A $70 Billion Impact
Oil a Big Rock in Louisiana’s Pond
Aside from its history of headline-generating colorful politics, Louisiana is perhaps best known as home to an enormous energy industry.
The amount of money this dynamic industry pumps into the state coffers is also enormous, according to a recently completed study conducted by economist Loren Scott and commissioned by the Louisiana Mid-Continent Oil and Gas Association (LMOGA).
The LMOGA effort determined that the total economic impact on the state from oil, gas and refining exceeded $70 billion in 2005 via both direct and indirect means.
“If you think about Louisiana as a big economic pond, when you drop a rock called the energy sector into it, it’s a very big rock that has a large multiplier effect,” Scott said. “When the rock hits the pond, it creates very large waves and ripples.
“In the study, I tried to show people the size not only of the rock but of those ripples, too.
“I do five to ten economic impact studies a year in various industries,” Scott said, “and I don’t think I’ve ever had one that shows numbers as big as this one.
“This is not surprising considering that we’re the number one producer of oil, if you include the offshore, and the number two producer of natural gas,” he said. “These are high price items, and it takes a lot of money to extract them.
“We’re also number two in the refining industry, which is a very capital intensive, high-wage industry.”
In fact, refinery wages are 59 percent higher than average manufacturing wages, while exploration and production wages are 83 percent higher than average manufacturing wages, according to Scott.
“The energy industry is extremely important to Louisiana’s budget – far more than any other industry,” Scott noted. “In fact, the industry directly paid more than $1.4 billion in state taxes, royalties and fees during fiscal year 2006, or about 14.4 percent of total state taxes, licenses and fees collected.
“This does not include taxes paid to local governments.”
Through both their direct and multiplier effects, the oil, gas and refining industries generated more than $12.7 billion in household earnings for Louisiana’s citizens in 2005. This represented 15.4 percent of total earnings in the state for the year, which in turn yielded $890 million in taxes for the state and $560 million for local government bodies.
To put the household earnings into better perspective, Scott noted at least four countries listed in the Statistical Abstract of the United States have smaller gross domestic products.
The LMOGA report revealed the oil and gas industry paid $172.6 million in ad valorem taxes to local governments in 2005. The ad valorem taxes paid exceeded $1 million in 31 of the state’s parishes and topped out over $5 million in 12 parishes.
Additionally, the industry paid 7.1 percent of all property taxes collected by local governments; the amount exceeded 10 percent of all local property tax collections in 21 parishes.
Another important finding in the report centers on the industry’s value added benefit, i.e., the value added to a product through manufacturing, processing and enhancements. The value added benefit of the oil and gas extraction sector was estimated to be $47.5 billion, while the value added impact of the refining industry was pegged at $34.3 billion.
Given that the ferocious hurricanes Katrina and Rita both cut a swath through the hydrocarbon-rich Gulf of Mexico – with the former storm bearing down particularly hard on Louisiana’s coastline – the LMOGA study took a look at the impact of these storms on the region’s significant hydrocarbon production and the accompanying vast array of energy infrastructure.
Not surprisingly, the storms caused some production shut-ins, refinery outages owing to flooding and electrical problems, and damaged platforms and pipelines.
However, Scott emphasized that only 165 of the nearly 5,000 existing offshore platforms were destroyed or badly damaged. He noted this is particularly remarkable given that the Naval Research Lab measured some waves at 131 feet tall during these storms.
Perhaps one of the most important points made by the study has nothing to do with economics per se.
“One of the things we saw is that we had two Category 5 hurricanes move right through the heart of the offshore oil and gas industry, and there were virtually no significant spills offshore,” Scott noted.
“To me, this should be a major signal to people on the East Coast, West Coast and the West Coast of Florida that we should open those areas for drilling,” he said. “There are far more spills from offshore tankers from Saudi Arabia, Qatar than from offshore platforms.
“These storms proved we’ve got that under control.
“We’re the only country on earth with restrictions on oil and gas exploration in some of its offshore area,” Scott said, “which is a remarkably dumb economic policy.”