Oil Boom and Bust

In a city that has made business headlines as one of the country’s newest hotspots for technology startups, it is sometimes easy to forget that an old-line industry has for decades been a more crucial pillar of the local economy.

The business of finding and producing oil and gas from beneath Louisiana’s soil and offshore waters has long generated tens of thousands of jobs that filled the city’s downtown office towers and generated crucial employment in coastal areas to the south and west of New Orleans. Tax revenue generated by the oil industry fuels a large chunk of the state’s annual budget, and despite a gradual shifting of white-collar jobs toward larger industry hubs such as Houston, the ongoing presence of Big Oil in New Orleans’ corporate ranks has brought untold charitable support for a range of local causes.

But during the last several years, market factors beyond the city’s or state’s control have weakened this driver of the local economy. After years of enjoying oil prices that hovered above $100 a barrel, the industry since 2014 has seen prices struggle to reach the $50 per barrel minimum considered necessary to sustain exploration and production. And industry analysts say the business is unlikely to regain its health soon.

“Things have improved a little, but barring a major unforeseen economic event, we’re not going to return to crude oil prices in excess of $60 – or anywhere near $100 – anytime in the near future,” says David Dismukes, director of the Center for Energy Studies at Louisiana State University.

As always, oil prices are at the mercy of global supply, and for some time the world’s many oil storage sites have been filled to the brim. In past decades, members of the Organization of the Petroleum Exporting Countries have asserted a measure of support for prices by cutting back on production when world prices fall too low. But as U.S. production has come on strong in recent years, rivaling that of OPEC’s biggest members, countries such as Saudi Arabia have become less willing to cut their production in order to support prices.

Lately, OPEC has provided some relief by tightening their spigots, thereby reducing the world’s oversupply. But Dismukes says it is futile to rely on OPEC for lasting support because those countries’ budgets are heavily reliant on oil revenue. “I don’t know that OPEC has a lot of endurance to maintain the production cuts they have implemented,” he says. “Meanwhile, we have huge amounts of hydrocarbons in storage, in tanks and underground [storage caverns], and that’s got to get burned off first before we start talking about an upturn in production.”

Dismukes notes that certain “stimulus activities,” such as big infrastructure spending and tax cuts mentioned recently by the U.S. administration, could  boost energy consumption in coming years. “But short of some unanticipated big change in economic output globally, we’re going to see below-$50 [a barrel] prices for the foreseeable future.”

The situation has taken a toll on the many oil-service businesses based across south Louisiana. In the Houma-Thibodaux area south of New Orleans, for instance, companies ranging from ship and barge builders to operators of service vessels and pipe fabricators have suffered. Some businesses have closed their doors or sought bankruptcy protection. And more than 6,000 job losses in the area during the past three years stem directly or indirectly from the industry downturn, economists say. In New Orleans, jobs directly related to oil exploration and production dropped by 15 percent in just the past year, according to figures from the Bureau of Labor Statistics.

While persistently low oil prices bode ill for employment in the drilling segment of the energy industry, it is worth noting that cheap oil and natural gas are driving growth in other business sectors that also are important to Louisiana’s economic health. Big energy users such as power plants and petrochemical plants that produce a huge range of materials for many industries are continuing to benefit from low-cost energy.

“The lower [oil and gas] costs are great for them, and in Louisiana that’s a good thing,” Dismukes says, pointing to an ongoing boom in industrial plant construction and expansion across the southern part of the state. Large, global companies have invested billions of dollars in these projects largely because Louisiana offers easy access to inexpensive energy. While the investments are large, however, these highly automated plants do not generate nearly enough jobs to offset those lost in the state’s oilfield production and service sector.

In New Orleans, recent job gains in the financial sector and in education and health services are helping to stabilize the local employment picture. And the city continues to win praise as a haven for technology innovators and the many  entrepreneurs who are starting new businesses here.

Such attention is welcome as local business groups continue efforts to diversify and strengthen the local economy. But ongoing pain in the oil and gas sector is a sobering reminder that still, today, an old-line industry remains crucial to the city’s long-term vitality.

Job gains, losses in New Orleans
 

This table shows the one-year change in employment for selected business categories.