The Oil Freak-Out Is Everywhere

Bakken shale north dakotaGetty Images / Phillip ChambersPhillip Chambers, a driller for Raven Drilling, talks on a phone while drilling for oil in the Bakken shale formation.

America’s got mixed feelings about the drop in oil prices.

While low energy prices is good for the consumer, oil is responsible for a lot of jobs and economic activity.

Here are some of the worrisome mentions from Wednesday’s Fed Beige Book release:


Our contacts are fairly optimistic and expect moderate to strong growth in 2015, though some expressed concern about weakening foreign economies and a decline in the price of oil.

Activity in the Marcellus and Utica shale formations remains at a high level. However, a sustained decline in oil and gas prices may pose some downside risk to drilling and production, and it is uncertain what the effect will be on hiring and wages in the near term.


Supply of crude oil and natural gas continued to outpace demand, leading to high inventory levels across the Gulf Coast. Industry contacts in the energy sector reported that the downturn in the price of oil has influenced their outlook and strategic planning for 2015, including a heightened focus on cost management, more prudent investments, and faster, more efficient drilling techniques. Exploration and production firms shared plans to continue drilling operations across the Gulf Coast and in Louisiana in 2015, though they intend to approach projects more cautiously. The same goes for oil service companies in the region, which are evaluating cost reduction strategies if low energy prices are sustained.


Manufacturing continued to grow at a moderate pace in December. Activity in the auto, aerospace, and energy industries remained a source of strength for the District. Demand for inputs for oil and gas production remained strong, boosted by projects begun before the fall in oil prices. An energy industry contact noted that given the typical lag between prices and production, activity should begin to slow in the second quarter of 2015.

Banking contacts noted the fall in oil prices as a source of medium-term uncertainty for business lending, with downside risk to loan quality for firms in the oil supply chain.

Ethanol margins compressed with the drop in oil prices. Hog and milk output was higher than expected, leading to further price decreases. Cattle prices were little changed, but became more volatile.


The energy sector slowed slightly in response to lower output prices. Oil and gas exploration activity decreased in late December compared with a month earlier in Montana and North Dakota. However, a company announced plans for four new diesel and natural gas processing plants in North Dakota.

Lower oil prices led to an overall slowing in hiring in the energy producing regions of North Dakota and Montana, but labour conditions remained tight. Contacts noted a continued shortage of truck drivers.

Kansas City

The District’s energy industry slowed in December. Most respondents reported lower drilling activity, and demand for oilfield services fell. Oil rigs decreased marginally while natural gas rigs increased. Future drilling activity, employment, and capital expenditures were projected to be significantly lower in response to lower oil prices. The price of oil dropped to half of its June peak and was projected to fall further through early 2015. Firms’ opinions were mixed about oil prices one year out, but on average they expected a rebound of 15 to 20 dollars per barrel from year-end 2014 levels. Moderate temperatures and higher production pulled down the natural gas spot price over the reporting period, with future decreases expected. A few firms reported increased difficulties accessing credit due to lower oil prices.


Gulf Coast chemical manufacturers, who use natural gas to fuel their operations, said the lower price of oil has narrowed their competitive edge over their foreign competitors that rely more on oil for production … Black Friday weekend sales were in line with or above retailers’ expectations. Contacts reported uncertainty in their outlooks for 2015 partly due to lower oil prices and possible price declines for some meats, produce, and pharmaceuticals.

Bankruptcy work was beginning to pick up, and one contact reported that an oil and gas firm was looking into bankruptcy options. Legal services to financial practices, particularly in private equity, continued to grow but contacts said that activity may slow next year if oil prices remain low.

Office leasing activity remained strong, but one contact noted a slight pull back in demand from oil and gas firms. Industrial demand was solid in Houston but slowed in Dallas. A few contacts said that investors are taking a wait-and-see approach because of the steep decline in oil prices.

Growth in consumer lending picked up, and business lending outside of the oil and gas sector increased. In contrast, community banks in areas focused on oil and gas said they were seeing some signs of slowing.

Outlooks remained optimistic, but contacts were concerned that sustained low oil prices may slow Texas growth in 2015.

Demand for oilfield services fell in the Eleventh District. Declines were concentrated in the Permian Basin as firms moved away from traditional vertical drilling, but the Eagle Ford and other oil basins in the District also saw a slight drop off in activity. Outlooks for the first half of 2015 are very uncertain and significantly weaker than in the prior reporting period, with firms expecting anywhere from a 15 to 40 per cent decline in demand for their services.

San Francisco

Oil price declines contributed to a drop in prices in the energy-intensive aluminium production sector.

Commercial aircraft production was strong. Order backlogs remained sizable, but contacts were somewhat concerned that the decline in oil prices may cause airlines to start deferring purchases of more fuel-efficient planes.

Declines in petroleum prices contributed to reductions in the cost of gas and fertiliser. However, some farmers also faced lower prices for their commodities.

But it wasn’t all bad. Here are some of the more positive mentions.


Any declines in orders were attributed to seasonal factors. Year-to-date results were generally better compared to those in 2013; several producers cited growth in the construction, shale gas, and auto industries as contributing to higher revenues.


Most retail respondents are optimistic about the outlook for 2015, given that business is currently good and consumer sentiment seems more positive, partly because the cost of oil is low.


Auto dealers remain bullish for 2015, and low oil prices are shifting purchases from cars to trucks.

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