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New PIIE Study Realistically Forecasts the Economic Impact of America's Oil and Gas Boom

January 8, 2014

WASHINGTON—The dramatic expansion of domestic oil and gas production in the United States is providing much-needed economic stimulus and will produce ongoing economic benefits through 2020, according to a new study published by the Peterson Institute for International Economics.

The revolution in production of shale gas and tight oil (derived from shale and sandstone) could increase GDP growth by an average of as much as 0.2 percent annually between the present and 2020, boosting economic output by a total of 2.1 percent over that period, the study concludes. While substantial, the forecasted long-term economic benefits are more modest than in many other analyses, and warn against simply projecting forward the current short-run impact of the boom.

The newly published study, Fueling Up: The Economic Implications of America's Oil and Gas Boom, is co-authored by Trevor Houser, visiting fellow at the Peterson Institute and partner at the consulting firm Rhodium Group, and Shashank Mohan, director at the Rhodium Group.

Houser and Mohan say that while energy driven reductions in unemployment and expansion of American manufacturing will occur in coming years, investment and job creation in oil and gas production and supporting industries will increasingly come at the expense of other sectors. This is expected to transform a handful of specific industries and regional economies, but there is unlikely to be an energy-caused broad-based economic renaissance. The US economy, they say, is too large and diverse to be driven by the energy supply changes alone.

The US manufacturing sector, for example, may improve its competitiveness because of the new energy environment, but this sector accounts for less than a sixth of overall US employment. In addition, a declining energy trade deficit could put upward pressure on the US dollar, which could erode the competitiveness of other manufacturing industries where energy input costs are less important (such as automobiles, electronics, and aviation).

Fueling Up is notable because of its detailed analysis of economic data at a time of remarkable changes in the US energy landscape. "Until now, there has been little objective analysis of the energy boom's economic consequences," said Adam S. Posen, president of the Peterson Institute. "This thorough study assesses the impact of the recent and projected increase in domestic energy production on US GDP, employment growth, manufacturing competitiveness, household expenditures, and trade balance. Importantly, Houser and Mohan find no evidence that allowing US gas and oil exports will undermine either the domestic economic, environmental, or security benefits of the boom."

Houser and Mohan also discuss the environmental issues raised by the energy boom. The authors contend that good policy can successfully mitigate the water, air, and seismic risks posed by new modes of natural resource extraction. The cost for doing so would increase energy prices by 7 percent, which the authors deem modest since natural gas prices would fall by between 25 and 60 percent in their analysis as a result of the boom.

>> Download news release [pdf]

Fueling Up: The Economic Implications of America's Oil and Gas Boom
Trevor Houser and Shashank Mohan
ISBN paper 978-0-88132-656-7
January 2014 • 172pp. • $18.95

About the Peterson Institute

The Peterson Institute for International Economics is a private, nonprofit institution for the rigorous, open, and intellectually honest study and discussion of international economic policy. Its purpose is to identify and analyze important issues to making globalization beneficial and sustainable for the people of the United States and the world and then to develop and communicate practical new approaches for dealing with them. The Institute is widely recognized as nonpartisan. It receives its funding from a wide range of corporations, foundations, and private individuals from the United States and around the world, as well as from income on its endowment.