In a series of posts leading up to the World Economic Forum’s Energy for Economic Growth report launched on Wednesday 7th March 2012, Howard Newman, CEO of Pine Brook Partners, talks about the growth potential in the US domestic oil industry.
I have bad and good news for you. The bad news is that the U.S. housing market is unlikely to recover strongly before 2014 and, even then, it will not return to its pre-recession levels. The good news is that investment in domestic oil production has the potential to create jobs for the very workers who suffered most under the recession-and can begin creating them now.
The United States is now in its fourth year of recovering from its “credit bubble” recession. Despite the substandard economic performance there are several promising developments. Real consumer spending has been growing since mid-2009 and is now greater than it was at the beginning of the recession. Total non-residential investment spending is now close to its pre-crash peak as well.
However, residential investment declined by more than 30% with no indicators for recovery in sight. Importantly, because every dollar of construction GDP requires the purchase of one dollar of intermediate goods and services, the economy cannot fully recover until housing does.
When the housing bubble burst it did the most damage in construction. One-third of the 7.5 million jobs lost during the recession were in that sector. In addition, job losses in supporting activities may have equalled 75% to 100% of the direct jobs lost. Even if the housing market returns to 75% of its peak level, we will still need to replace over 1 million construction-related jobs.
Who will create these jobs?
Well, the oil industry might be the one to deliver. High real oil prices and new technologies can boost domestic production by up to 3 million barrels per day within five years, creating at least 500,000 new jobs and maybe twice that amount.
These new jobs will be good jobs. And they won’t just be in the oil patch. New roads will be needed to reach well sites and transport oil to market. New resource technologies require significant investments in water handling. Pipelines will be needed to move supplies to markets. In short, this industry will create jobs for workers with construction skills.
What public policies are needed to make this happen?
First, the industry needs a reliable framework for tax, environmental and regulatory issues. Clarity and certainty allow firms to lengthen investment horizons and lower required returns –thus increasing the level of exploratory activity and expanding the potential resource base. More importantly, investment decisions can be made based on the economic life of the activity, rather than on the political cycle.
Second, the industry needs to know that infrastructure will be available on a timely and cost effective basis. The transportation charge associated with new infrastructure is directly related to the time period over which costs can be amortized.
Finally, the U.S. needs to address its financial system. Washington has not yet tackled the underlying regulatory problems that led to excessive leveraging in the first place. Excessive leveraging allows investors to achieve higher returns on financial assets than on the capital goods that they finance. As a result, industry is starved for capital, wages stagnate and America’s economy suffers.
If Washington were to curb this unnatural situation and focus on solving problems instead of blaming everybody (except themselves), energy investment might just be the right lever to grow our economy.
Author: Howard Newman is President and CEO of Pine Brook Partners, USA
Pictured: Oil storage tanks stand in a field in Linden, New Jersey August 24, 2011. REUTERS/Lucas Jackson