U.S. policymakers have been concerned about the country's dependence on imported energy since World War II. Those concerns were highlighted in the 1970s when episodes of sharply rising oil prices led to recessions, economic stagnation, and high inflation. However, recent gains in U.S. oil and natural gas production are changing the dialogue about U.S. energy strengths and vulnerabilities.
The "shale revolution" has stimulated tremendous production of oil and natural gas in the United States. The revolution is the product of advances in oil and natural gas production technology—notably, a new combination of horizontal drilling and hydraulic fracturing. These technological advances combined with high oil and gas prices have enabled increased production of the abundant oil and natural gas resources in the United States.
Greater availability of domestic energy resources benefits the United States by reducing dependence on imported energy and diversifying the economy.1 But the boom also brings new vulnerabilities. Examining how changes in U.S. oil and natural gas production may affect individual state economies shows that some of the states providing new energy resources are becoming less economically diversified and more economically vulnerable to energy price declines.
Oil Prices and Employment in the U.S. Fossil Fuel Industry
Until recently, the U.S. oil and natural gas industry mostly followed the ups and downs of world oil prices, but with a long-term decline that reflected the decreasing availability of U.S. oil and natural gas resources. At the height of the early 1980s oil boom, the five industries most sensitive to oil prices—coal mining, oil and gas extraction, oil field machinery, petroleum refining, and petrochemicals—accounted for 1.6 million jobs, 1.8 percent of total U.S. nonagricultural employment.2 By 2000, the share of these five industries had dwindled to 0.4 percent of total U.S. nonagricultural employment, only 457,000 jobs. With oil and natural gas prices rising beginning in the early 2000s, employment in the oil and natural gas sector began growing too. The boom in production of oil and natural gas from shale formations became a significant factor after 2008. Figure 1 shows that rising energy prices and the shale boom led to strong growth of U.S. oil and gas employment from 2005 to 2011.
Despite recent gains, however, the fossil fuel industry has a smaller share of U.S. employment than it did in the early 1980s, and the industry's share of national economic activity is relatively small. After the end of the recession, between 2010 and the end of 2012, the industry added 169,000 jobs nationwide, growing at a rate about ten times that of overall U.S. employment. The industry's output shares follow a similar path. The share of oil and gas extraction was 4.3 percent of U.S. gross domestic product (GDP) at its height in 1981, but declined to 0.6 percent by 1999. The share of oil and gas rose to 1.6 percent of GDP in 2011 as a result of the shale boom.3
Fossil Fuel Industries and State Employment
As energy prices and U.S. oil and natural gas production fell from the mid-1980s to the early 2000s, most U.S. energy-producing states diversified away from energy production and energy-intensive industries. In 1982, the states with the greatest concentration of energy-related industries were West Virginia, Wyoming, Delaware, Oklahoma, Louisiana, and Texas.4 Oil and natural gas accounted for much of the activity except in Delaware, which had a high concentration of the petrochemical industry, and in West Virginia, the heart of coal country. Shares of energy-related employment ranged from 7.3 percent in Texas to 13.7 percent in West Virginia. By 2000, these shares had declined to a range from 2.5 percent to 7.4 percent.
Rising oil and gas prices since the early 2000s prompted a resurgence of energy employment. Increased use of horizontal drilling and hydraulic fracturing led to further gains in oil and gas hiring. As of 2011, the states with the highest shares of energy employment were Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming. As shown in Figure 2, energy employment shares increased in all eight of these states from 2000 to 2011.5 Although there is little oil and gas activity in West Virginia, its coal production grew because coal prices followed the upward trend in oil prices in the 2000s. Despite these gains, however, almost every one of these states depends less on the five main energy-related industries than they did in 1982.
Fossil fuel production has been important to these states' recent economic performance. Since the early days of the shale boom in 2006, the four states with the highest rates of employment growth are the states with the highest shares of oil and gas employment (Figure 3). The greatest growth has been in Texas and North Dakota, states with production from shale and the largest production increases. As seen in Figure 3, between 2006 and 2012, U.S. employment declined 0.05 percent per year on average, while employment in North Dakota and Texas grew by 3.4 and 1.5 percent, respectively, the fastest growth in the country.
Oil Price Shocks and Regional Economic Activity
Because the United States is an oil importer, its economy has been hurt by previous episodes of sharply rising oil prices that resulted from oil supply shocks.6 Given the oil production increase in the past couple of years, has the response of the U.S. economy to oil price shocks changed? The economic composition of individual states affects their responses to oil price shocks. We find that the economies of forty-two states and the District of Columbia would suffer if oil prices rise. In contrast, the economies of eight states—Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming—would benefit from such increases.
To assess the effects of oil price shocks on states' economies, we first estimate the responses of individual industries to changes in oil prices using methods we used in a 1995 paper.7 As shown in Table 1, the estimated price elasticity of total U.S. employment, based on data for 2000–2011, is -0.02, which means that a 10 percent increase in oil prices reduces U.S. employment by 0.2 percent.8 Employment in the fossil fuel industries is considerably more responsive to oil price movements than employment in the overall economy is, but the responsiveness is less than we estimated eighteen years ago.9 These differences are the result of changing relationships between the industries, such as the reduced sensitivity of coal and natural gas prices to oil prices, the closure of some U.S. refineries, and how relative changes in oil and natural gas prices affect the U.S. petrochemicals industry.