Shale Boom Is Real Enough

Includes: UNG, USO
by: Modeled Behavior

By Karl Smith

A number of prominent economists have poured cold water on the notion that the boom in shale oil and gas is a significant boost to the U.S. economy. Via Brad Plumer, Paul Dales argues that shale

...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.

This kind of analysis always seems odd to me. First, 0.6 percentage points on its own is not trivial. A rough application of Okun's law would say that translates in .3 percentage points of unemployment. So we would be looking at 8% unemployment instead of 7.7%. Just as importantly, the shale boom is exogenous, real, and likely deflationary. That is, it came out of nowhere, provided actual new resources, and if anything caused consumer prices to go down as a result of cheaper gas bills.

This means a multiplier of two is certainly not crazy and probably modest, even in light of the Sumner Critique. Then we are looking at 1.2 percentage points or a counter-factual unemployment rate of 8.3%. That's significantly worse than what we have. Goldman Sachs economist Jan Hatzius has also been weirdly dismissive. This chart of his has been making the rounds:

This piece of evidence seems odd to me given several things. First, the general glut in primary metal capacity the world has seen since 2008, a phenomenon largely driven by Chinese industrial policy. Second, the collapse in U.S. gasoline consumption:

The expected increase in manufacturing capacity would come largely from increased plastics capacity and an expansion in refining extra-light oil for export. Both of these changes require massive capital investments that will take years to come online. What we see know is largely a change in investment patterns. The U.S. is adding refining and cracking capacity, while Europe is shutting it down.

Now, perhaps all of this is simply to warn folks that the 1950s aren't about to come back. However, a continued slowing of the secular collapse would feel like a renaissance to most Americans.