THE BASIS POINT

Oil and Jobs

 

We have seen jobs growth fall recently after a year or so of what was deemed healthy growth. So what’s wrong? If you look inside what caused jobs growth to increased and what caused growth to slow the answer is obvious.

 

From June 2009 to the end of 2014 40% of all the new jobs created in the U.S. were in Texas. CoreLogic stated, “As of October 2014, the Houston metro area had experienced more residential construction than all but two states.” The oil industry in particular and energy production in general are what drove those 5 years of growth.

 

This growth was not driven by the big oil companies but rather by small companies with fewer than 20 employees. Shale and fracking drove this growth so far that now these is too much supply and we are seeing well count fall. This is having an adverse effect on jobs.

 
Energy production growth has a large jobs multiplier. The job gains are not mostly people directly employed in oil and gas extraction but in support jobs such as transportation and refining of oil, production of fertilizers and chemicals, oil field equipment, and the second order jobs created. The large jump in Housing Starts is an example of the second order jobs.

 

Interestingly none of this was driven by Congress or the Administration. Supporting the oil industry is one of the least PC things possible. Some credit should go to the Fed because an increase in money supply helped provide loans to the businesses which created these jobs.

 
Other industries adding jobs are health care, restaurants and drinking establishments. The food and beverage service jobs are low paying. Health care jobs pay well but they do not have the jobs multiplier effect that oil jobs do.

 
It is usually manufacturing jobs which have the greatest jobs multiplier and lower energy costs can encourage the building of factories and generate jobs. This could create positive feedback. Lower energy cost = more jobs = more demand for energy = more jobs to produce that energy.

 

Another energy related job creating industry is solar power and especially rooftop solar. Government deserves some credit for this because of the Solar Federal Income Tax Credit. I installed solar recently and in addition to the Federal Income tax Credit the City of San Francisco paid $2,000 of the cost. Solar jobs will continue to increase. They will be helped by the new Tesla batteries which enable folks to store energy during peak generation and use it at night. Solar would be negatively impacted if the Solar Federal Income Tax Credit scheduled to expire at the end of 2016 is not renewed. While the cost of the solar panels has decreased substantially it is still the case that about 70% of the cost of solar is other than the panels.

 

The point here is that the jobs market is much more affected by an increase in oil producing jobs that most any other sector.

 

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