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2016-01-19 20:15:00

OIL INVESTMENT'S COLLAPSE

OIL INVESTMENT'S COLLAPSE

Slumping oil and gas prices and a downturn in investment are proving to be major headwinds for the economies of the United States and other key important petroleum producers.

Economists tend to think of oil and gas as simply an input into the production process for other goods and services, which is why they tend to think of falling fuel prices as a positive influence on economic activity.

But the production and refining of oil and gas is also a major industry in its own right, so a downturn in drilling can have a big negative effect on growth in the short to medium term, until the positive effects on other industries and consumption dominate in the long run.

By turnover and investment, petroleum exploration, production, refining, transportation and marketing is one of the largest industries in the United States and around the world.

In the United States, businesses engaged in oil and gas extraction and refining spent almost $200 billion on new equipment and structures in 2013, the most recent year for which data are available.

Oil and gas extraction and refining accounted for more than 14 percent of all new capital expenditures in the United States in 2013, according to the U.S. Census Bureau.

Oil and gas drilling and associated services on their own accounted for more than 13 percent of whole-economy capital expenditures.

The oil and gas drilling boom drove an enormous amount of extra expenditure and provided a significant boost to the entire economy.

Between 2003 and 2013, capital spending by oil and gas drillers quadrupled from $40 billion per year to almost $160 billion.

Capital expenditures surged even further in the first half of 2014 as the boom reached its peak but since then have been cut sharply.

Unsurprisingly, the collapse in investment spending has produced a measurable slowdown in the broader economy.

The downturn is evident in everything from data on industrial production to freight movements by road and rail.

Formerly booming states like Texas, North Dakota and Oklahoma, and cities like Williston and Calgary, in the heart of the oil patch, now face severe readjustment or even recession.

The slowdown has even caught the attention of New York Times columnist and Nobel Economics Laureate Paul Krugman, who blames the impact on an important nonlinearity in the effects of oil prices fluctuations.

"Small oil price declines may be expansionary through the usual channels but really big declines set in motion a process of forced deleveraging among producers that can be a significant drag on the world economy," Krugman wrote.

reuters.com

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Tags: OIL, PRICES, INVESTMENT

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