“Drill, Baby, Drill”: The Ongoing Economic Fantasy

Oct 7, 2013

          Some economic fantasies never seem to recede, even in the face of economic reality. One of these is the belief that if only more and more federal land were opened to oil and gas drilling, local and state economies would enter a period of permanent prosperity. That source of extensive economic prosperity, we are told, is just beneath our feet. All we have to do is drill. But, we are told, the federal government’s environmental regulations and bureaucratic incompetence block this drilling and keep  us unnecessarily poor.

          One would think we would already be basking in the glow of that oil and gas prosperity in the Mountain West given that employment in oil and gas development, production, and processing has increased two and a half fold since 1990. In Utah oil and gas jobs have increased four-fold, in Montana and Colorado, three-fold. In Wyoming and New Mexico, oil and gas jobs have doubled.

          That, however, did not make the oil and gas industry one of the leading sources of jobs in any of these states. In Montana in 2011 the oil and gas industry was directly responsible of about one-half of one percent of all jobs in the state. In Utah the four-fold increase in oil and gas jobs left them at three-tenths of one percent of all Utah jobs. Over the last two decades across all of the Mountain West, the jobs in oil and gas have averaged one half of one percent of all jobs.

          One of the reasons for the oil and gas industry’s small contribution to total employment is that the oil and gas industry is capital intensive, not labor intensive. It also makes use of a transient drilling workforce that is always moving on to the next oil or gas field. The payroll associated with oil and gas development and production represents only about ten percent of the value of the oil and gas produced. As a result, oil and gas development is not a likely candidate for substantial job creation.

          That is not to say that there are not oil and gas booms in particular areas that can overwhelm local communities. In Montana and North Dakota we have the boom in the Bakken oilfields. But few people hold up that phenomenon as an example of how most Montanan’s would like to live and raise their kids. But something like that seems to be what some of the “drill, baby, drill” folks have in mind as the ideal economy for Montana and the Mountain West.

          A recent study sponsored by the Utah, anti-federal-government, Sutherland Institute, projects that if we could shake off the federal shackles that limit oil and gas development, that industry could add 208,000 new jobs, 27 billion dollars in additional economic value, and 5 billion dollars in expanded government tax revenues. In Wyoming, according to this particular economic fantasy, expanded drilling on federal lands could add 44,000 new jobs.
          But in 2011, the Wyoming oil and gas industry provided a total of only 9,500 jobs. Apparently, if the federal government would get out of the way of Wyoming energy developers, employment in that industry could be almost five times as great. In Utah, opening up more federal land for drilling, we are told, could add 56,000 jobs. In 2011 despite a four-fold increase in oil and gas jobs, the Utah oil and gas industry only provided 4,600 jobs. Breaking free of those federal limits, apparently, could allow a twelve-fold increase in Utah oil and gas jobs.

          Of course these wild economic imaginings are built around the use of large economic “multiplier,” treating temporary drilling jobs the same as jobs that continue indefinitely, and ignoring the basic economic principles of supply and demand.

          One would gather from the critics of federal oil and gas leasing policy that American oil and gas production have been strangled, leaving us more and more dependent on foreign sources. Nothing could be further from the truth.  On October 4th the U.S. Energy Information Administration estimated that the U.S. will become the world’s top producer of petroleum and natural gas in 2013, surpassing Russia and Saudi Arabia. Since 2008 American oil production has increased by almost 50 percent and natural gas by 33 percent.

          That expanded supply of natural gas has pushed natural gas prices to very low levels, leading natural gas developers to cut back on their drilling and, even, to close in their more costly wells where the cost of extracting the gas is higher than the value of that gas. This is not the federal government’s doing; it is tied to the fact that natural gas supply has expanded faster than natural gas demand. Blaming the reduced interest in natural gas exploration and development on the federal government is similar to the claim that the federal government had driven the production of coal downward through an on-going federal “war on coal.” Coal’s problems are also tied to the low price of natural gas, a fuel that competes with coal in the generation of electricity. It is also cheaper to build electric generators fueled by natural gas; in addition, they can be built more quickly; and they produce far less air and water pollution. It is economics and technology that are working against coal, not some evil federal plot.

          Whatever federal energy policy has done, it has not restrained energy production in the United States.  In fact there has been a perverse reversal of energy policy being pushed by natural gas, coal, and petroleum interests. In the past we were told to worry about our heavy reliance on importing foreign oil. We talked about enhancing national energy security and energy independence.  Now we are being told that we should support the export of natural gas, coal, and petroleum because it will produce more jobs. Apparently extracting the fossil fuels we have in the United States as quickly as possible and sending them off to other nations around the world to burn is the strange new path to energy security, independence, and prosperity. Go figure!