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Producing oil and gas: economic and budgetary effects

Oilfield Technology,

It is known that virtually 10 years ago, the development of shale resources has boomed in the US, producing approximately 3.5 million bpd of tight oil and approximately 9.5 trillion ft3/y of shale gas. These are reportedly equal to approximately 30% of US production of liquid fuels and 40% of US production of natural gas. Shale development has also impacted the federal budget, chiefly by increasing tax revenues. It is projected that the production of tight oil and shale gas will grow over the next decade by approximately 30% and 60% respectively.

Impacting energy markets

It has been reported that total domestic US production of oil and natural gas will continue to be higher than it would have been without shale development, reducing the price of those energy supplies. The lower prices, then in turn, will increase domestic consumption of oil and gas, domestic consumption of total energy, and net exports of gas, while also decreasing the production of oil and gas from conventional sources, net imports of oil and the use of competing fuels.

Shale gas has affected the price of energy in the US more strongly than tight oil, and it is expected to continue to do so. The Congressional Budget Office (CBO) has estimated that is shale gas did not exist, the price of natural gas would be approximately 70% higher than currently projected by 2040, whereas if tight oil didn’t exist, the price of oil would only be approximately 5% higher. One reason for this difference is that shale gas is more plentiful that tight oil, relative to the size of the domestic US markets. Another is that the North American market for natural gas is relatively insulated from conditions elsewhere by high transportation costs, so the effects of higher or lower domestic production on market prices are concentrated within the continent; oil by contrast, is heavily traded in a worldwide market that diffuses the effects of domestic production on prices.

Impacting economic output

Due to the development in technologies that extract shale, existing labour and capital, whether they are employed in shale development, in industries using natural gas or oil, or in industries using products derived from natural gas or oil, are more productive than they otherwise would be. That heightened productivity has increased GDP and will continue to do so.

GDP is boosted by shale in other ways. The increase represents increased income, which allows people and firms to save and invest more in productive capital, and the higher productivity just described increases wages, raising the amount of labour available. Both the increased capital and the increased labour increase GDP. In addition, in the near term, shale development causes labour and capital to be used that would otherwise stand idle, again increasing GDP. In the long term, whether shale resources are available or not, the labour and capital available in the economy will be used at roughly their maximum sustainable rates, so the additional labour and capital used to produce shale resources or energy intensive goods will mostly be drawn away from the production of other goods and services. This means that there will be no net change in GDP through the last route, although GDP will continue to be increased by shale development in other ways.

Net, CBO has estimated that real GDP will be approximately 2/3 of 1% higher in 2020 and approximately 1% higher in 2040 than it would have been without the development of shale resources. The actual effect on GDP could be higher or lower than that estimate, depending on the uncertain factors noted above as well as on other considerations.

Impacting the US federal budget

The increase in GDP from shale development has increased federal tax revenues, and it is expected to continue to do so. That increase will be slightly largest than the GDP increase in percentage terms according to CBO. CBO specifically estimates that federal tax revenues will be approximately 3/4 of 1% higher in 2020 and approximately 1% higher in 2040 than they would have been without shale development.

Shale production also contributes to federal receipts through payments that the developers of federally owned resources make to the government, but that contribution has been modest and will continue to be, due to the fact that most shale resources are not on federal land.

Policy options

There are several ways in which Congress could affect shale development and thus affect the oil and gas markets, economic output, and the federal budget. The CBO report considers options that would change export policies, easing the current ban on exports of crude oil, repealing it, or changing the government’s criteria for judging applications to export LNG being a few, and concludes that the options would probably increase domestic production but have little impact on prices. That increase in production would most likely make GDP and federal revenues slightly higher than they would be under current export policies.

Edited from report by Claira Lloyd

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