Links for 2015-10-18

Quick links to a few items I found interesting.

From the Economic Review of the Federal Reserve Bank of Kansas City:

We find oil-specific demand shocks largely drove the oil price movements since mid-2014, reflecting shifts in expectations about future supply relative to future demand. In particular, the driving factors behind the decline appear to be expectations that the future supply of oil will remain higher, or at least more stable, and concerns about weakening future demand due to slowing global growth forecasts.

From a new study by James Feyrer, Erin Mansur, and Bruce Sacerdote:

The combining of horizontal drilling and hydrofracturing unleashed a boom in oil and natural gas production in the US. This technological shift interacts with local geology to create an exogenous shock to county income and employment. We measure the effects of these shocks within the county where production occurs and track their geographic propagation. Every million dollars of oil and gas extracted produces $66,000 in wage income, $61,000 in royalty payments, and 0.78 jobs within the county. Outside the immediate county but within the region, the economic impacts are over three times larger. Within 100 miles of the new production, one million dollars generates $243,000 in wages, $117,000 in royalties, and 2.49 jobs. Thus, over a third of the fracking revenue stays within the regional economy. Our results suggest new oil and gas extraction led to an increase in aggregate US employment of 725,000 and a 0.5 percent decrease in the unemployment rate during the Great Recession.

And from the always insightful Bill McBride:

Here is a review of three key demographic points:

  1. Demographics have been favorable for apartments, and will become more favorable for homeownership.
  2. Demographics are the key reason the Labor Participation Rate has declined.
  3. Demographics are a key reason real GDP growth is closer to 2% than 4%.

25 thoughts on “Links for 2015-10-18

  1. PeakTrader

    Larger economies tend to grow more slowly than smaller economies. Over the 1982-00 boom, per capita real GDP growth wasn’t in decline, even with increasingly larger trade deficits, which subtracted from GDP growth.

    There has been a slow demographic shift after 2000, which reduced per capita real GDP growth, along with even larger trade deficits and on top of huge GDP gains. However, the sudden and sharp downshift in per capita real GDP growth after 2007, along with smaller trade deficits, which add to GDP, cannot be explained by mostly demographics. It continues to be mostly a cyclical phenomenon.

    1. PeakTrader

      Over the past eight years, U.S. per capita real GDP growth should’ve been several times stronger.

      Total per capita real GDP growth over selected periods, since WW II.

      July ’47 to July ’61: 28.3%
      July ’61 to July ’70: 33.7%
      July ’70 to July ’82: 22.2%
      July ’82 to July ’90: 28.0%
      July ’90 to July ’00: 24.0%
      July ’00 to July ’07: 10.4%
      July ’07 to Apr ’15: 3.2%

      1. JBH

        PeakTrader Choice of words here. Other than marginally, unless for example had certain impediments been removed, growth could not have been several times stronger. If you understood the current environment, you would not make such a statement. Not until the debt burden is reduced will growth ever come back. Reducing debt is going to take a toll on growth until such time that the benefit of doing so outweighs the ongoing need to keep credit growth below the growth of nominal GDP. We are looking at decades. And as the economics profession is blind to this, we will go further into the hole before finally doing the right thing. Fight debt with more debt. Preposterous. Start with Reinhart Rogoff and then read all the papers that have come out since in support of their seminal work.

  2. Ricardo

    Thanks to Bill McBride for this admission:

    “Note: Household formation would be a better measure than population, but reliable data for households is released with a long lag.”

    With so much many price controls on housing and renting and mortgages I would say that demographics are down the list of causes, but demographics is a component. Don’t hang your investing hat on demographics.

  3. Ricardo

    Once again demographics is a component of decline in the labor participation rate but, as McBride notes, “The 25 to 54 participation rate decreased in September to 80.6%…” and he continues, “But there are other long term trends. One of these trends is for a decline in the participation rate for prime working age men (25 to 54 years old).” This group which should have the highest participation rate is crashing. This can only happen because governments at all levels are making it more attractive for this age group to leave the labor force than to stay in it. We ignore the downward trend in the labor participation rate at our own peril.

