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Summary of Quarterly Indicators

Tenth District energy activity continued to decline in the second quarter of 2023, as indicated by firms contacted between June 15th, 2023, and June 30th, 2023 (Tables 1 & 2). The drilling and business activity index decreased from -13 to -19 (Chart 1). The number of employees and employee hours indexes increased, as well as access to credit, while all other indexes decreased from previous readings. Wages and benefits cooled but remained expansionary.

Chart 1. Drilling/Business Activity Indexes

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Chart 1 is a time series of the drilling/business activity index versus a quarter ago and versus a year ago from the second quarter of 2017 to the second quarter of 2023. Quarterly drilling and business activity index decreased from -13 to -19.
Quarter Vs. a Quarter Ago Vs. a Year Ago
Q2 19 7 -11
Q3 19 -23 -21
Q4 19 -48 -50
Q1 20 -81 -92
Q2 20 -62 -70
Q3 20 4 -71
Q4 20 40 -60
Q1 21 35 12
Q2 21 33 59
Q3 21 43 68
Q4 21 32 74
Q1 22 29 52
Q2 22 57 77
Q3 22 44 78
Q4 22 6 56
Q1 23 -13 17
Q2 23 -19 -16

All year-over-year indexes decreased, except the number of employees which increased moderately and access to credit which remained steady. Drilling/business activity, supplier delivery time, and total profits crossed into negative territory on a year-over-year basis, while the total revenues index declined further from -10 to -48. The number of employees and employee hours indexes remained positive.

Expectations for future activity decreased again in Q2 2023. The future drilling/business activity index fell from -13 to -22, while firms expect declines in revenues and profits to moderate in six months. Accordingly, price expectations for oil and gas picked up in the second quarter.

Summary of Special Questions

Firms were asked what oil and natural gas prices were needed on average for drilling to be profitable across the fields in which they are active. The average oil price needed was $63 per barrel (Chart 2), while the average natural gas price needed was $3.49 per million Btu (Chart 3). Firms were also asked what prices were needed for a substantial increase in drilling to occur across the fields in which they are active. The average oil price needed was $86 per barrel (Chart 2), and the average natural gas price needed was $4.67 per million Btu (Chart 3).

Firms were asked what oil prices were needed on average for drilling to be profitable and for a substantial increase to occur across the fields in which they are active, as well as their price expectations in six months, 1 year, 2 years, and 5 years. Chart 2 shows the average oil prices and ranges that firms reported.
Firms were asked what natural gas prices were needed on average for drilling to be profitable and for a substantial increase to occur across the fields in which they are active, as well as their price expectations in six months, 1 year, 2 years, and 5 years. Chart 3 shows the average oil prices and ranges that firms reported.

Firms reported what they expected oil and natural gas prices to be in six months, one year, two years, and five years. The average expected WTI prices were $75, $79, $83, and $88 per barrel, respectively. The average expected Henry Hub natural gas prices were $3.00, $3.33, $3.71, and $3.98 per million Btu, respectively.

Contacts were also asked how tighter credit conditions since February 2023 have affected their firms and will affect their business plans in the future (Chart 4). 66% of firms reported that the tighter conditions have had no negative impact, 28% reported they have had a slight impact, and 6% reported a significant impact. Additionally, 52% of firms reported that tighter credit conditions will have no negative impact on their business plans, while 36% reported they will have a slight impact and 12% said they would have a significant impact.

Chart 4. Special Question - How have/will tighter credit conditions since February 2023 had/have an impact on your firm and business plans?

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Energy firms were asked how tighter credit conditions since February 2023 have affected their firms and will affect their business plans in the future. Chart 4 is a bar chart of the percentage of firms reporting no impact, a slight impact, and a significant impact of tighter credit conditions so far and in the future.
Response  Had impact so far Will impact business plans
No Impact 66.00 52
Slight Impact 28.00 36
Significant Impact 6.00 12

District energy firms were also asked how global consumption has compared so far this year with their expectations before China announced its reopening in December 2022 (Chart 5). While no contacts reported that global oil consumption has significantly overperformed expectations, 7% said it slightly overperformed expectations, 33% reported it met expectations, 53% reported it slightly overperformed, and 7% reported significant underperformance.

Chart 5. Special Question - How has global oil consumption so far this year compared with what you expected before China announced its reopening in December 2022?

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Firms were asked how global consumption has compared so far this year with their expectations before China announced its reopening in December 2022. Chart 5 is a bar chart showing the percent of firms that reported oil consumption has significantly overperformed, slightly overperformed, met expectations, slightly underperformed, and significantly underperformed.
Response Percent
Significantly Overperformed 0.00
Slightly Overperformed 6.67
Met Expectations 33.33
Slightly Underperformed 53.33
Significantly Underperformed 6.67
Table 1 shows the percent of Tenth District firms that report an increase, decrease, and no change in selected energy indicators, as well as its diffusion index for quarter 2 versus quarter 1, quarter 2 versus a year ago, and expectations in six months. The energy indicators are Drilling/Business Activity, Total Revenues, Capital Expenditures, Supplier Delivery Time, Total Profits, Number of Employees, Employee Hours, Wages and Benefits, Access to Credit, Expected Oil Prices, Expected Natural Gas Prices, and Expected Natural Gas Liquids Prices.
Table 2 shows the quarter-over-quarter, year-over-year, and six-month expectations diffusion indexes for Drilling/Business Activity, Total Revenues, Capital Expenditures, Supplier Delivery Time, Total Profits, Number of Employees, Employee Hours, Wages and Benefits, and Access to Credit from the second quarter of 2020 to the second quarter of 2023. It also shows the profitable price, substantial increase price, and expected prices in six months, 1 year, 2 years, and 5 years for WTI crude oil and Henry Hub natural gas from the second quarter of 2020 to the second quarter of 2023.

Selected Energy Comments

“Current low inventory levels leading to strength in 6-month time frame, demand slowing and longer term supply increasing over the 2-5 year time frame.”

“Gas seen as longer-term pillar in energy transition. Still lots of known supply available.”

“I expected higher demand coming from the China re-opening. Currently it does not look like that demand is there.”

“Our company could do more and would do more if we could find quality people. The traders have believed the recession talk and have hurt commodity prices. The fundamentals still show energy use increasing. Oil and gas are a big part of filling that need.”

“Our experience is that AI will augment personnel, not replace. Perhaps in a time frame longer than five years you might have some moderate replacement of personnel.”

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Authors

Chad Wilkerson

Senior Vice President and Oklahoma City Branch Executive

Chad Wilkerson serves as Oklahoma City Branch Executive and Senior Vice President for the Federal Reserve Bank of Kansas City. Wilkerson began his career with Federal Reserve in …

Chase Farha

Research Associate

Chase Farha is a Research Associate in the Regional Affairs department at the Oklahoma City branch of the Federal Reserve Bank of Kansas City. In this role, his responsibilities …