© Copyright 2005 by the Wyoming Department of Employment, Research & Planning

Oil and Gas Production and the Relationship Between Prices and Employment in Wyoming

by: Sherry Wen, Senior Economist

Wyoming's oil & gas industry constitutes a lower portion of the state's jobs now (4.8%) than in the early 1980s (9.6% in 1981). Consequently, the state's economy should weather any potential downturn in this industry better than it has in the past.

Crude oil prices hit record highs this summer, surging over $70 per barrel several times. In line with this are record-breaking gasoline prices, which more directly affect people’s daily lives. Many are concerned about what this means for the future and how the inflated prices will affect Wyoming’s oil & gas industry and the state’s economy. In this article, we use data from the Bureau of Economic Analysis (BEA), Energy Information Administration (EIA), and the Wyoming Oil and Gas Conservation Commission to examine historical trends in Wyoming’s oil & gas industry. We focus our attention on three areas: oil & gas production, employment in the oil & gas industry, and oil & gas employment as a percentage of total employment. 

Oil Prices and Production

The crude oil price used in this study is the U.S. average first purchase crude oil price – the marketed first sale price of domestic crude oil. Figure 1 shows that oil prices stayed under $10 per barrel from 1969 to 1978. From 1979 to 1981, prices rose rapidly with prices peaking in 1981 at $31.77 per barrel. After that, prices steadily declined to a low of $12.51 per barrel in 1986. For the next 14 years, prices stayed in the range of $10 to $20 per barrel. In 2000 prices rose to $26.72, then dropped to about $22 for 2001 and 2002. The most recent price increase began in 2003. As of first quarter 2005, prices reached $43.21 per barrel.

As Figure 1 shows, Wyoming’s crude oil production did not vary much as prices changed. Between 1978 and 1985, oil prices experienced their largest historical fluctuation. Prices climbed to $31.77 per barrel in 1981 from $9 per barrel in 1978 and then fell to $24.09 per barrel in 1985. During that time, Wyoming’s annual crude oil production ranged from 117 million to 136 million barrels. After crude oil prices dropped to a low of $12.51 per barrel in 1986, Wyoming’s crude oil production declined steadily. Despite the fact that crude oil prices had returned to record high levels by 2004, Wyoming’s annual oil production had fallen to 51.6 million barrels, the lowest level seen in the past 27 years and less than half of what was produced before the bust in the 1980s.

Natural Gas Prices and Production

Figure 2 illustrates Wyoming’s natural gas production and prices. The price represents the U.S. average natural gas wellhead price, which spiked twice from 1976 to 2005. In 1976 prices were $0.58 per thousand cubic feet (mcf). In 1984 prices hit $2.66 per mcf, the first peak. Prices then declined and remained between $1.55 and $2.32 per mcf from 1986 to 1999. The recent gas price increases started in 2000 and, with the exception of 2002, have continued into the present. In first quarter 2005, the price per mcf reached $5.88. 

Like crude oil, for most years between 1969 and 2005 Wyoming’s natural gas production did not move with gas prices. Only from 2000 to 2004 (except 2002) did the gas production level move in the same direction as the price. Unlike crude oil, Wyoming’s natural gas production has steadily increased over most of the past 28 years. Production in 1976 was 336,833 MMcf (million cubic feet), by 2004 it rose to 1.9 million MMcf (5 times more). The production increase indicates that the focus of Wyoming’s oil & gas industry has shifted from crude oil to natural gas. 

Employment in the Oil & Gas Industry

Figures 3 and 4 present 37 years (1969 to 2005) of Wyoming oil & gas industry employment history and the corresponding crude oil and natural gas prices. For purposes of this article, three employment series were combined to provide both historical and current employment information, while maintaining comparability. BEA employment data by Standard Industrial Classification (SIC) code were used for the years 1969 through 2000. BEA data by North American Industry Classification System (NAICS) codes were used for 2001 to 2003. Current Employment Statistics (CES) data by NAICS were used for 2004 and 2005. Both NAICS series represent the sum of oil & gas extraction (NAICS 211) and support activities for mining (NAICS 213) employment.

The Wyoming oil & gas industry experienced 10 years of job growth from 1972 to 1981 along with crude oil price increases. There were only 6,087 oil & gas related jobs in 1971. By 1981 employment more than tripled to 22,773 jobs, the highest number of jobs over the past 37 years. After 1981, along with an extended period of declining prices, the number of oil & gas jobs fell to only 8,894 jobs in 1987, or a loss of 13,879 jobs. During the next 12 years, 1988 to 1999, employment remained flat, ranging from 7,481 to 8,988 jobs. Starting in 2000, as oil and gas prices started to rise, the number of jobs increased. By second quarter 2005, the number of oil & gas related jobs increased to 13,950. As in the past, job growth will likely depend on how high prices go and how long they remain high.

