The U.S. economy has expanded 7.6 percent since the recession ended in 2009. That's better than Britain, Japan, the euro zone and many other advanced nations around the world. So why is that?
One popular theory is that the United States has benefited from a huge domestic energy boom. Thanks to new advances in drilling technology — particularly in hydraulic fracturing — U.S. companies have managed to exploit new sources of oil and shale gas in places like North Dakota, Texas, Ohio and Pennsylvania.
But not everyone is convinced that this drilling frenzy has carried the U.S. economy. In a new research note for Capital Economics, Paul Dales argues that the oil and gas boom has so far provided only a modest economic boost since 2009:
Since June 2009 the volume of oil and gas extraction has risen by 24%. Over the same period the production of mining machinery has risen by 47% and the output of mining support services, which includes oil and gas drilling, has leapt by 58%. The only disappointment is that output of petroleum refining has risen by just 3%.
But that rise explains only a small part of the economic recovery. Admittedly, it is responsible for a fifth of the 18.3% increase in overall industrial production. Given that the oil- and gas-related sectors account for only 2.5% of GDP, they have contributed just 0.6 percentage points (ppts) to the 7.6% rise in GDP.
Dales gets a similar result — about 0.7 percentage points of growth since 2009 — when he measures the value of the oil and gas boom in a different way, by looking at investments and the reduction of imports. That's still significant (the reduction in imports alone have contributed 0.4 percentage points to growth), but it's also relatively limited.
On the latter point, it's worth noting that while the United States has managed to reduce the sheer volume of crude it imports, the price of oil has stayed high. So our total oil import bill hasn't fallen as quickly:
Okay, but what about the consumption benefits from cheap natural gas? Hasn't that helped lower costs for certain industries and reduced electricity bills for households? Yes. But these effects have been surprisingly small on the whole.
According to the latest 2011 input-output tables, since the natural gas price peaked in 2008 the US economy spent 23% less on utilities (i.e. electricity and gas) in the production process. That sounds impressive, but that led to a reduction in total spending on intermediate inputs of just $70bn, or 0.6%. Put another way, that saving of $70bn is equivalent to just 0.8% of total wage costs. ...
Similarly, lower natural gas prices have not significantly boosted GDP by increasing real household incomes. While wellhead natural gas prices have dropped by 70% since the 2008 peak, the price of electricity and piped gas paid by households has fallen by just 10%. That will have reduced households’ spending on gas and electricity by just $20bn. That’s equivalent to a 0.2% boost to real incomes and a 0.2% boost to real consumption. Clearly this explains a very small part of the 7.4% rise in real consumption since the recession ended.
Dales also notes that manufacturing sectors like steel, aluminum and cement have not yet seen any appreciable boost from cheaper natural gas. In fact, energy-intensive industries are still doing slightly worse than manufacturing as a whole.
Now, it's worth emphasizing that we're still early into this era of cheap natural gas. Firms like Shell are in the process of building ethane crackers in places like Pennsylvania to take advantage of nearby shale production. That, in turn, could eventually provide a boon to other industries — plastics, say. But it may be a few years before this registers in the macro-level data.
In all, Dales concludes, it's hard to give oil and gas more than a small bit of credit for America's better-than-average economic performance since 2009. "[T]he recovery in US GDP since the recession has been driven by an improved performance across a wide range of sectors, including motor vehicle production and professional business services."
His preferred theory is that the United States has done better than its peers "partly due to its greater exposure to the faster growing Asian nations and partly due to the willingness of U.S. households to reduce their saving rate more significantly."
— It's worth noting that other analysts have argued that oil and gas drilling play an even larger role in the economy when you include all the various indirect and induced impacts from the industry.
For instance, a recent report (pdf) from the American Petroleum Institute (the oil and gas lobbying group) argued that "each direct job in the oil and natural gas industry supported approximately 2.7 jobs elsewhere in the US economy in 2011." By that metric, they estimated that the oil and gas industry had impacts on about 7.3 percent of GDP.
— A more detailed look at whether cheap shale gas can revive U.S. manufacturing.