder of the article. (Return to text)

[4]Chen, Sarah. “China Coal Prices Fall to a Four-Year Low Amid Economic Slowdown” Bloomberg.com, Bloomberg News, 29 July 2013. Web. 28 Aug. 2013. (Return to text)

[5]EIA Energy classifications are defined as liquids, natural gas, coal, nuclear and other. (Return to text)

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October 21, 2013

Seventh District Update

by Thom Walstrum and Scott Brave


A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: The rate of growth in economic activity in the Seventh District slowed a bit in September. Contacts remained generally optimistic, although several expressed concern about the potential impact of the federal government shutdown.
Consumer spending: Consumer spending grew modestly in September, falling short of retailers’ expectations. Auto sales increased at a slower pace and back-to-school spending was less than last year. Retailers expected holiday season spending to be similar to last year.
Business Spending: Growth in business spending flattened out in September. Growth in capital spending slowed slightly and inventories were at comfortable levels for most retailers and manufacturers. The pace of hiring edged lower and retailers indicated that seasonal hiring plans were about the same as last year.
Construction and Real Estate: Construction and real estate activity continued to increase in September. Demand for residential construction grew moderately, as did activity in the residential real estate market. Nonresidential construction grew modestly and commercial real estate activity continued to expand.
Manufacturing: Growth in manufacturing production decreased slightly in September. The auto and aerospace industries were again a source of strength. Steel production was steady, demand for specialty metals, construction materials, and household appliances declinedslightly, and demand for heavy equipment remained soft.
Banking and finance: Credit conditions changed little on balance over the reporting period. Banking contacts noted competitive pressures for commercial and industrial loans, with narrowing spreads and easing standards. Consumer loan demand was steady, with a decrease in mortgage lending and an increase in auto lending.
Prices and Costs: Cost pressures changed little in September. Overall, commodity prices were down slightly. Retailers again noted a slight increase in wholesale prices. Wage pressures remained mild and non-wage labor costs increased.
Agriculture: Although the year’s drought affected the harvest, corn and soybean yields in parts of the District were higher than expected in September though rains slowed harvesting. Corn, soybean, hog, and fruit prices decreased, while milk and cattle prices increased.

The Midwest Economy Index (MEI) increased to +0.41 in August from +0.22 in July, and the relative MEI rose to +0.73 in August from +0.45 in July. August’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.5% in August, to a seasonally adjusted level of 96.7 (2007 = 100). Revised data show the index was down 0.7% in July. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved up 0.7% in August. Regional output rose 4.0% in August from a year earlier, and national output increased 2.8%.

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October 18, 2013

Bureau of Economic Analysis Event

By Jacob Berman

On Thursday, September 26, the Chicago Fed was pleased to host a presentation by Steve Landefeld, the Director of the Bureau of Economic Analysis (BEA), to the Chicago Area Business Economists (CABE). The BEA is the government agency responsible for producing key statistics such as gross domestic product, GDP, a measure of economic output, and the personal consumption expenditure price index (PCE), a measure of inflation. In his CABE presentation, Landefeld illustrated the importance of BEA’s statistical products to policy topics, such as changes in the U.S. distribution of household income. He also explained their role in illuminating features of the financial crisis and Great Recession. Landefeld then discussed planned cuts to existing statistical products due to budgetary pressures. Ideally, he said, these plans should be shared with users ahead of time so that they can adapt their data use accordingly.

However, the agency has also been working on some interesting new products. For example, the BEA recently released new measurements of real or price-adjusted personal income for states and metropolitan areas—Regional Price Parities (RPPs). Although the BEA has been estimating nominal income by state since the 1950s, the value of these data was limited by the fact that the price levels can vary considerably, both across states and over time. While the new products are still in the experimental stage, they have the potential to allow comparisons of personal income across both time and geography.

Up to now, the only available price indexes for household income have been the local area Consumer Price Indexes (CPI). The Bureau of Labor Statistics calculates CPI on a national level every month; estimates for major cities are released less frequently.

Figure 1 compares inflation measured by the CPI for the three major urban areas in the Seventh District with national CPI inflation. We see that CPI inflation does not vary much across cities, and it has closely followed the national trend in recent years.

The CPI measures changes in the price level within individual cities; it does not reflect price differences between cities at any one point in time. Additionally, these data exists for only 26 cities, so many states are entirely unrepresented.

Click to enlarge.

In contrast, the BEA’s new RPP data series provides estimates of the price levels that are comparable across states and time. These estimates are constructed by combining survey data from various sources, including the CPI and the PCE, and calculating an index such that national price levels in a given year are calibrated to 100. Figure 2 shows RPPs for selected states in 2011. The price level in Illinois is barely above the national average; price levels for all other states in our district are below the national average. The RPP also shows that South Dakota has the lowest cost of living in the nation and Hawaii has the highest.

Click to enlarge.

So far, the BEA has only released data in this series for 2007 to 2011. Figure 3 compares the RPP-derived price changes related to household income for Seventh District states with the national average. The series are almost indistinguishable. In fact, the variance across states is substantially lower than the CPI data would suggest. While Figure 2 shows that there is a large gap in the price level across states, Figure 3 suggests that this gap is persistent and has been largely invariant over this short period.

Click to enlarge.

New products from the BEA, such as the RPPs, present exciting new opportunities for economists and other analysts to improve our understanding of regional economic trends and structure.

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