How strong is the economic impact of the US oil and gas boom?
By Stefanie Heerwig

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Since the fracking boom, the media has been awash with articles about the impacts of the oil and gas industry on the U.S. economy. True, oil and gas extraction has risen by 24 percent since 2009 while the U.S. economy expanded by 7.6 percent, recovering 20 percent of its jobs lost since the financial meltdown. But how strong is the correlation between the oil and gas boom and the economic situation in the U.S. — or more exactly, is it as high as anticipated by so many?


Is the oil and gas industry responsible for the U.S. job recovery?
  • 1. Yes
  • 2. No

A large number of experts and industry representatives are convinced this boom can be purely explained by the rising oil and gas production. For instance, a recent report by the American Petroleum Institute affirms that "each direct job in the oil and natural gas industry supported approximately 2.7 jobs elsewhere in the U.S. economy in 2011," concluding that the industry made up about 7.3 percent of GDP in 2011 alone.

Daniel Yergin, a leading energy expert and author of award-winning "The Prize," estimates the U.S. energy boom has generated 1.7 million new jobs, including direct and "induced" employment. He expects the number to double by 2020, the year when the U.S. is expected to surpass Saudi Arabia in oil output and Russia in gas.

A big reason for this is the so-called "collateral impact" of cheap fossil fuels, as Charles R. Morris, author of "Comeback: America's New Economic Boom," stresses in a recent article. As energy-intensive industries in the U.S. are blooming, European industries are flocking to the U.S. for cheap gas, creating jobs on a rolling basis, and long-dormant chemical industries using gas and oil as raw materials are experiencing a reawakening.

But, although the figures seem to be unambiguous, economics never is and countering opinions are slowly on the rise. In a recent research note by Capital Economics, Paul Dales argues the oil and gas boom has not had as big an impact on the U.S. economy as assumed. He argues, for instance, the oil and gas industry only contributed 0.6 percentage points to the 7.6 percent rise in GDP.

Looking at the reduction of import and input costs, Dales concludes the impact of the oil and gas boom on the U.S. economy, though significant, is limited. For instance, he says the reduction of oil and gas imports only adds 0.4 percent to growth as crude prices remain high. Moreover, while the U.S. economy might have spent 23 percent less on production utilities (as electricity and gas), this led to a reduction of intermediate inputs costs by only 0.6 percent.

What's the main reason for growth then? Together with Morris, Dales also sticks to the theory that the U.S. is mainly growing due to the exposure to fast-growing Asian nations. But he also thinks the U.S. is doing so well because of a reduced saving rate, which makes sense from a Keynesian perspective.

In any case, one thing is for sure: While the link between U.S. economic growth and the oil economy might not be as strong as some would suggest, there is a link for sure. And if the energy boom continues (particularly with cheap gas and oil prices creating a strong base to expand the U.S. industry), the future looks rosy. And it could only be dampened if LNG gets exported on a large scale and prices ends up being oil-linked — something of which a major study does not approve.

Stefanie Heerwig is a research consultant in the energy sector. She has contributed to a series of papers on "oil-to-cash" and fossil-fuel subsidy reforms that are about to be published by the Center for Global Development, a Washington based think-tank. She holds a BA (Hons) degree in economics and politics from the University of London's School of Oriental and African Studies.