The Woodward News

February 9, 2014

Energy index provides status report on industry

Rowynn Ricks
Woodward News

Woodward, Okla. — Want to know how well the energy industry is doing in Oklahoma?

You can now get a monthly status report on the state's crude oil and natural gas industry thanks to the new Oklahoma Energy Index which was recently launched by the Oklahoma Independent Petroleum Association (OIPA).

"What the index is essentially a measure of the oil and natural gas industry in Oklahoma," said Cody Bannister, vice president of public relations for OIPA.

The Oklahoma Energy Index (OEI) is actually a joint project of the OIPA, Bank SNB, and the Steve C. Agee Economic Research and Policy Institute at Oklahoma City University.

Dr. Russell Evans, economist and executive director of the Agee Institute, said the purpose of the OEI is "to consolidate a bunch of useful information into one easy to track and easy to follow number."

By using data from 6 different economic indicators related to the oil and natural gas industry, Evans said the energy index helps to provide a picture of the current status of the energy industry in Oklahoma.

The 6 indicators are the average monthly price of natural gas (in mm/BTU), the average monthly Baker-Hughes rig count, statewide energy production employment numbers, statewide energy support employment numbers, crude oil spot prices as taken from the Cushing hub, and a hypothetical portfolio of publicly traded energy companies in Oklahoma.

"What it (OEI) does is consolidates information about movements in commodity prices, movements in employment, movements in stock prices, and movements in rig and drilling activity," Evans said.  "It takes all those movements and combines them into one series where we can track the combined effect of all those influences on the oil and natural gas industry."

Evans said these 6 indicators were chosen because "it is the smallest collection of variables that we can look at and still be able to explain almost all of the movements in the industry as a whole and correspondingly movements in the state economy."



WHAT DOES THE ENERGY INDEX NUMBER MEAN?

The 6 different indicators are assigned different values which are then totaled to provide the current index reading, which for Dec. 2013 stood at 235.32.  This total index value is in itself arbitrary, Evans said.

Bannister said this means "you can't just look at the one number and say if it's good or bad."

It is in comparing the OEI value with historical data that the index number has meaning, both men said.

"It is an arbitrary value that is set back to Jan. 2000 levels, with Jan. 2000 being set arbitrarily at a value of 100," he said.  "So the 235 number is strictly interpreted as 235 minus 100, which equals 135, meaning conditions now are about 135 percent above their levels in 2000."

However, Evans said that more important than knowing how the current number compares to the baseline period of Jan. 2000, will be seeing how the index number continues to change in the coming months.

"What we're really interested in the index is the movement in value from month to month; we're interested in the percent change in the index and knowing is it growing, is it going up or down," he said.

Bannister said officials at OIPA are excited to say that the most recent numbers seem to indicate that the industry is showing some small growth.

According to an OIPA press release, the December index value showed a 1.76 increase over November activity numbers.

"The increase represents the largest single monthly increase since April 2011.  More significantly, all 6 indicators trended positively in December for only the third time in the last 18 months," the press release states.

In particular, the indicators for natural gas and crude oil prices saw significant month to month increases, with December seeing a 60 cent, or 16.5 percent, increase for average natural gas prices and a $3.77, or 4 percent, increase in average crude oil prices.  However, the press release notes that these price increases "are largely reflective of short-term fluctuations in market conditions, such as an increase in natural gas demand attributed to colder winter weather."



WHAT ARE THE IMPLICATIONS OF THE ENERGY INDEX?

Evans and Bannister said the significance of the Oklahoma Energy Index is tied to the significance of the oil and natural gas industry to the overall state economy.

"The oil and gas industry is Oklahoma's most vibrant industry and its success is intertwined with the success of Oklahoma's economy as a whole," Bannister said.

He then provided some statistics showing just how important the energy industry is in the state.

"When you look at the oil and gas industry in Oklahoma, one out of every 6 jobs comes directly from the oil and natural gas industry.  One out of every $3 spent in Oklahoma comes from the oil and natural gas industry. And I've seen different studies that say between 22 and 27 percent of all taxes paid in Oklahoma come from the oil and natural gas industry," Bannister said. "So this industry is vital to Oklahoma, vital to our economic success and vital to the success of working families as well because working Oklahomans work in the oil and gas industry."

Having a tool like the Oklahoma Energy Index which can help monitor that success may prove to be vital too, he said.

Evans agreed, saying "I think it (OEI) will become a useful tool for people to reference over time and to see how well the energy industry is doing, see what the struggles and successes are for the state's most important industry."

The more the index comes to be used, then the more officials can use it to track trends and even "help forecast what will come next" for the energy industry and the overall economy, Bannister said.

"The 2 takeaways from the index are first what is the pulse of the state's most important industry, and then what does that mean about the pulse of our state economy in the months and years ahead," Evans said.

The economist said he believes the index will prove out that when there is an uptick in the oil and gas industry then the state economy can look forward to experiencing a similar uptick.

"If the state's most important industry is getting better then it's likely, given the relationships over the last 15 years, that the effect will be the overall economy is getting better too," he said.

Bannister said he believes the index should also become a useful tool for policy-makers in Oklahoma.

"Since the success of the state of Oklahoma is so dependent on the success of it's most important industry, then I think the index will be important for policy leaders in our state as it tracks the health of that industry," he said.  "Because even for our local civic leaders to be able to make decisions, especially decisions that could impact the oil and natural gas industry, I think you have to be able to understand where the energy industry stands today, where it has been in the recent past and what you think it might do moving forward."

To help policy-makers and the public stay up to date with the constant fluctuations in the energy industry, Bannister said OIPA will release the latest Oklahoma Energy Index numbers "to statewide media on the fourth Thursday of every month."

"The index will also be available on the Oklahoma Independent Petroleum Association's website, OIPA.com," he said.