The number of jobs in oil & gas was highly correlated with either crude oil or natural gas prices at different time periods. Using regression analysis, we found that between 1971 and 1986 oil production was much greater than natural gas production. The crude oil price change explained 85% of the job variation in oil & gas, while the natural gas price only explained 23%. From 1987 to 1999, both oil and gas prices stayed at lower levels and fluctuated very little. During this period, the crude oil price could only explain 3% of the job variation, while natural gas prices could account for 11%. For the past 6 years (2000 to 2005), crude oil prices moved very closely with natural gas prices. Natural gas prices, however, showed a much stronger relationship to employment changes than crude oil prices. Natural gas prices explained 85% of the employment change, while crude oil prices explained 73%. 

Our regression analysis points to a shift in the primary commodity produced (crude oil to natural gas) and the accompanying employment. At first glance, it may seem odd for employment to be sensitive to price while production is not. Upon further examination we see why this paradox occurs. When prices are high, there is an incentive for firms not only to operate existing production facilities but to also drill new wells and construct more production facilities. Expanding production requires more workers. In order for firms to continue to make a profit when prices are low, employers have to cut production costs. Reducing wage expenses by laying off workers would be the quickest and easiest way to reduce total production costs, while sustaining target production levels. 

The regression analysis is based on current prices and employment. However, to some extent employment is probably also affected by expectations about future demand and future prices. 

Impact of Oil & Gas Jobs on Wyoming Employment 

Oil & gas jobs as a percentage of total Wyoming nonagricultural wage and salary employment from 1970 to 2004 are shown in Figure 5. Employment in the state experienced three significant stages (Wen, 2002). During the first stage, from 1970 to 1981, Wyoming experienced fast growth related to the energy boom spurred by the 1973 OPEC oil embargo (Hakes, 1998). During those 12 years, Wyoming nonagricultural wage and salary jobs grew at an annual average rate of 6.1%, from 123,450 jobs in 1970 to 236,186 jobs in 1981 (91.3% increase). The international oil price collapse largely drove the second stage (between 1982 and 1987) when employment fell. During those 6 years, the state lost a total of 38,208 jobs (16.2%). Slow but steady growth marked the third stage (1988 to 2004). The state experienced an annual average job growth rate of 1.7% and reached a total of 261,360 jobs in 2004 (a 30.5% increase from 1988 to 2004). 

The proportion of statewide jobs in oil & gas defines the difference between the earlier and the current booms. The proportion of jobs was getting larger as total jobs increased during the first growth stage. By 1981, 9.6% of jobs in the state were in oil & gas. In contrast, the proportion of oil & gas employment was either flat or shrinking during most of the third stage. By 2004, only 4.8% of Wyoming jobs were in oil & gas. This decrease suggests that jobs became more diversified after the first growth stage. Hence, Wyoming job growth in the third stage relied less on the oil & gas industry. From 1981 to 1987 (peak to valley), Wyoming lost 13,879 jobs in the oil & gas industry and impacted another 24,375 job losses (a count of all other jobs lost) directly or indirectly because of the decline in the industry. Should another bust occur, total job losses will not be as dramatic. Because Wyoming jobs are less concentrated in oil & gas now than in the 1970s and early 1980s, the state is at a reduced risk of a severe economic downturn. However, as the expansion of oil & gas continues, so does the potential for greater secondary negative effects on employment in Wyoming. 

Summary

Wyoming’s crude oil production compared to natural gas production experienced completely opposite development trends from 1986 to 2004. Crude oil production showed a continuous decrease to less than half the level of the early 1980s by 2004. In contrast, natural gas production steadily grew. By 2004, it was more than triple the early 1980s level. This contrast indicates the focus of Wyoming’s oil & gas industry has shifted from crude oil to natural gas. The common ground between the two is that production of neither commodity was sensitive to current price variation.

Historical data show that once oil & gas production facilities are in place, price changes have little influence on production levels. Employment levels in this industry showed a much closer relationship to crude oil and natural gas prices. A possible explanation for the closer tie between employment and prices is that reducing the number of jobs may be the easiest way for firms to lower production costs and still earn a profit when prices drop. 

The proportion of Wyoming jobs in oil & gas decreased markedly compared to the peak in 1981 (9.6% in 1981 down to 4.8% in 2004). Meanwhile, the total number of jobs had bypassed the 1981 level (236,186 jobs) by 2004 (261,360 jobs). The more diversified job character and lower proportion of oil & gas jobs may diminish the economic effects if another downturn occurs. 

References

Wen, S. (2002). Thirty years of Wyoming employment and wages. Wyoming Labor Force Trends, 39(8), 1-7, 9. 

Hakes, J. (1998, September 3). Administrator’s message. In Energy Information Administration, 25th anniversary of the 1973 oil embargo. Retrieved July 25, 2005, from http://www.eia.doe.gov/emeu/25opec/anniversary.html

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