Sobering Numbers on American Energy

This week the American Petroleum Institute (API) hosted a conference on “The State of American Energy” in Washington, which I attended. In it, API president Jack Gerard set forth some rather startling figures which speak to the future of the energy industry in the United States and how government policy will impact the effect this critical sector of our economy will have on jobs and the deficit – two areas of immense concern to the majority of Americans. (The full text of the address is available here.)

First, Gerard recapped some of the highlights from the previous year.

In 2010, oil and natural gas companies created 57,000 new jobs in Pennsylvania and West Virginia alone as part of the Marcellus Shale natural gas development.

The number-one ranking in Gallup’s “Job Creation Index” belongs to North Dakota, thanks to its record-breaking oil production numbers.

Last year, oil and natural gas companies’ investments in U.S. capital projects for this decade hit the two trillion dollar mark.

Finally, this industry provides the U.S. Treasury, on average, with well over $95 million each day in taxes, rent, royalties and bonus payments.

As to the future, there are two major areas of concern which may be directly affected by the government: expansion of areas of access for energy exploration and taxation of the energy industry as a whole. The Obama administration is faced with an opportunity to move forward in expanding the economy, creating jobs and stimulating government revenue, or to give in to populist impulse and pursue regressive policies.

Regarding expanded energy access, a recent study by Wood-Mackenzie examined the potential for allowing expanded oil and gas exploration, as well as the effect higher taxation on the energy industry would have. The results will come as no surprise to students of history.

Wood Mackenzie’s analysis found that increasing access leads to a direct increase in domestic production, jobs, and government revenue. Whereas increasing taxes reduces production and jobs. It is also detrimental to government revenues five years into the future.

Exploring the details of this study are well worth the time, but they follow a solid historical pattern. Some of the numbers should still prove eye-opening.

If access is expanded:
Direct Employment Potential: 130,000 direct jobs are estimated to be created by 2020 and 150,000 by 2025
Indirect* Employment Potential: 330,000 indirect jobs are estimated to be created by 2020, growing to 380,000 by 2025

If access is restricted and taxation of the industry expanded:
Direct Employment Potential: An estimated 50,000 jobs lost in 2014, dropping to 15,000 in 2020 and 8,000 in 2025
Indirect Employment Potential: An estimated decrease in employment of 120,000 in 2014, 35,000 in 2020 and 20,000 in 2025

When government attempts to recoup losses by taxing productivity, they kill the goose which has produced vast quantities of golden eggs. For the energy industry in particular, if we restrict opportunities for productivity, those opportunities do not disappear… they migrate elsewhere, taking much needed jobs across various market sectors with them. But by allowing one of the most successful industry avenues in the nation to expand – while ensuring maximum safeguards against environmental impact – the result is a net plus for both the government and the private sector.

Recent restrictions on the issuance of new drilling permits by the current administration have already proven disastrous. As this report from Investor’s Business Daily demonstrates, government policy has a real time effect on productivity if handled unwisely.

Since President Obama took office in January 2009, the price of oil has rocketed 117% to $90.41 a barrel and gasoline has jumped 67% to $3.07 a gallon. In the 34 industrialized nations, oil imports have surged 34% in the last year to $790 billion. The U.S. alone has seen a $72 billion jump.

All this imperils a fragile recovery from the financial crisis. “Oil prices are entering a dangerous zone for the global economy,” says Fatih Birol, chief economist at the International Energy Agency.

Given the clear threat, it’s economically irrational to sit on our hands and fail to develop our own energy resources. At least 130 billion barrels of oil and trillions of cubic feet of natural gas lie offshore, and hundreds of billions of barrels more are locked in shale deposits in the Northeast and West. Yet our policy remains leaving this wealth alone.

It’s a lot of material to cover, but two messages become clear. First, taxing our way out of poor government policy by attempting to target the more productive sectors of our economy will result in a net loss of both government revenue and jobs. Second, we have the resources available which will allow the private sector to produce the needed boost to our economy which the federal government can not. But the government itself can thwart this recovery if it submits to what passes for good political headlines.

DISCLOSURE: The author was invited to attend this conference with transportation and accommodation costs supplied by API. No other financial considerations were offered or accepted. There was no agreement to publish anything regarding the conference and API was not offered any preview of published material nor the opportunity to comment on it prior to publication.

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