Energize Weekly, September 5, 2018
Capital investment in the oil and gas industry grew rapidly after 2006 but has shown itself to be more volatile than overall capital investment, creating both a boon and a potential bane for the economy, according to an analysis by the Federal Reserve Bank of Kansas City.
From 2006 to 2014, capital expenditures, or capex, by publicly traded companies were up 41 percent primarily driven by energy sector investments, which were up 125 percent, reaching more than $300 billion in 2014. Then oil and gas industry share plummeted 50 percent when oil and gas prices collapsed in 2016.
The ups and downs are tied to the “shale revolution” and the nearly 70 percent increase in oil and gas production between the end of 2005 and the end of 2015. “To achieve these higher production levels, the energy sector added more capital investment,” the analysis said.
Investment in the energy sector grew from a low of 8 percent of overall capex in the early 2000s to just more than 30 percent in 2014.
Before the shale revolution, about 28 percent of year-over-year changes in total U.S. investment were attributable to changes in energy investment. Starting in 2006, the advent of shale energy accounted for roughly 77 percent of year-over-year changes in total investment.
“As energy production increased in the United States, the U.S. economy became increasingly sensitive to fluctuations in energy investment,” the analysis said.
The biggest target for capex in the oil and gas sector was exploration and production. The paper notes that the variability in this area, with drilling starting or stopping quickly, adds to the unevenness.
“Energy sector investment became even more variable over the last decade compared with the non-energy sector, driven largely by greater investment in the more variable upstream segment,” the analysis said.
The analysis identified three main factors affecting investment variability: commodity prices, technological change and the mix of companies making investment.
“Improved drilling technology in the upstream segment may explain these results, as a more elastic oil supply would increase investment variability,” the analysis said.
When oil prices collapsed in 2014, energy capex dropped more than 50 percent by 2016, and that was enough to push overall business capex down by 15 percent for the period—even though non-energy investments were up 2 percent.
“From 2010 to 2014, a time when energy production in the United States was expanding, investment in the energy sector was a boon to aggregate investment,” the analysis said. “However, following the sharp oil price decline in 2014, the energy sector was a drag on aggregate investment. These recent examples demonstrate that the energy sector can contribute both positively and negatively to overall investment activity in the United States.”
The volatility in the energy sector also has spillovers in other areas of the economy, which may be linked by supply chains and investments.
“The energy sector largely drove recent investment changes within the U.S. economy, both to the upside and to the downside,” the analysis said.
The analysis was done by David Rodziewicz, a commodity specialist with the bank.