  4. Ricardo

    McBride, after recognizing the growing problems with the labor participation rate of the 25-54 demographic, puts his faith in demographics impacting the GDP “The good news is that will change going forward (prime working age population will grow faster next decade). While the evidence and trend democrats the opposite, McBride has faith that this will turn around. Short term GDP is driven by government spending but long term government spending drives down private industry growth and the government loses its income base. Lower participation rates will drive down GDP and that means that McBride’s points one and two have more of an impact on GDP than demographics.

    Too much is made of demographics in economic prosperity. A shift in demographics does not reduce prosperity, it simply changes the mix of supply and demand. Economic prosperity is being driven down by government intrusion and wedges to productive activities.

  5. B.P.

    The Kansas city fed paper emphasizes the shift (decline) in “precautionary demand” as factor driving lower oil prices. Is it possible to test this somehow using current data e.g., show that refiners are storing less inventory but producing more products?

  6. Nony

    They’re nice studies that JH linked. I urge posters to read more than just the excerpted paras, but the entire docs and to think about the factors on themselves. Markets are future looking on both supply and demand, but that does not mean they are omniscient. Arguably with US LTO, the markets and analysts did not anticipate the large tranche of resource which could come on line at 100+. [It’s like US NG, which has crashed in price and increased in volume substantially, There, the hype was not believed enough (!), as opposed to needing more skepticism.] Even after LTO was well into coming on line, the markets may have only had a gradual awakening to the extent of LTO (at 100). The forecasts of 1.5 MM bpd growth for 2015 back in summer 2014 may have been the breaking point. And I really don’t doubt that it could have done it, based on the accelerating growth. Similarly the markets do (as I argued before) seem to price in some possibilities of cartel action. OPEC is not a complete non factor. So changes in the view of cartel efficacy or policy can alter future price expectation, which alters current price.

    Few more interesting links:

    1. (lot of recent good videos here: NGL, oil and gas expert panels, even an individual video on Texas independents (strippers really), the winter outlook for gas is especially well organized).

    Listen and think about the factors described. There is nothing authoritative, but then the average academic paper with some correlations is not really authoritative either (they have their good points in being more statistical, but sometimes don’t really seem to look at the issue analysis as well as a trade analyst would). At a minimum, the lists of factors affecting production, consumption, transport are good to hear. There are some cool little econ 101 business insights (.e.g.Marcellus production giving indications of moving to seasonal production because of storage/transport inadequacy and the consequent super low summer prices in region, less than a $1.50 gas).


    Little bit dated, but has a list of supply and demand factors and is from a prestigious academic economist.

    3. (not a new link, but maybe a point that hasn’t been spelled out explicitly):

    Article talks about Iraq went up 0.5MM bpd in a year and implicitly impacted price. Consider in comparison the section of The Changing Face of Oil Markets (JUL14) that expressed skepticism of Iraq growth potential.

    “Iraq’s geological potential led Maugeri (2012) to expect it to make a major contribution to world oil production over the next five years. But recent geopolitical events in that country make it clear that’s not going to happen.”


    Charles Blanchard, gas analyst, view on US natural gas through the winter and deep into 2016. Again interesting list of factors and I like how he refers to the strip and what is right/wrong with it. IOW, he at least recognizes it as the baseline to observe info from and to compare to. Kind of a glib fast talk mannerism, but it’s high energy and watchable too. As always, sift for insight and understanding, rather than tone…


    Best energy journalist I know, some little nice nuggets shared periodically. Sign up for his daily email listserv and you get 5-6 stories (around the web) that are usually pretty interesting and topical.

  7. Anonymous

    RE: McBride’s 3rd point: Our entitlement system can not be supported with 2% growth (not to mention open borders).

