By Mark Agerton
How many jobs will the North American oil and gas boom create? Environmental concerns certainly loom large in the public’s mind, but in the recent economic environment creating jobs remains a pressing concern for policy makers and political constituents. Newspaper headlines like, “Boom in Energy Spurs Industry in the Rust Belt,” “North Dakota tries to woo workers for empty jobs” and “Rent in Williston, N.D. tops averages in New York City and Los Angeles” are part of a narrative that the shale revolution will be a panacea for the United States’ labor market. Recent research at Rice University’s Baker Institute for Public Policy shows that shale may not be quite the national job-creating juggernaut that boosters claim it will be. This means that policy makers must not be complacent about job-creation and simply rely on fracking to lead us out of the underemployment woods. In particular, state and local policy makers concerned about creating jobs should promote intelligent policies that promote drilling in a responsible way, encourage individuals and firms to spend locally where fracking takes place, and pursue an “all of the above” job-creation strategy.
Cumulative employment growth relative to the national average since 2008 has been much higher for most oil and gas-producing states than for the rest of the nation (see Figure 1 in the working paper). This has triggered much rhetoric, but the question remains, “How many jobs will additional upstream drilling activity actually create for each state?” In a recent working paper at the Center for Energy Studies at Rice University’s Baker Institute, the answer to this question is given explicit attention. The paper finds a robust, positive, statistical association between state-employment growth and growth in drilling activity. This is good news for states with shale resources. Nevertheless, the job-creation multipliers (the number of jobs created directly and indirectly following an increase in upstream investment) in the paper are substantially less than those implied by industry reports. (For example, IHS's national study or another on the Marcellus.)
In particular, the paper predicts that each additional active rig drilling for oil or gas creates, depending on a multiplier used, anywhere between 224 and 389 additional jobs in the future. Summing over all the increases in rig-counts from 2003 through 2013, the resulting boost in national employment has been anywhere between 205 and 356 thousand jobs (assuming increased jobs in one state don’t correspond to decreased jobs in another). This is substantially less than the 0.6 to 0.9 million jobs in 2013 due to shale gas predicted by a leading economic analysis and forecasting firm - IHS Global Insight Inc. in the impact study The Economic and Employment Contributions of Shale Gas in the United States. (Note that the IHS study doesn’t consider light-tight oil, which would have an additional impact over and above the shale gas.) Given that the total national employment (seasonally adjusted) was 117.5 million this September, even the working-paper’s maximum estimate of job-creation – 400 thousand additional jobs over the past 10 years, while large, may notbe as significant as one would hope.
There are a number of take-away points for policy makers at all levels of government stemming from this less optimistic (but still positive) outlook on job creation from the shale boom. First, it is undeniable that drilling for oil and gas—especially in an economy with slack labor markets—will lead to new jobs. This means that places with high unemployment should be promoting policies that encourage drilling in a responsible way. Policy makers should eliminate burdensome red-tape and give firms a clear and consistent regulatory framework. They should make sure environmental regulations are fact-based, not emotionally driven, and uniform within a state. Poor environmental regulation with lots of regional heterogeneity can add to costs without necessarily delivering the intended wide-scale benefits. Particularly at the federal level, serious consideration should be given to removing artificial constraints like the crude oil export ban since these limit producers’ abilities to get product to market and, therefore, their incentive to produce.
Second, state and local policy makers can maximize the local job-creation multiplier effect of additional drilling activities by actively promoting the growth of local investment associated with increased hydrocarbon production instead of just assuming that it will happen on its own. Higher upstream activity leads to job increases in three primary ways. First, increased production requires increased use of labor—a direct, positive impact on local labor markets. Second, increased supply may reduce the price of various hydrocarbons, which can encourage job-creating growth and investment in manufacturing and other sectors – both midstream and downstream. Third, upstream firms’ increased payments to labor, capital and holders of mineral rights will induce higher levels of local spending by the recipients of this additional income, which can trigger secondary benefits accruing at the local level.
Third, it is extremely important to maintain an “all of the above” job-creation strategy, not just the “all of the above” approach to developing energy resources that President Obama has articulated. Oil and gas extraction is a relatively small part of the national economy, so the net impact of increased activity in this sector is likely to be small in comparison to the entire labor market. This means that lowering unemployment will require growth in many sectors, not just energy. In fact, the diversified nature of the US economy as a whole means it is unlikely to experience Dutch Disease – an economic phenomenon in which energy production effectively cannibalizes other sectors. It is certainly true that explosive growth in resource extraction must be managed well—increased stresses on roads, water and public services all present a challenge for local governments. On the whole, however, it’s important to cheer on the recent boom in domestic oil and gas production, and it’s equally important not to believe that the boom will be the magic elixir to cure the post-recession employment hangover.
Mark Agerton, Graduate Student Fellow, Center for Energy Studies, Rice University's Baker Institute for Public Policy
