Oil, Gas Drilling Swings Obfuscate Texas Economic Growth

    

   CRANBURY, N.J. (DTN) -- Two economists with the Federal Reserve Bank of 
Dallas highlighted flaws in the way the Bureau of Economic Analysis estimates 
economic growth for Texas, indicating that while the BEA has made improvements, 
their calculation can exaggerate gross domestic product because of the wide 
swings in oil and gas drilling activity.

   In a report published today, Keith Phillips, assistant vice president and 
senior economist in the San Antonio Branch of the Dallas Fed, and Christopher 
Slijk, associate economist with the Dallas Fed's Research Department, found BEA 
makes sharp changes in the state's oil and gas output estimates that are 
aligned with spot prices but fail to consider most energy companies sell oil 
and gas on long-term contracts or hedge with options contracts.

   "This can distort the measure of real GDP. For example, suppose spot prices 
decline by 50 percent but the price that oil companies receive only declines 5 
percent (because most oil is sold at contracted prices or hedged with options). 
If production doesn't change, the measure of real oil output would increase by 
90 percent. If prices stay low, then in later months when contracts are 
renegotiated, the measure of real GDP will fall even if production remains 
stable," the authors explain.

   Because contracted oil price data is unavailable, using physical oil and gas 
production converted into BTUs provides a more robust model that can be checked 
against other indicators of energy activity.

   The authors note energy production is capital intensive and activity can 
change quickly that may significantly lag changes in price. 

   "New drilling activity---measured by the drilling rig count---declines 
first. Oil and gas employment falls next, as layoffs signal expectations of 
more-persistent weakening within energy. Finally, production declines reflect 
the drop-off in existing-well productivity coupled with less new-well drilling. 
When prices recover, a similar sequence occurs in reverse---rebounding rig 
counts, employment and, ultimately, production," writes the authors.

   Using their approach, the authors found real GDP in Texas grew at a more 
moderate 3.9% from fourth quarter 2018 through third quarter 2019 compared with 
BEA's estimate of 4.7%.

   Texas real GDP growth averaged 3.6% annually since 1990 compared with 5.7% 
when not adjusting for inflation.

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