"Kee" Points with Jim Kee, Ph.D.

Last week I attended an energy conference in Houston hosted by the National Association for Business Economics (NABE). Since the release of NABE’s Quarterly Economic Forecast happens to be today, I thought I would hit the highlights of both the energy conference and the quarterly outlook for Kee Points readers.


Quarterly outlook: The business economists expect GDP to move up to its longer-term 3 percent growth path in 2014 while averaging around 2.4 percent this year (2013). That’s higher than the 1.7 percent actual growth in 2012. Panelists expect personal consumption expenditures (i.e. consumer spending) to go from 1.9 percent last year to 2.3 percent in 2013 and 2.6 percent in 2014, and they expect residential and non-residential investment and housing starts to continue to grow. Relative to a quarter ago, expectations for government spending going forward were lower, while those for consumer spending were higher.


Energy conference: Richard Fisher, President of the Federal Reserve Bank of Dallas, was the opening speaker. He made a point to note that press coverage of his views has been distorted. He felt that “Bernanke saved us from collapse.” Fisher also stated that he is not worried about inflation, but rather about growth and job creation. He asserted that fiscal policy is restraining growth, which is a theme that has been in Bernanke’s speeches for several years now. He believes that while professional forecasters had been too optimistic for 2010, 2011, and 2012, the economy today appears to be “strong enough,” meaning out of the fragile stage. In fact, Fisher felt that current growth forecasts are underestimating growth. No fan of Dodd-Frank (the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010), Fisher stressed his concerns that banks were staffing up with lawyers and regulatory compliance officers rather than loan officers. Finally, in defense of economic forecasters, he noted that prior energy conferences used to focus almost exclusively on “peak oil” (the point in time when the maximum rate of petroleum extraction is reached), which “is now dead.”


The gist of energy experts who spoke was that oil production growth and declining consumption (due to substitution of newer, more fuel efficient cars, factories, plants, etc.) means that the long-term forecast for oil prices is down. Estimates were that this would add 25 to 40 basis points to annual real GDP growth; call it a quarter to a half a percent per year more GDP than would otherwise be the case. An interesting question was whether or not the South Texas shale plays would kill the more expensive deep-water drilling. The answer was no, because even at $60-$70 a barrel (the average long run price estimate was probably around $80), deep water works because it requires $40-$60, depending upon the well. And as for deep water existing rigs, they only need to cover their variable or incremental costs in order to keep pumping, which are about $15 to $20 dollars a barrel. Interestingly (predictably?), companies at the conference that used (bought) oil as an input, like Dow Chemical, were against exporting crude oil (currently illegal), while those involved in oil exploration and production, like ConocoPhillips, were for it.  


Finally, the most interesting part of the conference was a three hour tour of the Baker-Hughes Center for Technology Innovation, the most advanced energy R&D facility in the world. I had no idea….they have to develop their own electronics and computer systems in order to handle the high temperatures and pressures of drilling. They use nano-technology to develop “steel” spheres that guide fracking fluid and then disintegrate like an Alka-Seltzer tablet. They use fiber optics to help monitor pipeline integrity, temperatures, pressures, and flows. So it’s a lot more than just drilling and connecting pipe. Your energy dollars hard at work!