Economic Volatility in Oil Producing Regions: Impacts and Federal Policy Options

DESCRIPTION: Growth in US oil production has created substantial economic and energy security benefits for the nation. Over the course of a decade, new oil production has virtually eliminated the US trade deficit in petroleum and, in 2020, the Congressional Budget Office projects that US GDP will be 0.7% higher than it would have been without shale development. However, the rise in oil output has also expanded the number of communities closely tied to swings in crude prices—the boom and bust cycles that have confounded producers since the first commercial wells were spudded in the mid-19th century.

US oil producing regions enjoy significant economic growth during boom times, boosting state and local investment, employment, and household income. This growth often comes with its own challenges—such as strains on local housing, school, and infrastructure—which are amplified by uncertainty over when, and to what extent, prices and production will fall. When oil prices drop, local and state economies can face sharp declines, and decisions or investments made during the boom period may become obsolete. This volatility creates planning challenges for both the public and private sectors, along with substantial risks for residents of oil producing regions.

In this report for Columbia University’s Center on Global Energy Policy, the authors address whether the federal government can and should intervene to reduce the challenges associated with this volatility. In their research, the authors convened two expert workshops, reviewed the existing evidence, and analyzed a range of potential policy options. The report recommends a modest intervention: establishing a federal interagency Oil Volatility Advisory Board. The board would synthesize data on local economic, fiscal, and social conditions in producing communities. With this information, the board would play a coordinating role by connecting public and private institutions in producing regions with existing federal programs designed to manage near-term challenges and diversify local economies over the longer term. While this proposal is unlikely to eliminate all of the local challenges associated with oil price volatility, it could help smooth fluctuations, providing the basis for a higher quality of life along with more stable economic growth in producing regions.