Economic Growth From Oil Mining – As U.S. oil production has more than doubled over the past decade, the oil and gas industry—essentially the exploration, production, and servicing of oil—has become a critical component of materials and structures investments. Economic export investment supported growth in non-residential investment in 2017 and the first half of 2018.
However, oil prices have since fallen 15%, and oil and gas companies have cut investment, disrupting the economy. This suggests that the benefits for some businesses from lower consumer oil prices will be offset by lower investment in the oil and gas industry.
Economic Growth From Oil Mining
U.S. oil production increased from about 5 million barrels per day (mb/d) in 2008 to 12 mb/d in 2019, showing that the supply chain has benefited from the development of remediation technologies such as horizontal drilling and hydraulic fracturing. Oil and gas’s share of U.S. fixed income has doubled from shale’s 3.4% a decade ago to 6.4% since 2008.
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The oil and gas industry’s contribution to quarter-on-quarter growth in fixed capital has also increased relative to other economic sectors since 2008 (
). While oil and gas generally contributed to positive investment growth, oil and gas became a challenge when oil prices fell by 50% from around 2014 to 2016.
In the second quarter of 2018, total non-residential investment increased by 7.9%. Upstream oil and gas contributed strongly to this growth, accounting for approximately 2.7 percentage points, while other industries accounted for approximately 5.1 percentage points.
Things have changed since then; the oil and gas industry has led to corporate economic decline. In the second quarter of 2019, total non-domestic investment fell by 0.6%, led by a decline in oil and gas investment. In other words, without oil and gas, changes in fixed investment would be nothing more than negative.
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). Oil and gas investment slowed as oil prices fell about 15% in the second half of 2018. As it turns out, many companies responded by seeing their expectations not only fail to improve in the third quarter, but worsen. Fifty-eight percent of respondents reported increased uncertainty. If oil prices do not recover, we should expect oil and gas to remain in the capital markets.
Research shows that the growth of oil and gas investment relative to total nondomestic investment also helps assess the impact of changes in oil prices on the U.S. economy. While U.S. consumers are expected to increase spending in response to lower oil prices, negative impacts from investment in the oil and gas industry offset these gains.
The exact impact of this investment on oil prices is unclear. Breakeven prices (the price at which producers need to make more profit than new wells) come into play and will influence the relationship between oil prices and investment. For example, with the average U.S. oil price around $50 a barrel, a drop in oil prices from $55 to $45 10 would be more profitable than a drop in oil prices from $85 to $75 10 .
It is also important to examine the potential shocks that could drive higher oil prices. If prices fall due to the global recession, it could impact investment in oil and gas and other industries.
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Overall, the oil and gas industry has become more important to competition for non-domestic investment. A continued fall in oil prices will have a disincentive effect on all investments. This may reflect the positive impact of lower fuel prices on consumers.
Mertens is a senior economic policy adviser in the Research Department of the Federal Reserve Bank of Dallas.
The views expressed are solely those of the author and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
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