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The Economist: Economic Benefits of the Oil Industry

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August 20, 2014 | 3,506 views | Post a comment

The resurgence of the oil industry over the past few years has been dramatic. As I’ve mentioned in previous columns, production levels have reached totals not seen since the late 1980s and continue to increase. In 2012, total US production was almost 2.4 billion barrels, with 2013 rising to more than 2.7 billion. The United States still relies on imports to meet about 40% of crude oil needs, but the increase in domestic supplies has helped reduce dependency on foreign oil and improve the US trade situation. In fact, the US is likely to be the top producer in the world by the end of the year.

All of this exploration and production activity generates a substantial economic stimulus. We recently analyzed the economic benefits of oil and natural gas drilling and exploration activity in the United States and major energy-producing states. (Results of this assessment are summarized in a report available on our website: Here are some highlights from the study.

A primary reason for growth in the industry is technological advancements including horizontal drilling and hydraulic fracturing, which have unlocked previously unrecoverable oil and natural gas reserves in shale plays. Early experiments in hydraulic fracturing began in the 1980s, but it was decades later before the technique developed (and prices increased) to the point of making drilling within shale plays economically feasible. With horizontal drilling and better exploration tools, the nation’s shale plays have become primary sources of new production. These advances have also allowed for the rejuvenation of wells in older fields, further enhancing activity in the industry.

The oil surge has also been important to the economic recovery from the recent recession. While market conditions and price levels are currently less favorable to extensive natural gas exploration, there is nonetheless a significant level of investment in developing natural gas resources.

Although direct employment in the industry is a small percentage of total jobs, the work is often well paying. Moreover, the ripple effects through the economy of this high value-added industry are large, especially in states which have a substantial concentration of support services able to meet the needs of oil and gas companies. We estimated the direct investment in oil and natural gas exploration and production (including various oilfield support activities), then quantified the total economic benefits of this activity when multiplier effects through the economy are considered.

The total economic benefits of oil and gas exploration and development activity (including multiplier effects) are estimated to include almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs in the United States. We also found that the economic benefits of oil and natural gas production have more than doubled over the past 10 years even after accounting for the effects of inflation. Although the industry (including spinoff activity) is about 6.7% of the US economy, it has accounted for more than 30% of the growth since the trough of the recession. The ability to produce oil and gas from shale plays using advanced recovery methods has been the driving force behind this renaissance in the US energy segment.

Texas realizes the largest economic benefits both from the substantial oil and gas reserves in the state and the long history of the industry and resulting supporting sectors, with gross product gains of an estimated $472.5 billion each year and almost 3.8 million jobs. Oklahoma came in second with gains associated with the industry of an estimated $111.6 billion in gross product each year and nearly 874,500 jobs. In states where oil production has only recently begun to escalate, such as North Dakota, support industries are still developing and ripple effects through the state economy are smaller.

Even so, North Dakota’s economic benefits include $11.3 billion in annual gross product and almost 102,100 jobs (in a state with only about 500,000 total jobs). In these areas, overall economic effects can be expected to rise over time.

Investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence. While changing market conditions will lead to cycles in the industry, the oil and gas industry will be a driver of substantial economic activity for many years to come.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group ( He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
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