Oil’s plunge won’t drag down the US econ­omy

The Pak Banker - - OPINION - Justin Fox

US real gross do­mes­tic prod­uct grew at a 0.7 per­cent an­nu­al­ized pace in the fourth quar­ter of 2015, the govern­ment an­nounced to­day. Now, for­get that num­ber. It is the "ad­vance es­ti­mate," and the Bureau of Eco­nomic Anal­y­sis will re­vise it again and again over the com­ing months and years. Th­ese re­vi­sions tend to be es­pe­cially big at points where the econ­omy tips from growth into re­ces­sion, or vice versa. Con­sider what hap­pened to GDP growth es­ti­mates for the first quar­ter of 2008, which turned out to be the be­gin­ning of the Great Re­ces­sion.

There are those who fear the U.S. econ­omy might be tip­ping into re­ces­sion now. Could be, but clearly to­day's ad­vance GDP num­ber won't tell you much about the like­li­hood of that. There's an­other BEA re­port, though -- re­leased last week, on GDP by in­dus­try in the third quar­ter of 2015 -- that might of­fer some more in­sight into the like­li­hood of re­ces­sion.

There's one in­dus­try in par­tic­u­lar that I'm cu­ri­ous about: oil and gas. Oil and gas prices have plum­meted, partly be­cause of re­duced global de­mand and partly be­cause of new sup­ply. In gen­eral, lower en­ergy prices are good for the U.S. econ­omy. In the 1990s oil was mostly cheap, and the econ­omy was mostly great. In 1997 and 1998, as crude oil prices fell 50 per­cent in the face of emerg­ing-mar­ket since June 2014. The boom must be just around the cor­ner, right? In the 1990s, though, U.S. oil pro­duc­tion was dwin­dling, while since 2008 it has al­most dou­bled, thanks to new tech­nolo­gies such as hy­draulic frac­tur­ing (frack­ing) and hor­i­zon­tal drilling. The U.S. is even ex­port­ing crude oil again, for the first time in four decades.

Is it pos­si­ble that the oil and gas in­dus­try has be­come so im­por­tant to the U.S. that its trou­bles will drag the econ­omy down? Here's a rough mea­sure of the oil and gas in­dus­try's share of GDP since the late 1970s. Oil and gas have be­come a lot more sig­nif­i­cant since the late 1990s. And 3.1 per­cent of GDP, the to­tal for 2014, is noth­ing to sneeze at: If the en­tire oil and gas in­dus­try were to sud­denly dis­ap­pear, that would throw the econ­omy into a deep re­ces­sion. It won't sud­denly dis­ap­pear, of course, and when it was at its low­est share of GDP in the 1990s, that was partly be­cause the rest of the econ­omy was boom­ing. But a sud­den sharp drop in oil and gas in­dus­try value added -- as oc­curred in 2009 -- can be an eco­nomic drag.

How much of a drag have oil and gas been lately? The timeli­est GDP-by-in­dus­try data -the num­bers re­leased last week -- only break things down by the broad­est in­dus­try cat­e­gories, but by my count oil and gas made up about three-quar­ters of the min­ing in­dus­try's value added in 2014, so min­ing ought to do. Here's its con­tri­bu­tion to real GDP growth since 2010. Ad­mit­tedly, it's not the eas­i­est chart to di­gest. But it shows that min­ing (and by ex­ten­sion oil and gas) has gone from boost­ing GDP growth most of the time from 2010 through 2014 to re­duc­ing it for the past two quar­ters. GDP-by-in­dus­try num­bers for the fourth quar­ter of 2015 won't be out un­til April, but all in­di­ca­tions (em­ploy­ment num­bers, mainly) sug­gest that the oil and gas in­dus­try con­tin­ued to drag down GDP.

Still, the oil and gas in­dus­try wasn't that big a part of GDP growth over the past few years. The pre­vi­ous chart seems to in­di­cate that it was from about 2003 through 2008, when the frack­ing boom was gear­ing up, that the in­dus­try's con­tri­bu­tion to growth was great­est. Mean­while, our econ­omy con­tin­ues to use much more crude oil than it pro­duces (net im­ports ac­counted for about 27 per­cent of U.S. pe­tro­leum con­sump­tion in 2014, ac­cord­ing to the En­ergy In­for­ma­tion Ad­min­is­tra­tion). With nat­u­ral gas, net im­ports are neg­li­gi­ble. But in gen­eral, the con­sumers of both oil and nat­u­ral gas ac­count for far more of U.S. eco­nomic ac­tiv­ity than the pro­duc­ers do. For con­sumers, cheap en­ergy is good. So even­tu­ally, what­ever drag the oil and gas in­dus­try's trou­bles ex­ert on the econ­omy should be more than com­pen­sated for by gains in other sec­tors.

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