Assessing a Model for Quantifying Economic Evolution in an Energy-Based Economy
In a groundbreaking research paper titled "Economics of Modern Energy Boomtowns: Do Oil and Gas Shocks Differ from Shocks in the Rest of the Economy?", a team of researchers has developed an economic impact analysis model designed to predict the local effects of energy development, specifically focusing on oil and gas booms.
The model, based on the project "Maximizing the Gains of Old and New Energy Development for America's Rural Communities," utilizes data from Economic Modeling Services, Inc. (EMSI) and other publicly available sources. It examines the total employment as well as employment in 14 energy related sectors between 1993 and 2013, and takes into account variables such as community size, time frame, energy resource potential, economic sector, geography, historical intensity of energy infrastructure, and demographic and educational attainment variables.
Key variables in the model include Energy Activity Indicators, Local Economic Outcomes, Control Variables, and Shock Specification. Energy Activity Indicators measure local oil and gas development, while Local Economic Outcomes consider employment levels across sectors, wages and earnings, population changes, housing market variables, local income or output measures, and more. Control Variables help isolate energy boom impacts, and the Shock Specification distinguishes between oil and gas price shocks and other economic shocks.
The key results of the analysis reveal that the local economic impacts of oil and gas booms differ markedly from shocks in the rest of the economy. Energy-intensive counties experience more pronounced growth in employment and wages. Areas experiencing energy booms see rapid growth in population and housing demand, leading to pressure on local infrastructure and public services. While the energy sector grows strongly, there can be mixed effects for other sectors—some may benefit through increased demand (construction, retail), while others may face higher costs or labor shortages. Energy booms lead to wage increases, especially in energy-related industries, which can raise local income inequality.
However, the effects of energy sector expansion in metro counties are less pronounced compared to nonmetropolitan counties. In metro counties, crowding out in the manufacturing sector is observed as a result of energy sector expansion. The positive effects of energy sector growth in non-metro counties peak at six years and decline thereafter.
The research paper underscores that local economic outcomes depend on the magnitude and duration of energy shocks, local labor market conditions, and the ability of local economies to absorb and adapt to rapid resource sector growth. It highlights the importance of distinguishing energy-driven shocks from broader economic trends to accurately predict and manage local development impacts.
In conclusion, the model emphasizes that a diversified local economy has a greater growth potential compared to an economy relying on jobs from an energy boom. Local governments should consider a comprehensive approach to economic development and not an overreliance on the energy sector as an answer to viable economic growth. The U.S. shale energy boom has increased interest in how the expanding oil and gas sector affects local economic performance, and this research aims to summarize the economic impacts related to energy development in six chronological fact sheets.
The model, developed for the project "Maximizing the Gains of Old and New Energy Development for America's Rural Communities," delves into the financial sector by assessing the impact of energy development, particularly oil and gas booms, on employment levels and wages in various sectors. On the other hand, the research paper, focusing on the economics of modern energy boomtowns, underscores the significance of a diversified local economy in promoting sustained economic growth, contrasting an economy overly dependent on energy sector jobs.
