Correcting the Record on Greg Ip’s Criticism of IER Study

The Wall Street Journal’s Greg Ip recently claimed that Donald Trump’s economic plan “doesn’t add up,” and among Ip’s criticisms he included IER’s study titled,  “The Economic Effects of Immediately Opening Federal Lands to Oil, Gas, and Coal Leasing.” We can let others debate the merits of Ip’s points regarding other elements of the Trump plan, but when it comes to the IER study, Ip’s criticisms are unfounded. This study, which was conducted by Dr. Joseph Mason of Louisiana State University, updated a 2012 Congressional Budget Office (CBO) report that analyzed the federal lease revenues that could be expected to arise from opening federal lands and waters to oil, gas, and coal extraction.

Our study asked the question of what would be the economic impact of opening all lands to energy production including economic multiplier effects and found that there would be massive economic benefits totaling hundreds of billions of dollars, which would provide higher job growth and wages, increased domestic energy production, and extra revenue for the government.

What is our study based on?

First, we should be clear about what IER’s study is actually based on. Mr. Ip claims that the study relies on a report by the Bureau of Economic Analysis (BEA). This is incorrect. The study was actually based on the previously mentioned CBO report that estimates “the government’s gross proceeds from all federal oil and gas leases on public lands will total about $150 billion over the next decade.”

The resource estimates used in our study come from the CBO report. Dr. Mason simply translated those estimates into jobs, earnings, and economic growth based upon methods devised by the BEA in the “federal study” Mr. Ip actually cites.

Use of multipliers

 Mr. Ip goes on to criticize Dr. Mason’s use of multipliers to arrive at the numbers in the study:

“The study projects mining employment will eventually rise 500,000, which is double the number of people now employed in oil, gas and coal mining, and a further two million jobs through the “multiplier,” i.e. the jobs created when a mining worker spends.”

But that is a misuse of multipliers. The federal study Mr. Mason based his multiplier on assumes the firms involved are operating below capacity. That’s reasonable for a short-term project in a depressed city. It’s not reasonable for an entire country at full employment, as the U.S. eventually will be in the coming decade. Jobs created by mining will be at the expense of some other sector.”

Mr. Ip is correct that the use of multipliers is often abused. In particular, if an economy is at full employment, then the expansion in one industry can only come with a contraction in another; total jobs can’t increase. However, our study explicitly acknowledged that the economy was not at full employment, stating on page 3 that the jobs created by opening new areas for leasing would aid “economic recovery for workers facing historically high un- and under-employment rates.”

And the economic analysis from the Trump team also believes that the low unemployment rate today reflects discouraged workers who have stopped looking for a job, rather than a labor market that has returned to normal.

Are IER’s numbers excessive?

Our study found that opening up federal areas for oil, gas, and coal exploration could generate $127 billion per year in added GDP. The Trump team discounted this number to $95 billion per year:

“In view of the prospect for continued price volatility (and to ensure that our scoring estimates are indeed conservative), we discount the IER $127 billion estimate by 25% to $95.25 billion for the purposes of our calculations and ignore any step-up in years eight through ten. From this $95.25 billion estimate, we can use our income statement approach to score the Trump energy plan. We have modeled only the impacts of implicit profits and wages, not any other economic aspect of the increased activity.”

Mr. Ip seems to think that increasing GDP by $95 billion a year from more energy production is excessive, but is it really? Admittedly, it seems difficult to imagine that much economic growth in a short period of time, however, consider what actually happened in the oil market from 2008 through 2015. In 2005, U.S. oil production averaged 5.000 million barrels a day. Due to hydraulic fracturing and directional drilling along with private ownership of mineral rights (the bulk of the increased production has been on state and private lands), domestic oil production in 2015 increased to 9.415 million barrels a day.

From 2008 through 2015, U.S. oil production increased by 4.415 million barrels of oil a day. In 2015, the average price of oil was $48 a barrel. A simple back-of-the-envelope calculation suggests that in the oil industry alone there was an increase in economic activity of $77.3 billion a year.

It is important to consider that this $77.3 billion was only the oil market and did not consider the increase in natural gas or other liquids production. Furthermore, our study also includes opening more lands for coal production.

This back-of-the-envelope example is not perfect, but the point is to show the magnitude of economic activity in the oil sector that actually happened, not merely the output of a model.

This shows that for Donald Trump to suggest that opening federal lands and waters to more energy production it would certainly be possible to increase $95 billion a year, especially given that our calculation for 2008-2015 did not consider the multiplier effects as the U.S. Bureau of Economic Analysis calculates them.

Some people may argue that this massive increase in oil production couldn’t happen again. But it is important to point out that just four years ago experts were saying that it couldn’t happen at all. President Obama was saying that the U.S. couldn’t drill its way to lower gas prices. When Newt Gingrich made the audacious claim that if he were elected president, he would promote policies to help get gasoline prices down to $2.50 a gallon (from $3.80), President Obama’s spokesman called Gingrich a liar and said that Gingrich “doesn’t know what he is talking about.”

You can certainly cancel out one politician calling another politician a liar, but even oil industry analysts supported the claim that Gingrich didn’t know what he was talking about. For example, Fadel Gheit, a Managing Director and Senior Analyst covering the Oil and Gas sector for Oppenheimer & Co. Inc., argued that Gingrich was wrong—unless the economy went in the tank.

Gheit went so far to say, “If we drill in the middle of Manhattan and everybody drilled in their backyard we would not have enough oil to move the global market.” American entrepreneurs proved Gheit and President Obama wrong. Again and again, the so-called experts have historically guessed wrong about the potential and promise of developing our domestic natural resources.

What about the drop in capital spending?

Mr. Ip points to the drop in capital spending plans by oil and gas companies to undermine the findings of our study:

Today’s prices are half those used by the study and oil and gas companies have already slashed capital spending plans through 2020 by about $1 trillion worldwide, roughly a third of that in the U.S.

However, this statistic reflects the current restrictions on development. Opening up federal resources to development would give new opportunities to oil and gas companies, increasing their willingness to invest for any given price of oil. Moreover, the prospect of future supply increases would induce faster extraction from existing operations.

It’s also worth nothing that federal lands contain vast conventional oil resources that could be developed, as opposed to unconventional resources like shale resources. Conventional oil resources are typically less expensive to produce. Moreover, a great deal of the U.S.’s offshore resources that are currently blocked are in shallow waters, not deep waters, which is much less costly.

The point is that there are better opportunities to invest that are currently off limits so companies are forced to consider more expensive options.

Conclusion

We are sympathetic to a few of Mr. Ip’s points and appreciate his thoughtful response given that many have resorted to ad hominem attacks on our organization instead of taking the study head on. For some, like Mr. Ip, the idea that a $95 billion per year increase in GDP due to increasing energy production may be difficult to imagine. However, before criticizing the estimates in our study, it’s important to look at the reality of the massive increase in economic activity caused by the massive increase in oil production that actually happened from 2008-2015.

The point of our study, and we believe Donald Trump understands this, is to illustrate the vast economic potential of the energy resources on federal lands and waters that are currently under lock and key. Continuing to block these resources, as the Obama administration has done and Hillary Clinton will most certainly continue to do, ultimately means that the U.S. will forego massive gains in terms of GDP, jobs, wages, revenue, and overall economic activity.

The post Correcting the Record on Greg Ip’s Criticism of IER Study appeared first on IER.

from Raymond Castleberry Blog http://raymondcastleberry.blogspot.com/2016/10/correcting-record-on-greg-ips-criticism.html
via http://raymondcastleberry.blogspot.com

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s