How Federal Energy Policies Can Support U.S Economic Recovery

Today the Senate Energy and Natural Resources Committee, chaired by Senator Ron Wyden (D-Oregon), holds yet another hearing to investigate the pricing of oil and gas commodities in the U.S. and the restructuring of the U.S. refining industry and distribution system.

While the hearing will be a platform for some Members of Congress to point fingers, it’s important to review federal policies that should be adopted to put downward pressure on prices, those which could increase prices and should be abandoned, and the contributions of the energy industry to the U.S. economy.

Expanded Access to Onshore and Offshore Reserves Will Positively Impact U.S. Growth

Several recent economic analyses suggest that increased access to domestic onshore and offshore oil and gas reserves (including shale gas) could strongly boost U.S. economic recovery, manufacturing and job growth. Fossil fuels, which provide 78% of U.S. primary energy production, can have a positive impact in restoring strong economic growth.

A recent Global Insight/CERA analysis, “Restarting the Engine-Securing American Jobs, Investment and Energy Security” finds that allowing exploration and development in the Gulf of Mexico in 2012 could create more 230,000 jobs, a $44 billion increase in GDP and $12 billion in additional tax receipts to federal and state treasuries. In another recent analysis, “The Economic and Employment Contributions of Shale Gas in the United States” the consulting firm Global Insight documents the significant contributions that shale gas is making to the U.S. economy. The report finds that in 2010, the industry supported 600,000 jobs and contributed more than $76 billion to GDP. Capital expenditures were $33 billion in 2010 and will grow to $48 billion in 2015. The current low and stable gas prices will contribute to a 10% reduction in electricity prices in the near term and to a 1.1% increase in the level of GDP by 2013.

LNG Exports Will Also Enhance U.S. Jobs and Economic Opportunity

Multiple economic analyses over the past two years demonstrate the power of allowing U.S. producers to export LNG.  Using various assumptions regarding export levels, global market conditions, and the costs of producing natural gas within the U.S. and also examining alternative scenarios that might affect natural gas supply and demand, the vast majority of these analyses have reached the same fundamental conclusion: the more LNG exported, the greater the domestic economic benefit. See ACCF’s recent paper “LNG: Why Rapid Approval of the Backlog of Export Applications is Important for U.S. Prosperity” for more detail on enabling LNG exports.

A recent macroeconomic analysis by ICF International finds that expanded LNG exports would spur significant gains in nationwide employment. The net effects on U.S. employment are anticipated to be positive with net job growth of between 73,100 to 452,300 jobs on average between 2016 and 2035, including all economic multiplier effects. The net effect on U.S. GDP is expected to be positive at about $15.6 to $73.6 billion per year on average between 2016 and 2035, including the impacts of associated liquids production, increases in the petrochemical manufacturing of olefins, and all economic multiplier effects.

In addition, the ICF analysis predicts that LNG exports would have only moderate impacts on domestic natural gas prices. Over the 2016-2035 period, price increases would range from about $0.32 to $1.02 per million British Thermal Units (MMBtu) on average. Given the sharp increases in shale gas production predicted in EIA’s 2013 Annual Energy Outlook, it seems quite likely that price changes for natural gas in the U.S. would be small (see for more details).

Tax Policy Can Encourage Continued Strong Investment in the U.S. Oil and Gas Industry

A recent analysis by the Progressive Policy Institute, Investment Heroes: Who’s Betting on America’s Future notes that most of the U.S. capital expenditures by energy companies consisted of production and exploration costs, which includes building out oil and natural gas pipelines and exploratory costs for new drilling sites. In 2011, four of the top ten non-financial companies investing in the U.S. were oil and gas companies, according to PPI, and these four companies, Exxon Mobil, Occidental Petroleum, ConocoPhillips and Chevron, invested a total of $28.3 billion domestically in 2011.

This strong domestic investment by U.S. oil and gas companies in 2011 was due in part to outlays that would be classified as intangible drilling costs (IDCs) and G&G. However, President Obama’s 2012 Framework for Business Tax Reform calls for eliminating expensing for IDCs, requiring such costs to be depreciated over time. Yet when companies drill for oil or gas, they incur IDCs which are largely the labor costs of locating and drilling wells and cannot be recovered as they have no salvage value (in contrast to the drill pipe and casing itself, which is a “tangible asset” and is subject to depreciation).  If IDCs had to be depreciated rather than deducted or, in the case of geological and geophysical costs, amortized over longer periods, it is likely that less investment will occur in the oil and gas industry and fewer new jobs will be created in the U.S.   Given the importance of cash flow to investment spending, policymakers need to weigh carefully the impact of repealing current law provisions that reduce the cost of capital for new investment.


The economic impact of the U.S. oil and gas industry is significant..  Given the industry’s strong job creation and significant U.S. investments, lawmakers would be best served promoting policies that enable the production of more North American energy both onshore and offshore, thereby helping put downward pressure on prices.. In addition, policymakers should grant permits for exporting LNG on an expedited basis and current federal tax provisions for new investment  should be maintained. Lawmakers should also focus on removing barriers to U.S. investment, including a host of EPA mandates under consideration.  Policymakers must realize their role in creating a welcoming environment for industry investments, which will enable more production and lower prices.


Margo Thorning

Dr. Margo Thorning has frequently testified as an expert witness on capital formation, tax, energy and environmental policies before multiple U.S. congressional committees. She has also traveled coast to coast to present findings to state and local lawmakers, business organizations and the media on the economic impact of climate change policies on local job and economic growth.

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