January 20, 2015 / 4:40 PM / 6 years ago

COLUMN-Falling oil investment will hit U.S. economy: Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON, Jan 20 (Reuters) - If capital and workers could move instantly and without friction between industries, the plunge in oil prices would be unambiguously positive for the U.S. economy in the short term as well as the longer one.

Despite the growth in shale production, the United States is still a net importer of around 5 million barrels per day of crude and refined products, according to the Energy Information Administration.

In the long run, cheaper fuel prices will benefit U.S. consumers and businesses more than they hurt oil and gas producers and royalty recipients.

In the real world, however, capital and workers cannot be redeployed seamlessly between industries. The impact of falling oil prices is being felt almost immediately in the oil and gas patch while the full benefits for the rest of the economy will take time to filter through fully.

Oil and gas has been the fastest-growing sector of the U.S. economy over the last decade so anything that causes investment and employment to stall will have a noticeable negative impact on the economy as a whole in the short term.

Capital spending by businesses in the “mining, quarrying and oil and gas extraction” sector (which is dominated by oil and gas producers) increased at a compound annual rate of more than 16 percent between 2002 and 2012.

Investment rose almost five-fold from $42 billion in 2002 to $194 billion in 2012, according to the latest edition of the Census Bureau's Annual Capital Expenditures Survey (ACES) (link.reuters.com/qyh83w).

Over the same period, business capital spending in the rest of the economy increased at a compound rate of just 2.7 percent per year (link.reuters.com/tyh83w).

In 2002, the mining sector accounted for just 4.6 percent of economy-wide capital spending. By 2012, resource extractors accounted for 14.5 percent of all spending on structures and equipment.

The mining industry was responsible for 36 percent of all the increase in business investment in the United States over the decade, according to Census Bureau data.

The most recent ACES survey numbers are for 2012. Given the enormous oil exploration boom, however, it is very likely capital expenditure rose further in 2013 and the first half of 2014, both absolutely and relative to the rest of the economy. So the oil and gas sector was probably even more important by the middle of 2014 than it had been in 2012.

This investment boom is now at risk as oil and gas producers slash their investment budgets for 2015 in response to the 60 percent decline in oil prices since June 2014.

Ultimately, lower fuel prices will leave most households and businesses outside the petroleum sector with more money to spend on other goods and services.

Other consumer goods and services industries will gradually expand and eventually increase their own capital spending.

But all that will take time, while the hit to the oil and gas industry and its equipment suppliers and service firms is more or less instant.

The same dynamics are being played out on a global scale. High-paying jobs and capital investment are being lost in the oil and gas sector faster than they are being added in the other industries that will eventually replace them.

The global oil and gas sector has been a massive engine of global growth over the last five years and is now coming to an abrupt halt.

The speed and magnitude of price changes matter: the 60 percent reduction in oil prices in just seven months counts as a price shock of the first magnitude.

Rapid price changes (positive or negative) in key raw materials (and none is more vital than oil) always produce some economic dislocation.

Prices change faster than consumers and businesses can adapt to them, causing some loss of potential output and employment.

Lower energy prices will, eventually, be an unambiguous net benefit for the United States, and for much of the rest of the world economy. But the process of adjustment itself could be painful. (Editing by David Evans)

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