An Economic Impact Analysis of Oil and Natural Gas Development in the Permian Basin

This study analyzes the economic impact of oil and natural gas development in the Permian Basin with a focus on the NM part of the Basin. The analysis looks at the impacts on state revenue, local employment and income levels. Several existing economic impact reports from other states have been criticized by the peer-review literature that the impact estimates are very likely overstated due to questionable methodologies. In this analysis, a panel data regression model with county fixed effects and year effects is deployed to identify the impact of oil and natural gas production on employment and per job annual income at the county level. The analysis covers 62 counties (12 counties in NM and 50 counties in TX) for the time period of 1998 – 2016. The main findings of the analysis can be summarized as: 1. Over the last decade, according to different estimates the state revenue generated by the oil and natural gas industries in NM has been consistently exceeding one billion dollars per year. In the meantime, a large amount of intensive direct investment has been capitalized into the southeast NM. 2. In aggregate, per job annual income (in the real term) and the number of jobs have both experienced significant growth in the last two decades of active oil and natural gas development in the region. It is reasonable to speculate that much of the growth can be attributed to the ongoing energy development. 3. It is estimated that on average additional one million BBLs of oil equivalent production brings 54 jobs and about $170 (2015 dollar) extra annual income per job (or a 0.5% increase) in the county of production. 4. The intensive oil and natural gas production around the center of the basin (Lea County and Eddy County in NM) have had significant spatial spillover effects to the surrounding counties. Depending on the distance from the given county to the center of the Basin and for additional one million BBLs of oil equivalent production, the employment effect ranges from 35 to 10 jobs and the income effect ranges from $170 to $90 (2015 dollar) extra annual income per job. The paper also provides details on methodology and guidelines on how to interpret estimation results. The estimated economic impact coefficients can be used for prediction purpose with available future production scenarios. The paper includes instructions and suggestions on how the prediction may proceed.