Kemp: U.S. Economy Slows Sharply as Oil and Gas Slump Deepens

(John Kemp is a Reuters market analyst. The views expressed are his own)


LONDON, Feb 1 (Reuters) - The U.S. economy eked out anaemic growth in the final three months of 2015, and the struggling performance of the oil and gas sector was a major contributor to the slowdown.

Real gross domestic product rose at an annualised rate of 0.7 percent in the fourth quarter, down from 2.0 percent in the third and 3.9 percent in the second, the Bureau of Economic Analysis (BEA) reported on Friday.

The economy was buffeted by a broad-based slowdown in consumer, business and government spending growth, as well as a deterioration in trade performance thanks to the strengthening currency.

The data was contained in the latest edition of the National Income and Product Accounts (NIPA) released on Jan. 29 which contained advance estimates for the fourth quarter of 2015.

Consumer spending remained the brightest spot in the fourth quarter, contributing 1.46 percentage points to real GDP growth, though even this was reduced from 2.04 points in the third quarter and 2.42 in the second.

Government spending also remained positive, contributing 0.12 points to growth, though down from 0.32 and 0.46 in the preceding quarters (NIPA Table 1.1.2).

But the parts of the economy most closely linked to industrial production made increasingly negative contributions to growth in the final three months of the year.


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Lance Brofman | Feb. 1, 2016
There are two schools of thought regarding the future direction of oil prices. The geopolitical approach is that major producers such as Saudi Arabia and Russia will keep flooding the world oil market precluding any recovery in oil prices in the foreseeable future. The other approach regarding the future direction of oil prices is based on fact that all oil and gas production in any period is the result of previous exploration and production capital expenditures. Since all oil wells deplete, albeit at widely varying rates, no drilling today eventually results in no oil at some future date. This approach is taken in our article: Will Oil Production Fall Off A Cliff? In that article, we utilize macro models to relate world oil prices to exploration and production capital expenditures. We then utilize macro models to relate world exploration and production capital expenditures to oil supply. The word cliff with regard to future oil supply refers to a situation where the decline in oil production resulting from the ongoing reduction of exploration and production capital expenditures will not significantly impact total supply for a while due to the enormous amount of oil stockpiled in storage tanks, ships and drilled but uncompleted wells. In the way that cartoon characters like Wile E. Coyote and the Road Runner run off a cliff and seem not to fall for a while, but then drop precipitously, when the stockpiled oil runs out, the reduced production will cause effective total supply to plummet. There was an old rule of thumb that it takes $20 of exploration and production capital expenditures to produce a barrel of oil. Like all such generalizations, the actual relationship between exploration and production capital expenditures to barrel of oils produced varies greatly. However, by most accounts, the decline in oil prices in recent years has reduced exploration and production capital expenditures by at least $200 billion below what would have been the case, if oil prices had not declined. Land based oil drilling rigs in the U.S. have fallen from a peak of 1609 in November 2014 to about 550 at the end of 2015. Clearly, in order for any oil to be produced an oil rig must first drill a well. Thus, oil production in one period is a function of exploration and production capital expenditures in prior periods....


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