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Great Expectations, Deferred

Still waiting for large, economy-wide job increases from the "shale revolution"

From Goldman Sachs, "Is the Economy Gaining “Fracktion?”" (not online):

There is little evidence of significant “induced” employment growth in downstream manufacturing industries. Similarly, cap-ex in energy intensive sectors that might be expected to benefit most from the shale boom has not outperformed cap-ex in other sectors during the recovery, although it did decline by less during the recession.

On top of fears that the surge in unconventional oil and natural gas will not be enduring [1] [2] [3], there remains some doubt that the development of fracking will be the game-changer that many have claimed – at least with respect to macroeconomics. (Prominent studies include IHS (2012), McKinsey (2013).)

Below I turn first to a discussion of employment growth in core oil and gas extraction. Then I discuss the extent (or non-extent) of spillover effects to the rest of the economy.

The impact on Oil and Gas Sector Employment

It’s clear that employment has increased dramatically in recent years.

Figure 1: Employment in oil and gas extraction, seasonally adjusted, and employment in oil and gas support activities (blue). NBER defined recession dates shaded gray. Source: BLS via FRED.

From 2005M01, employment in gas and oil extraction rose by 72,200, and in gas and oil support by 165,600 (through August). From 2010M01, the figures are 41,500 and 95,700, respectively.

It’s important, however, to recall the context. This sector accounts for a very small portion of total nonfarm payroll employment. This point is highlighted in Figure 2.

Figure 2: Month-on-month change in employment in oil and gas extraction (blue), in oil and gas support activities (red), and in nonfarm payroll employment ex.-Census (green), all seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS via FRED.

The impact on GDP growth is estimated by Goldman Sachs to be 0.10 ppts in 2013.

Broader Impacts

It might be expected that the resulting decrease in natural gas prices will result in lower production prices, either through lower energy prices (GS sees little impact thus far) or lower feedstock prices. Certainly gas costs in the US are lower than overseas (oil prices will remain tied to overseas, see here).

Exhibit E4 from McKinsey Global Institute, “Game changers: Five opportunities for US growth and renewal,” July 2013.

As Goldman Sachs notes:

A core narrative in the US manufacturing renaissance theme is that low energy prices will directly support growth in downstream manufacturing industries. In past research we found scant evidence of a structural renaissance in US manufacturing in the incoming data―whether due to energy cost advantages, rising productivity, subdued labor costs, or other factors ... we now look at employment outcomes in downstream industries in particular.

We define these downstream manufacturing industries relatively broadly, including the chemical, plastic and rubber products, and primary metal manufacturing industries. As shown in Exhibit 4, employment in these industries has underperformed the overall US labor market.

Exhibit 4 from K. Dawsey, D. Mericle, “Is the Economy Gaining “Fracktion?” US Economics Analyst 13/42, October 18, 2013 [not online].

What about stories of “re-shoring”, that is the return of manufacturing production to the US, as recounted in The Economist? Employment is indeed increasing in manufacturing, as is total output.

Figure 3: Manufacturing employment, seasonally adjusted (blue), and manufacturing output (red), both 2009=1. NBER defined recession dates shaded gray. Source: BLS via FRED, NBER, author’s calculations.

In addition, the share of manufacturing employment in total nonfarm payroll employment has stabilized, suggesting an arrest to the offshoring phenomenon (although the fact that manufacturing employment is more pro-cyclical than other components suggest that it’s just a suggestion).

Still, energy prices are only one factor in the calculations firms make. Rising labor costs overseas (particularly China), exchange rate changes, and -- perhaps most importantly -- the supply chain disruptions associated with the 2011 earthquake and tsunami might loom even larger than the differential in energy prices. Hence, the case for very large employment and output effects from the “shale revolution” remains to be made.

Last Thoughts

Perhaps the most nuanced assessment of what magnitudes of effects to expect comes from the IMF's Article IV review of the US economy (Special Topics), pp. 27-28:

The [IMF Global Economic Model] simulation results suggest that the macroeconomic benefits for the United States are positive, but may be modest. In a scenario with only production gains (and no efficiency improvements), the U.S. real GDP level gradually increases by about 0.3 percent over the next 10 years. In a scenario with both production increases and efficiency gains, the GDP level increases by 0.5–1 percent during the next decade. In the short run, the impact on GDP is largest when the boom in energy production and efficiency are fully anticipated and the economy exhibits economic slack (and thus monetary policy does not need to lean against the resulting increase in aggregate demand). The real exchange rate tends to appreciate and energy prices fall in all scenarios, helping to boost private consumption and investment. In the medium run, the U.S. current account balance as a share of GDP deteriorates slightly, but the adjustment path is highly sensitive to assumptions about expectations and private saving behavior—the current account can either improve or deteriorate.

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