International Turmoil and How it Impacts California

How strongly does a drone strike on an oil refinery in the Middle East impact oil extraction employment flows in California? Since the energy crises of the 1970s, oil prices have been highly volatile. West Texas Intermediate (WTI) oil prices dropped nearly 60% during the 1986 oil crash, 70% during the 2008 financial crisis, and 55% in 2014. However, the rise of shale oil wells via fracking since 2000 has changed the responsiveness of US oil supply to price shifts.

Shale oil wells enjoy a relatively short production cycle, encouraging the industry to suspend drilling when the current price dips and restart when the price recovers. As a result of this change in technology, we find that drilling is 50% more responsive to price changes in the modern era than it was prior to the widespread adoption of shale oil. For the 5,494 Californians directly employed in oil and gas extraction (source: BLS), this means a wilder ride over the business cycle. 

The graph above illustrates how oil prices and oil rig activity move fairly uniformly. Indeed, the causality is bi-directional. Higher oil prices lead to more drilling, which increases supply and brings oil prices back down. To properly estimate the strength of the underlying causal channel from oil prices to drilling activity, we ran a vector auto-regression. The following figures show the change in drilling in response to a 1% increase in oil prices both pre- and post-fracking.

Both before and after fracking, it takes about 5 months for drilling activity to register its full increase following a rise in oil prices. However, nearly twice as many additional rigs (almost 10% vs. almost 5%) are activated in response to a price shock in the later period. This is significant because of the correlation between rig activation and employment flows. A greater number of rigs re-activating after an increase in oil prices is likely to lead to the hiring of more employees in the industry. And it goes both ways: when oil prices drop, drilling declines and fewer jobs are available.

In 2015, California was the fourth largest oil-producing state in the US. The direct output of the oil and gas industry employed 168,100 individuals in the state and produced 2.7% of its GDP (Markle, 2017). By county, Los Angeles County has the second highest percentage of active rigs in the state at 6.7%. Since 2000, employment in this industry has trended very closely with oil prices. 

While the development of shale oil has cut US imports of crude oil by a third off their As a globally traded commodity the supply of which comes largely from the Persian Gulf region, the price of oil is often impacted by turmoil in the Middle East. After the drone strike in September of this year on the Saudi Arabian Oil Company, the world’s second largest daily oil producer, the nation’s oil output dramatically decreased by nearly 50%. Crude oil prices jumped 15% the next day. The response by drilling will likely have a positive effect on California employment as US shale oil production ramps up to compensate.

Works Cited: Markle, Lawren (2017). Oil & Gas in California: The Industry and Its Economic Impact. Los Angeles County Economic Development Corporation.