Energy Jobs: Fueling the Overall Economy

Article title
Oil and gas jobs stimulate the economy through the multiplier effect.

Jobs in the oil and gas industry have a far greater impact on the overall economy than most jobs in other industries, according to economists. In locations where the oil and gas sector is one of the prevailing local industries, an energy industry boom can be instrumental in halting, and even reversing, a localized economic downturn. The reason, some economists say, is that the creation of every new energy job prompts hiring both within and outside the industry.

The Multiplier Effect

A principle way in which energy sector jobs underpin the general economy is through the multiplier effect. The multiplier effect of an industry is the total number of jobs created within and outside of the industry when it adds a new job. Once considered an arcane construct used primarily by economists in academia, the multiplier effect moved to the front page of business news outlets in recent years as a way of explaining the importance to the overall economy of new jobs in certain industries, including the energy industry, according to economist Karr Ingham, owner of Ingham Economic Reporting, an economic analysis and research firm specializing in the indexing and tracking of regional and Houston metro-area economies. Ingham created the Texas Petro Index a decade ago for the Texas Alliance of Energy Producers, and conducts various industry-related economic impact studies in Texas and Oklahoma.

The importance of the energy sector multiplier on local economies has been put into sharp focus in recent years as the
country began to emerge from the 2008 economic recession. To put into perspective the effect of the industry on the general economy, non-farm employment in the United States was nearly 3.25 million jobs below the January 2008 figure as of February 2014, according to the American Enterprise Institute (AEI). However, during the same time period, new oil and gas jobs increased by more than 26 percent.

Because of the multiplier effect, hiring at energy companies boosted job creation at support companies providing goods and services to energy companies, and at a wide variety of companies outside of the energy sector. With energy sector hiring doing the heavy lifting, the overall economy in oil and gas states began pulling out of the recession ahead of the rest of the nation, Ingham said.

There are two reasons why a job in the energy sector has a higher multiplier effect than jobs in most other industries. One is that energy industry jobs pay higher wages than jobs in many other industries, and the average salary of a given industry is linked to the size of that industry’s multiplier effect, according to Ingham.

The second reason is that the energy industry generates a significant demand for goods and services that are filled by a large number of suppliers in the supply chain, such as oilfield service companies. As the number of energy industry workers expands, so does the number of workers for energy industry suppliers.

How Large Is The Energy Industry Multiplier?

While the numbers that economists come up with to capture the multiplier effect of the oil and gas sector can vary over time and location, and even by reporting entity, they generally are significantly larger than the multiplier effects associated with most other industries.

The oil and gas multiplier effect in 2011 was 6.9 jobs, according to the U.S. Bureau of Economic Analysis. That means that when someone was hired in the oil and gas industry that year, an additional 5.9 jobs were indirectly created or induced in the economy. That same year, the World Economic Forum came up with a more conservative multiplier figure of 4.

Ingham puts the current multiplier effect somewhere in the middle.

“What is a good number? I feel comfortable going with 5. If you say, for example, that 10,000 jobs were directly created in the oil and gas industry in a calendar year, then we can surmise that in addition to those 10,000 jobs, there were another 40,000 jobs created as a direct or induced result of that activity in the creation of the original 10,000 jobs. I don’t think you would get much argument with a number of 5, and if anything, it’s probably a little bit conservative. The actual figure could be just a little higher,” Ingham told Rigzone.

Even among those who disagree over what the multiplier may be, there is no doubt among the economic and business communities that a multiplier effect of some magnitude does exist, Ingham noted.

“So, once you acknowledge that there is a multiplier effect, and that this ripple effect does exist, then it’s just a matter of trying to glean what the number is. Anything less than 5, I think, is low,” he said.

Most other jobs, such as retail sales jobs, have a less robust multiplier effect on the economy, Ingham said.

“They just don’t pack quite the punch that a higher-paying job does,” he said. “It’s not just the payroll itself, though. There are other things, like what their supply chain looks like, that also affect the size of the multiplier. But payroll obviously has a fair amount to do with it.”

Direct, Indirect And Induced Jobs

There are three kinds of jobs associated with the multiplier effect of a new job: direct, indirect and induced jobs.

A direct job is one created by an industry, and is filled on-site. For example, when an energy company adds a new geophysicist, that position is a direct job. All of the new energy jobs added by the industry in recent years are direct jobs.

When a company within an industry adds a direct job, and outside companies in the same industry add jobs as a result of the new direct job, those additional jobs are called indirect jobs. An example of an indirect job in the energy industry is an oilfield services worker. When energy companies are adding new workers, companies that support the energy company will also add new workers to fill the demand for parts and equipment. These indirect jobs multiply the effect of the energy company new-hires.

The third kind of job that makes up the multiplier effect is the induced job. An induced job is a job in another industry that was created in response to the increased demand for goods and services generated by the initial new job. Examples of induced jobs are realtors, auto salespeople and the wait-staff at a restaurant.

Induced job creation is driven by the higher-than-average salaries of energy workers. As a group, energy industry employees spend more on goods and services than workers in most other industries. The additional demand for those goods and services drives up hiring in those industries.

“An induced job is the most nebulous of the three, but there is no doubt that it exists,” said Ingham. “It’s the activity that is somewhat removed from the original equation, and yet it’s substantial. Oil company paychecks are pretty good. It’s what they spend in the community. As payrolls go up, the number of induced jobs goes up.”

An induced job is “how your paycheck is dispersed on various consumer goods and services after you receive it,” Ingham said. “All one has to do is look at automobile sales in Midland, and general retail sales in Midland, to realize just what is going on there,” he said.

The number of induced jobs can quickly increase when a previously inactive area suddenly experiences a drilling boom, such as in the Eagle Ford shale formation south of San Antonio, Texas. The steep rise in exploration and production activity in the area created a significant number of new oil and gas workers; estimates from the University of Texas at San Antonio are that the field supported 116,000 jobs in 2012. Those workers produced a strong demand for goods and services in San Antonio, according to the San Antonio Express-News.

The growth in new jobs in the energy industry shows few signs of a slowdown early in 2014, with AEI figures showing that the number of new hires for drilling, extraction and oil and gas production in the United States late last year and early this year is running at an average of nearly 100 per day. Using a multiplier effect range of 4 to 6.9, the growth in energy industry hiring has directly or indirectly resulted in between 400 and nearly 700 new U.S. workers every business day, giving ample evidence of the importance of the energy industry – and the multiplier effect – on the overall economy.



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