Oil and Gas Boom Propels GDP
The American economy is still slowly recovering from the recession. U.S. GDP growth continues to fall short of the last half-century’s track record (see graphic). Overall GDP growth has been far too tepid to support a robust economic recovery, so the recession effectively continues for many Americans.
Without the $300-$400 billion yearly increase in output from oil and gas production, economy growth would still be negative. Manhattan Institute senior fellow Mark Mills shows the extent these industries have contributed to U.S. growth in his new report, “Where the Jobs are: Small Businesses Unleash Energy Employment Boom.”
The United States now produces more hydrocarbons than any other country, and its lead is increasing. It recently surpassed Saudi Arabia in combined oil and natural gas output and surpassed Russia in natural gas output. By next year, the U.S. will produce more petroleum than either Saudi Arabia or Russia.
This recent growth stands out in a still-struggling economy. As Mills points out, “In just two years, U.S. oil output has risen by 2 million barrels per day. In just two years, U.S. oil production has grown more than it declined over the previous 20 years. Natural gas is so abundant that the U.S. now has a permanent competitive global advantage both for domestic industries and exports. And exports of refined petroleum products (gasoline, diesel, jet fuel) have tripled since 2006. The U.S. is a net exporter of such products for the first time since 1949.”
All of this new production was not created by government programs, economic stimulus acts, or from new discoveries of reserves. Instead, the new production comes from previously-discovered shale fields which are now unlocked by modern technology. This “smart drilling” is a combination of the industrial innovation of hydraulic fracturing (fracking) and information technology advancements which increase efficiency.
This economic boom is not confined to the hydrocarbon industry. Access to cheap, reliable energy has positive ripple effects through other industries. According to a 2013 American Chemistry Council survey, abundant, low-cost energy has already attracted over $70 billion in new investments in 100 chemical operations. Those plants are expected to create over 1 million new jobs and add $300 billion annually to GDP.
Other manufacturers benefit as well. This helps the economy since manufacturing jobs generate $1.48 of economic activity for every $1 spent, making manufacturing the highest economic multiplier of all industrial sectors. These manufacturing jobs do not come from government programs trying to revive the manufacturing-based employment environment of the 1950s. Rather, these jobs are organically arising because of increasing oil and gas production.
To keep this growth which is supporting the U.S. economy going, there are steps the government should take. First, the United States needs to lower its corporate tax rate. The U.S. top combined state and federal rate of 39 percent is now the highest among the 34 Organisation for Economic Co-operation and Development nations. As recently as a quarter century ago, the U.S. had the lowest rate.
Simply reducing corporate income tax to the OECD average of 25 percent—never mind making it the lowest again—would boost U.S. GDP by 2 percent. This growth would come from increased business investment, including investments in energy production. Additionally, U.S. multinational companies are holding $1.7 trillion offshore because of the tax burden if they were to bring it home. Removing this burden to investing income that in earned overseas in the United States would allow these funds to grow the U.S. economy.
Nearly all the growth in demand for oil and natural gas is now taking place outside the United States. This is one reason antiquated laws which restrict energy exports should be rescinded. This increased demand would lead to greater production of oil and gas which benefits the American economy.
The oil and gas industries have been the backbone of recent U.S. GDP growth. While the success of these industries has been impressive, there is no guarantee this success will continue. Oil and gas production must be allowed to grow, and this growth has the potential to jumpstart the rest of the economy.