What Dr. Loren Scott said and what I heard
Jennifer Whitmore, Billeaud Company VP of Real Estate Operations and I, along with a few members of our Board of Directors attended the annual State of the Economy breakfast presented by The Independent. This event is a “not to be missed” presentation for business leaders and others interested in the local economy and what potentially lies ahead. Dr. Loren Scott, Professor Emeritus in Economics at LSU reported on the findings contained in his annual Louisiana Economic Forecast available here
Dr. Scott admittedly confessed that he missed the mark on his projections for the Lafayette and Acadiana Area a year ago. Much to his misfortune, his annual presentations in October preceded a major economic shift. Less than a month from his somewhat rosy, “plugging along” prognostication for the local economy in 2015, OPEC held it’s now infamous, Thanksgiving meeting. This meeting predicated a collapse in Oil Prices that have yet to settle, this move tainted the holidays for many in South Louisiana and the entire oil patch.
Understanding that Dr. Scott was making projections on a product whose price is set a world away by very few people, I can cut him some slack about being so wrong. His rock-solid forecasts over many years have set pretty high standards for his accuracy. He did take time this year to both stress how unpredictable and difficult it is to forecast the future price of oil. His 2016 forecast included a wide range in the price of oil this time next year. What I heard was, “I’m guessing and I have no idea what OPEC is going to do”.
Dr Scott pointed out that complicating Oil Price predictability is the incredible success of the United States oil and gas producers. This success leading to dramatic new supplies being produced right here in the good ole’ USA has not gone unnoticed by the powers that be in Saudi Arabia. Along with some demand challenges around the world, the new US Oil and Gas production has practically singlehandedly forced OPEC’s hand.
To keep you from having to read the entire 129 page report (at the bottom of this post), I will recap some of his comments and have included a few of the most pertinent charts for Acadiana. While reading the entire report would be a daunting task, I do highly recommend a quick read of his three-page Executive Summary for a quick statewide overview of his forecast.
A few of Dr. Scott’s comments I found interesting:
He predicted that the break even point for oil and gas operations around the country and particularly in various shale plays are moving down rapidly. He referred to a “Shoveled Down Effect” where due to falling prices the oil and gas producer turns to his suppliers and contractors to negotiate. These suppliers and contractor then negotiate lower rates with their suppliers, contractors, employees and landlords creating an effect industry-wide. Our business like many other has seen the “Shoveled Down Effect” of lower oil prices. If you are a vendor or service provider of any business whose revenue has been cut in half, you should expect it to trickle you eventually.
I found it interesting that Scott illustrated the center of a shale play find is where the costs are lowest because it is much easier and cost effective to extract oil and gas. As you go out to what he referred to as the “Edges” of the oil shale play, geographically, extraction is more difficult and in turn more expensive. He actually breaks down in his report the breakeven point by county for the Bakken Shale Play in North Dakota, to illustrate his point. As you can imagine, production is being shut down from the outside in, while the very center of the prospect still remains profitable in some cases. This explains to me the continued, albeit slowed, production in North Dakota and West Texas.
According to Scott “Impairment” is a big word these days in the oil and gas industry. Impairment refers to this heavily leveraged industry’s ability to borrow money. The industry assets, used as collateral to borrow money, are oil reserves. Therefore, as the price/value of those assets decline, so does borrowing ability. The impairment effect is likened to attaining a home loan in Lafayette in 1986; with little demand for homes and many available, prices were falling fast. While in 1986 you may have been able to get a loan but, is was going to be extremely difficult and for less than what you would have gotten a couple of years prior.
It was not all bad news, Dr. Scott did note that oil and gas employment in Louisiana is down drastically due to a more restrained and less speculative industry. This was his explanation for the lack of drastic job loss and justification for a prediction that there will not be a return to the type of economic devastation seen in the 80s. Louisiana employment in the oil and gas sector in 1973 was 47,000. In 1981 that jumped to 95,000. Currently, the sector employs 47,900 similar to 1973 levels.
In the good news category, Scott reported on the many new projects and employers in and around Lafayette and Acadiana, including several new tech companies. Below are a few of the charts I found most interesting and contain his predictions for 2016 & 2017.
There are certainly many great things going on in Lafayette and Acadiana. The simple fact is that it has taken a year since the price of a barrel of oil was cut by half, for there to be any effect on retail sales in the area. This is a simple testimony to the diversification of our economy today.
While Dr. Scott’s comments were much more guarded and painted thick with qualification, I, for one, am hoping for the high end of his forecast for oil prices in 2016.
Select Images from the Louisiana Economic Forecast