Friday, January 30, 2015

Falling Oil Prices: Who is Vulnerable in Utah?

 Mark Knold, Supervising Economist

The most obvious answer is oil producing areas; the areas in Utah that extract oil from the ground. But vulnerability does not come solely from being an oil extraction area. If an oil-producing area has a large amount of its employment spread across a variety of other industries, then the ripple effects from declining production will be dispersed and the consequences minimized. On the other hand, if oil extraction alone comprises a large proportion of the entire local employment base, then the area is vulnerable to a setback. And in Utah, that combination of oil production and highly concentrated employment puts Duchesne County squarely in the crosshairs.

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Duchesne County’s vulnerability has received national notice. This recent article by CNBC looks at the most oil-and-gas-extraction-dependent counties across the United States based upon oil and gas extraction’s share of jobs in each local economy. Not surprisingly, seven of the top ten are in rural Texas and Oklahoma. But one of the other three rounding out the top ten is Duchesne County, Utah.

The measuring device for relative employment concentration is called a location quotient. It is a mathematical ratio that gauges the share of oil-and-gas-extraction employment in Duchesne County against some sort of measuring stick or standard, and in most cases that standard is the United States average. The numbers play out like this.

The oil and gas extraction industry (NAICS code 211) employs 951 people in Duchesne County (CNBC used June 2014 numbers) out of a total county employment of 9,868. Dividing 951 by 9,868 yields that 10 percent of Duchesne County’s jobs are in oil and gas extraction. Nationally, 197,121 oil and gas extraction jobs against 137.8 million total U.S. jobs means this industry makes up only 0.1 percent of all U.S. employment. The location quotient is the result of comparing Duchesne’s share against this national share. Duchesne County’s share (0.096372) divided by the U.S. share (0.001431) yields a location quotient of 67.4. This says that Duchesne County is 67.4 times more dependent upon oil and gas extraction in its employment base than the national average.

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This is just using NAICS code 211. If we were to add in support activities for drilling oil and gas wells (NAICS 213111), support activities for oil and gas operations (NAICS 213112), and oil trucking jobs (NAICS 484220 and 484230), then one-third of Duchesne County’s jobs are directly related to oil activity. It would be higher yet if we could separately identify manufacturing and construction activities solely supporting oil and gas extraction.

The message is the local economy has many economic eggs in only the oil basket. If oil production is negatively impacted by rapidly falling oil prices, and all indications are that is happening, then the local area is vulnerable to having an economic setback as a result. Sliding revenues for local producers can mean reductions in capital investment and business expenditures— including those on labor. In-turn, this can hamper productive potential and drag down demand for other goods and services. If the local area’s employment distribution were spread across a wider range of other employment areas, then such ripple-through effects would be minimized. But Duchesne County does not have a dispersed employment base, and is therefore vulnerable from an oil setback.

In a past issue of Utah Insights, I had taken a look at employment diversity across all of Utah’s counties. A Hachman Index was employed as the diversity measurement tool. Duchesne County’s employment structure emerged as the least diversified in Utah. Where a Hachman Index of 1.0 would measure maximum diversity, Duchesne County was instead closer to zero; its measure was 0.09. That is an economy heavily dependent upon a single industry base.

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Oil setbacks can hit Duchesne County quick and hard. In December 2008, as the Great Recession exploded, oil prices fell and oil exploration and production slowed. In just one year, by December 2009, Duchesne County total employment had fallen by nearly 18 percent, with over 1,500 jobs melting away. It is anticipated that the current falling oil prices will have a job-loss effect as well. It may not trigger as quickly, be quite as rapid in decline or as deep as in 2009, that has yet to reveal itself, but low oil prices have always had some employment-setback upon the area.

Tracking initial claims for unemployment insurance from Duchesne County has historically been a good first signal of oil-related layoffs. These claims can be evaluated weekly. The most recent two weeks are starting to show a rise in claims from that area. New claims are typically around two to eight per week, but the last two weeks saw those numbers climb to around 20. That is not an alarmingly high number, but the anxiety is that it may just be a beginning wave.

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