By Bob Iaccino
At A Glance
Energy has been a tailwind to U.S. growth, but recent declines in oil and gas investment may lessen its impact
- Oil and natural gas mining remain one of the top U.S. growth sectors
The U.S. economy has had a long and bumpy ride on the path to stable growth. The last four GDP growth figures going back to the second quarter of 2018 have averaged +2.85 percent with two of those figures being over 3 percent. Plenty has gone into that steady rise in GDP including a growing tech sector, a resurgent manufacturing base, and the U.S. achieving the title of largest crude oil producing nation on the planet at 12.2 million barrels per day (bpd).
The U.S. was already the number one natural gas producing nation in the world and that has not changed. This energy sector growth has been a tailwind to GDP growth, accounting for approximately 7.6 percent of U.S. GDP and 5.6 percent of total U.S. employment in 2015, according to the American Petroleum Institute (API). However, with petroleum and natural gas investment down recently, the tailwind may lessen or even disappear.
A Tax Or A Surplus
Rising and falling energy prices have always been thought of as either a tax on the consumer (in the case of rising energy prices) or a surplus to the consumer (in the case of falling prices). While this is still true, in the U.S., it is now also either a plus to nominal GDP or a minus. Last year, mining, which includes the oil and gas extraction industry, increased 38 percent in the fourth quarter in terms of real value added, after no increase in the third. According to the U.S. Bureau of Economic Analysis (BEA), this was the largest increase since the fourth quarter of 2008. In the chart below, you can see a jump in dollar value added by the mining industry as a whole.
Real gross output for mining, however, only increased 9.5 percent in the fourth quarter, after increasing 12.7 percent in the third quarter. The fourth quarter increase was also primarily attributed to oil and gas extraction according to the BEA. Natural gas liquids increased $0.4 billion. Fuel oil increased $0.3 billion. Other petroleum products increased $0.3 billion.
Oil Infrastructure Supports GDP
This was all during a period of falling prices for both crude oil and natural gas, so how does the economy get a real value boost with lower output and falling prices? Through growth in capital expenditures (CAPEX). Simple oil and gas extraction only accounted for approximately 1.8 percent of GDP according to data from the BEA, but supporting that extraction makes the overall industry a much bigger factor. Rig counts have indeed been falling but wells are not the only source of CAPEX in the oil and gas sector, there is also infrastructure, equipment production, refinery expansion and transport, such as storage facilities, pipelines and export terminals.
Global oil and gas capital spending had been on the rise for two straight years, but the collapse in oil prices late in 2018 has analysts speculating that a ramp up in CAPEX isn't coming any time soon. Capital expenditures, while slowing year to date, could pick up if prices stay elevated considering the more than 26 percent rise in crude prices in 2019. Estimates by Raymond James have Oil and Gas CAPEX rising from 2018 levels despite the slowed pace so far.
Major Regional Spending on Oil Ahead
Additionally, according to a report written by ICF and commissioned by the API, the Oil and Gas industry will be spending between $1.059 trillion and $1.3 trillion on cumulative Regional CAPEX for Oil and Gas Infrastructure from 2017 looking forward to 2035. The Southwestern U.S. should account for between $381 billion and $501 billion of investment or 36 to 37 percent of the total projected spend. The Northeast U.S. will be substantial as well, accounting for a total ranging between $204 billion and $278 billion, roughly 20 percent of the total investment spend across the U.S. The Offshore Gulf of Mexico region should be at approximately $177 billion to $204 billion, roughly 16 percent and all other geographic areas would account for the remaining $296 billion to $360 billion, or roughly 27 percent of the total investment across the projections.
If any of these aggressive predictions come true and prices rise slowly or simply do not fall, the oil and gas industry will continue to add to GDP as a tailwind and the U.S. oil and gas boom will continue with no end in sight. Trade wars, geopolitical supply, and/or demand disruptions and changes will add as much or more volatility as will energy company CAPEX plans.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.