  8. SJP

    A completely digressive suggestion here.

    I would find it extremely interesting to hear your thoughts on Cochrane’s new working paper (which is quite related to what he’s recently been working on): “Do Higher Interest Rates Raise or Lower Inflation?” It seems like a very interesting question being asked at the right time.

    Certainly your thoughts on his discussion of equilibria would be insightful. But also your handle on the empirical evidence, particularly since you’ve thought hard about certain kinds of SVAR restrictions, would be valuable. And, of course, it’d be great to read whatever else you’d like to say.

  9. BC

    WRT to demographics and the LFPR, see Aaronson’s work in 2012 and 2014 in which he forecasts trend growth of payrolls to average no more than 50,000-80,000/month (currently the secular trend since 2007-08) into late decade and thereafter, which fits with the implications of peak Boomer demographic drag effects, secular stagnation, a debt-deflationary regime of the Long Wave, risk aversion, liquidity trap, fiscal constraint, and decelerating productivity as a result of a record low for labor share, extreme inequality, the contraction of acceleration of money velocity, and the onset of deflation.

    Also, see Adair Turner’s latest interview at INET about his book about debt.

  10. Nony

    For first study, think it us deficient to just look at price rather than the futures curve. E.g. how is the 5 year out projection changing or some static point like the clz8 contract.

    Any free option for the middle link? I’m not .edu or .gov.

  11. Nony

    [Thanks for the fracking paper.]

    Anyone have a good (or non-good) time series for natural gas prices? Ideally real prices, but even if nominal, I guess I can convert it. [A real to nominal time series appreciate then.]

    EIA HH time series only goes back to 1998:

    They have some other time series at this page that go a lot further back, but then wellhead doesn’t have post 2012 prices. And I don’t really know how to think about citygate versus wellhead versus HH. Are they all pretty well correlated, so using any of them allows comparison across the eras (to see “what would have been HH”) or are there big shifting differentials over time or during seasons.

    I guess the question I want to know is how low are HH current prices (and projected strip of sub $3 real out quite a ways).

    You can always have an abnormal high or low year because of the weather and storage/distribution limits. But want to see more on a decadal or several year pattern how current prices compare to 70s, 80s, 90s. [I think before that, demand was so low compared to supply that it was almost a waste product.] My impression is that current strip is pretty darned low compared to the overall 2000s, but I have heard that 90s were also quite low or even lower.

  12. Nony

    For the middle link, thought the comments about crime being overplayed were interesting. Very not surprised that the NYT given their liberal bent pushed that angle. Can imagine various other dynamics where there is huge correlation of crime and the NYT under reports it because of their sensibilities. But they were also pretty anti fracking in general (had their omsbudsman even intervene at one point because it got so egregious). Proprietor of Million Dollar Way (Bakken blog) says that he has mostly heard how people liked the respectful Southern workers and were generally sympathetic to people moving to work. What they didn’t like was traffic and price increases (unless they had property to rent!)

    Maybe I missed it parsing the paper, but thought some comment on the benefit to state tax coffers (both extraction taxes and corp income taxes) was warranted. Seemed like they were more interested in wages and employment, but of course huge benefits in ND to the tax funds. Even in PA, without an extraction tax, just the corporate income tax has been a big windfall for the state. Then again, maybe that is a subject for another paper (and they can get into the extra funds spent by the states on roads and such…but I sure bet those activities bring more dineros to the states than they cost in services).

  13. Steven Kopits

    Natural gas prices were regulated, at least in part, until 1989.

    Here is a very good file with historical energy prices for the US (annual): Nat gas is tab 25. It might take some work to line it up with HH, but probably reasonably doable.

    I think it’s quite tricky to align historical and recent nat gas prices, due to the impact of both oil and gas shales.

  14. Nony

    Good stuff for both links. I used elec prices as the reference and did a little HH ratio and real to nominal magic.

