Monday, January 30, 2012

Will Oil And Gas Drilling Activity Determine Economic Growth Rates By State and Country?

The end of cheap oil is a huge drag on economic growth for the U.S. states and for the countries that are net importers. As oil production from easy to tap wells declines and oil exploration and discovery becomes more expensive, the transfer of wealth from energy importing states and countries to exporting geographies is likely to become an increasingly important driver of economic growth. Demand for oil is predicted to continue increasing due to population growth and growing levels of car ownership in Asia. Thus, the days of cheap oil are almost certainly in the rear view mirror. Economic forecasts that do not factor in the likelihood of higher cost of oil may turn out to be badly flawed.

The high price of oil has spurred huge investments in exploration and recovery of oil from expensive new sources, including tar sands, deep off shore wells and fracking. The investment in and recovery of oil via expensive techniques is transferring more wealth than ever to oil exporting geographies.

In the U.S, the cost of energy per household increased from 7% to 11% from 2001 to 2011. Further increases in the cost of energy will depress the net incomes of households in states that are importers of energy and put them at a disadvantage versus energy exporting states. A review of employment statistics shows that this trend may already be in effect. The state with the lowest unemployment rate is North Dakota, with just 3.3% unemployment due to the Bakken drilling boom. Unemployment rates are dropping faster in states that have embraced fracking than in those that have banned it. As shown below, unemployment is dropping faster in Ohio and Pennsylvania than in New Jersey and New York.


Oil and gas drilling activity may also change the balance of economic power around  the globe. The U.S. will gain from our cheap supply of gas.  A silver lining to the economic dark cloud of higher energy prices is that  U.S. competitiveness will improve due to low cost energy from natural gas versus countries that are lacking in natural gas supplies and reliant on importing oil. However, on a net basis, our importing of 9 million barrels of oil per day will hurt the U.S trade deficit and the economy if the price of oil continues to rise.

A number of countries that have been economic power houses, including Germany, China, Japan and South Korea may all experience an increasing drag on economic growth due to higher oil and energy prices. The already high cost of oil being paid by European nations is often an overlooked factor in the cause of the debt crisis. It may become an even larger headwind in restoring growth Europe. The outlook for Germany and Japan made be bleaker than most economist realize due to the self imposed damaged to their economies caused by shutting down nuclear power plants, requiring increased imports of expensive fossil fuels.

Conclusion
For those looking to relocate, it may be appropriate to consider geographies that are likely to expand  economic activity and tax bases via increased oil and gas production. Within in the U.S, the economic future of North Dakota, Ohio, Pennsylvania, Texas, Wyoming, Colorado may be much brighter than that of states that are lacking in oil and gas drilling opportunities.

Likewise, the economic activity for countries around the globe may be greatly influenced by the oil and gas reserves that they can tap. Oil rich countries may have an even bigger advantage in terms of economic growth in the future than they do now.

Related Post
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1 comment:

  1. Great article. Helped a lot with school research.

    ReplyDelete