Oil's Plunge Won't Drag Down the U.S. Economy

By Justin Fox

U.S. 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 economic troubles, U.S. GDP grew at a 4.5 percent annual pace. Now emerging-market economic troubles are back, and the Brent crude benchmark price is down 70 percent 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. I’m guessing that, for the U.S. economy at least, the parallel with the 1990s will hold up.

1. Natural gas production has gone from rising slowly to rising quickly.
2. "Oil and gas field machinery and equipment manufacturing," "oil and gas pipeline and related structures construction," "utility system construction" and other such related industries can’t be included here because the BEA doesn’t break the manufacturing sector down to quite that level of detail.
3. This measures an industry’s output minus all its inputs from other industries. The BEA does things this way because if you just added together the output of, say, oil and gas extraction, petroleum and coal products, truck transportation, and food and beverage stores, you’d be quadruple-counting the oil that was the feedstock for the refinery that made the diesel that fueled the trucks that carried the food to the store.
4. I’m talking in purely cyclical economic terms here. I realize that low fossil fuel prices can be problematic for all sorts of other reasons.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net
To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net