    Based on that, current HH prices of ~2.5 are notable with the average 90s price being 10% higher and with only a single year, 1995, at less. 80s were much higher priced, about 80% higher and no single year cheaper. You have to go back to 1974 before a single year is cheaper (and then they quickly become much cheaper).

    Of course strip doesn’t believe HH $2.5 will last. If you try 2.8 (next year or so strip), 90s are about on a par with now. We don’t hit 3.0 (2015 dollars) until 2022, and that would be about 10% above 90s average.

    So, net, net, expectations are for about as cheap as average NG prices as in 90s for next few years. Nice, but not anything we haven’t seen before.

    I bet there was a bunch of NG drilling and sales once the govt got out of micromanaging it, which might have led to the 90s cheap prices.

  15. Nony

    NG price broke below $2.4, NOV15 contract. End of month contract, warm weather caveats. Still, impressive.

    Unrelated: EQT had an interesting discussion of the deep Utica. Lot of nice microecon type business strategy insights. There is a possibility that the impressive wells to date will continue (record IPs) and that costs will reduce with experience (very deep, high pressure wells) and that Utica may actually surpass Marcellus in time. And basically only the core of each play will remain competitive. To the extent of further depressing long term prices and of cannibalizing other gas reserves that can’t compete.


    40 minute discussion (3Q15 earnings call):

  16. Nony

    Implications of deep Utica on NG from EQT call:

    1. Deep Utica is still being validated, but results to date are promising enough that strategic implications need to be considered. The below comments are all caveated based on Deep Utica coming through (type curves working out, extent working out, cost reductions working out)

    2. Potential for lower price of gas long term. Lower than strip.

    3. ‘Small corner of Appalachia has the potential to deliver most of North America’s gas.’

    4. Within basin, non-core Marcellus and Upper Devonian would become non-competitive. Or since “coreness” is a relative term, the extent of the Marcellus core will be shrunk.

    5. There will be winners and losers. Those who have good acreage for core Utica win. Those who have acreage elsewhere lose. Even overall winners would face some cannibalization of their resources because of price drops making some previous reserves uneconomic.

    6. Out of App basin transport could remain challenged for many years (past the time when people expected it would be taken care of).

    7. Within basin, gathering systems in non-core areas could be underutilized and those in deep Utica areas, over capacity. (needing additions). As with acreage, there are implications for winners/losers based on who has what system where.

    8. Longer term, it may be desirable to have separate gathering systems for Marcellus and dry Utica because of the higher pressure of the Utica.

    9. Shorter term, deep Utica gas can go into Marcellus midstream pipes, at some cost disadvantage for the Utica. [Unstated but possible implication could be converse: lower pressure Marcellus being pushed out of some pipes, based on pressure, where it makes overall economic sense.

    10. EQT was really only willing to even speculate about the extent of the dry Utica in the counties where they had significant acreage, even within SE PA. “We’ll leave it to others to define those boundaries.” [But of course, for an outsider, we care about total resource brought to bear, how it affects other companies, midstream, etc. Even looking past boundaries in SE PA, there is the question of the dry Utica sweet spot in NE PA, Gee/Neal well area of Shell. Is it similarly economic? More stranded? Etc.]

    11. Not discussed by EQT, but an implication is continued gas to gas competition from the different shale gas basins. Presumable, if dry Utica has a really needle-moving affect [e.g. the phrase “equal production to the Marcellus” was used!], then the Haynesville, Fayetteville, etc. could be impacted once eventual out of basin transport materializes and the deep Utica play goes into rapid development. With consequent affects on companies, landowners and midstream operators in those basins. Conventional gas prospects and GOM gas and Canadian gas have already been negatively impacted by the price drop and gas on gas competition from the Marcellus–this would just continue and increase.

  17. Nony

    HH natural gas (NOV delivery contract) broke through 2.3 on Friday (linked article with discussion: As of today, 1015, EDT, 26OCT, it is below 2.2. In addition, it is not just the front month, but all the winter months coming have dropped about $0.3 (from peak in 2.8s to peak in 2.5s).

