Virus is double trouble for economy

Louisiana’s top economist said Friday that the coronavirus pandemic and subsequent stay-at-home order issued mid-March, along with the plummeting price of oil, have been a double-whammy for a state projected earlier to do quite well this year.

In a webinar presented by the Southwest Louisiana Economic Development Alliance on Friday, Loren C. Scott, professor emeritus of economics at LSU, spoke to the effects that the one-two punch has had on the state and region.

Scott said there have been 21,426 unemployment claims filed in Calcasieu and Cameron parishes in the past five weeks in response to the state’s suspension of non-essential business.

He said that when combined with the 4,300 already unemployed, the Lake Charles metropolitan area has an implied unemployment rate of 29 percent.

“These are numbers like we’ve never seen before,” he said. “But, I want to emphasize, what is going on now is not because of something fundamentally wrong in the economy,” he said. “The underlying basis of the economy is basically very good.”

He said the job losses are directly related to the pandemic and the safety precautions taken to slow it.

As the result of the state’s suspension of all non-essential business, there were 72,438 unemployment claims filed over the week that ended on March 21. Scott said, pre-coronoavirus, that number would have been around 1,500.

He said this level of unemployment applications hasn’t been seen since Hurricanes Katrina and Rita. By April 18, unemployment claims in Louisiana totaled 443,586 — about one-fourth of the state’s labor force.

As the pandemic continued to spread, Scott said the oil market presented a second shock to the state.

One component of that shock was the dramatic decline in the demand for oil as the result of the virus. Scott said about 60 percent of oil consumption in the world is for transportation. During the week of April 11 there was a 46 percent decline in the demand for gasoline.

The typical world demand is 100 million barrels of oil per day.

The International Energy Administration projects the decrease to be about 29 million barrels.

“So, about one-third of the oil demand has suddenly dropped,” Scott said. “This is something we’ve never seen, really, in history before.”

Scott said during the Great Recession in 2009, the drop in demand was only 2.9 million barrels a day. He said demand is expected to increase in the first quarter of 2021.

Scott said the refineries are operating at around 69 percent of operating capacity now. He said smaller refineries often decide to completely shut down when they reach 60 percent.

“I don’t think that’s going to happen here,” he said.

Another component was the price war. Scott said in early March, OPEC nations met with Russia to discuss further decreases in oil production. He said OPEC had been helping the global market by taking oil off the market to keep prices up. Russia did not agree to the proposal. In response, OPEC put a halt to the decrease in production and added 2.5 million barrels to the market.

Scott there has been a recent compromise in which OPEC+ and G20 members, along with others, agreed to decrease production by a combined total of 37 million barrels of oil per day. But it won’t be implemented until May 1. He said there is now a scramble by producers to locate storage for the huge buildup of oil. Scott said Saudi crude oil carriers are just sitting in the ocean with no where to offload the oil.

“Today the price of oil has dropped from about $60 a barrel in January down to, today, around $16 or $17,” he said.

Scott presented GDP forecasts made by Wells Fargo’s economics department and Consensus Forecasts USA, a group of 45 forecasting firms around the country through 2021. Wells Fargo projects a GDP of -1.2 percent for the first quarter and -22.3 percent for the second and Consensus projects -3.7 for the first quarter and -25.7 percent for the second quarter.

“We have never seen anything like this before,” Scott said.

He said quarterly data on the real gross domestic product has been collected for 73 years.

“The worst quarter ever was about -10 percent,” he said. That was in the late 1950s. This is two-and-a-half times worse than that. This is going to be bad.”

From the third quarter of 2020 though 2021, both have more positive forecasts, with the highest being projected by Consensus at 10.7 percent for next quarter. Scott said the big jump will be the result of pent-up spending on durable goods and services.

As to the state’s economic recovery, Scott said as the United States goes, so, too, does Louisiana. He said when the country’s economy is booming, the state follows along. But, the price of oil is down dramatically and there is a huge amount of oil not being used.

“That’s going to be a problem for the oil patch, especially the area of Houma and Lafayette,” he said.

The second problem, according to Scott, directly affects the Lake Charles area. He said prior to the virus, there were four LNG projects set to happen locally. LNG prices are typically about 15 percent of the price of oil per barrel — about $100 when the facilities were planned. Now the price is under $20 a barrel.

“Our competitive advantage has disappeared in terms of getting long-term contracts,” Scott said.

He said the LNG demand will begin to outpace the supply and the area can expect planned LNGs to come online about 2022-2023.

There is some good news for Lake Charles, Scott said.

He said Lake Charles is home to 16 chemical plants, three refineries and two LNG facilities and “three of these are 24-7, 365 days-a-year operations, are the highest wage industries in manufacturing and are still operating. That’s very good for your area; you have this to kind of save you.”

He said the chemical sector hasn’t taken as much of hit today as it did during the Great Recession. He noted Southwest Louisiana produces the products or the products that go into making hand sanitizers, soaps, chlorine, cleaners, alkalies and pharmaceuticals — all of which are very much in demand at the moment.

The shutdown of the entertainment and hospitality sectors will lead to problems for local governments as sales tax revenue are at a standstill, he said.

Scott said he hopes to see casinos reopen in June. Chase Bank credit/debit card data show that while grocery stores are doing well, retail stores are not. And restaurants have seen a 65 percent decrease in revenues.

But both the stay-at-home orders and the low oil prices are projected to end and things will likely return to “normal” some day.

Scott said he wants people to remember that “normal was very good before coronavirus hit.”

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