America's oil and gas industry employs over 11 million people and is worth more than $1.6 trillion, making the energy transition more difficult than it may seem.
The Biden administration is making strides in reducing the United States' dependence on fossil fuels for its energy needs. The federal government's post-pandemic plan involves hundreds of billions in financing for renewable energy and electric vehicle projects. But it might be harder to get rid of oil and gas than some would like to believe.
In a recent report commissioned by the American Petroleum Institute, PwC described the oil and gas industry as a critical one for the United States in terms of both direct and indirect impacts in the form of employment, labor income, and value added. The report makes for quite interesting and sobering reading.
For example, the oil and gas industry employed 11.3 million Americans in 2019, both directly and indirectly. Labor income from these jobs, which PwC defines as wages and salaries, and benefits as well as proprietors' income, came in at $892.7 billion for that same year. Finally, the value added by the oil and gas industry in the US for 2019 came in at about $1.688 trillion. In other words, the oil and gas industry contributed close to $1.688 trillion to the national GDP.
PwC noted that each direct job in the oil and gas industry supported another 3.5 in other industries. And that is counting only so-called backward linkages, as the authors of the report point out. Backward linkages refer to those with the industry's suppliers. Forward linkages, which were not included in the calculation of the impact of oil and gas on the US economy, refer to those with the industry's consumers.
Now, the pandemic last year wrought havoc on the oil and gas industry, but it didn't kill it-it is far too big to kill, if you will. This year, it is in recovery mode, and even production has been growing consistently, albeit cautiously. Yet green transition plans envisage a much smaller role for oil and gas for the U.S. economy. What will replace it?
The obvious answer would be "Renewable energy". Yet wind and solar farm construction is very different from oil and gas production. Let's talk about employment as it would be the simplest example. Oil wells are drilled and then monitored and maintained. Solar farms, once built, need a lot less maintenance and monitoring than an oil well-after all, that's one of the best things about solar; the panels just sit there soaking the sun's heat, turning it into electricity. Oil and gas, meanwhile, need someone watching them flow out from the ground properly.
What this means is that oil and gas production needs more people than solar farm operations. And what this means is that oil and gas production creates more jobs than solar farm construction could, on a permanent basis. On the one hand, this makes oil and gas an uneconomical industry. On the other, it creates jobs, and job creation is good for the economy.
And what about those $1.688 trillion that oil and gas production, transport, storage, and property generated for the US economy? Some $1.4 trillion of this total came from direct and indirect operations, PwC said. Capital investments by the industry added another $245.4 billion. The total amount accounted for 7.9 percent of US GDP for 2019.
Here are some of the industries that oil and gas impacted indirectly with regard to GDP generation: the service sector was by far the most heavily impacted, followed by finance, insurance, real estate, rental, and leasing. Wholesale and retail trade was also considerably affected by oil and gas, as were manufacturing, transportation, and warehousing, and information, although to a lesser extent. The total indirect impact of oil and gas on these industries came in at $924.3 billion, in both operational and capital investment impacts.
Now let's consider renewables and their impact on job creation and GDP. A 2016 report by the International Renewable Energy Agency estimates that "Given the distributed and labor-intensive nature of renewable energy, direct and indirect employment in the renewable energy sector could reach 24.4 million people in 2030." That's 24.4 million people globally.
Also, the IRENA estimated that "Doubling the share of renewables in the global energy mix increases global GDP in 2030 by up to 1.1%, equivalent to USD 1.3 trillion." That's compared with $1.688 trillion in GDP contributions from oil and gas in the US alone in 2019.
In a more recent report, from last year, IRENA estimates that the total number of energy sector jobs globally will increase to almost 100 million under an energy transition scenario the agency called ambitious yet realistic that would allow the world to achieve its goal of limiting global warming to 2 degrees Celsius. That's almost a doubling of the 58 million employed in energy in 2017.
As to what these renewable-energy jobs would be, IRENA is scarce on the details, mentioning renewable energy and energy efficiency as some job avenues in its scenario. At the same time, the agency forecasts a 40-percent decline in fossil fuel jobs in North America, as well as Europe.
IRENA mentions the effects of the energy transition on GDP, too, noting these would be mostly positive, but they would depend on differences in the "socio-economic starting point." Yet for North America, the agency sees GDP gains from the transition, to the tune of $659 per capita per year.
From IRENA's perspective, this outweighs any economic benefits the oil and gas industry in any country could provide because these go hand in hand with emissions. However, the US government data cited in the PwC report suggests that emissions or not, the contributions of oil and gas might be difficult to let go of.