    Obviously weather has a huge effect on winter NG prices, so a cold snap could drive it up. And the market watches El Nino predictions and the like, but weather out more than a couple weeks can be very different and we could get a cold winter when predicted warm and visa versa. So significant uncertainty on this winter gas prices even though market is recently betting more than 10% “lower” versus a few days ago.

    Of interest are the NOV16 and NOV17 contracts. As of the time of this post, they are at 2.75 and at 2.97. More significantly, they both dropped about $0.4 from JUL-AUG15. [for comparison, NOV15 has dropped ~$0.7 since JUL-AUG15.]

    The above implies a market sentiment (again, just a guess, but at least a guess with money!) that NG will be systemically lower than previously believed. This has been a general trend over the last few years, even from when gas was projected in the ~$5 range, long term (by shale hypers like Ralph Eads, etc., and by strips). It really does seem like the market at least is pricing in shale getting “better”. Instead of swinging away from “hype”, they are saying they should have believed the hype more! I don’t have some fancy math, but hard to believe in a demand story for NG demand curve dropping, no? IOW, the comments about “first innings” a few years ago were correct, even if poo-pooed by skeptics. There is a general insight here to consider not just current performance but the possibility for improvement, when new production techniques come into an industry.

    That’s a dramatic success of shale fracking and should give general peak gasers from several years ago some concern (e.g. Association of Peak oil and GAS). In addition, should be considered by those who talked down the shale gas plays as they were coming on line the last few years (emphasizing individual well decline curves, sweet spot limits, leveraged financing of the drilling).

  18. Anarchus

    Count me among the skeptics that poor 2% real GDP growth is a function of demographics.

    I prefer to look at real final sales, year-over-year, rather than real GDP, because inventory changes are misleading – so using FRED, I did a scatter plot of real final sales, year over year, vs labor force growth in percent, also year over year.

    If you squint really hard (I didn’t bother with a regression, eyeballing is fine for these purposes), maybe there’s a very slight positive slope to the relationship, but not much of one. There’s something else at work acting as a brake on real and nominal growth, and that brake is DEBT. Irving Fisher shall be vindicated, yet.

  19. Nony

    Nat gas is just amazing me. Dipped into the 1s a little while a day or two ago. Dancing just over 2.0 right now. And all winter under 2.5 now.

    Looking at the chart for NOV17 nat gas is just fascinating in terms of the implied evolutions of the supply/demand outlook. Link:

    (convert with icon to area or line with top controls to get rid of the annoying open/close indicators; go to the bottom and there are little controls that allow resizing to show 2009 to present.)

    Price dropped from the 8s in 2009 until JAN2012 when it broke into the 5s. So this was already during the period that shale was talked up as the shale gale, gas was even becoming passé and attention diverted to the oil boom. We didn’t break below 4.0 until JAN15. So all during that JAN12-DEC14 period, you could kind of believe the Ralph Eads (a smart energy I banker, but a bit of a shale booster) story that resources were so massive that medium term production would stay below the 5.0, despite decline rates, despite export, despite coal conversion. But you also had to believe his (and others of the ilk) story that prices would stay over 4.0 since companies couldn’t make money, the 2012 gluts was bad weather and over-drilling, blabla.

    But in the very recent times (2015), two-year out gas has dropped from above 4.0 to 2.89 (2.66 in 2010 dollars). This is a massive further change in the long term outlook for gas and very recent.

    I’m amazed more is not being written about it, especially the strip, not next month. [Although this goes to my general criticism of over interest/reporting in the next month price and lack of looking at the strip. The strip is what companies look at when deciding on projects and the strip is what matters to the country long term.] And heck, it is happening in the face of the “loss of associated gas” from shale oil play declines (or really predicted declines), which I agree will happen.

    I know gas is the ugly little brother of crude, but really this is a massive important thing happening.

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