Contribution of Upstream and Downstream Oil and Gas Industries in Texas

Given the current headwinds faced by the oil industry, the Real Estate Center did an analysis to measure the oil industry’s contribution to the regional economies of the State of Texas, the Houston Metropolitan Statistical Area (MSA) and the Midland MSA. Looking at both the upstream (e.g., oil and gas extraction) and downstream (e.g., petrochemicals) sectors of the industry gives an idea of the net effect on economic performance during a period of falling oil prices.

An economic contribution analysis describes the portion of a region’s economy attributed to an existing industry. Data in the model look backward to identify and consider all the potential linkages that contribute to the impact of a particular industry. In a contribution analysis, the model uses total output as a measure to establish the multiplier effect of that industry on the region’s economy. When compared with the entire economy, the results offer insights into the relative impact of the industry in the study area.

This is a summary of the findings:

• Extraction of oil and natural gas is the major contributor of direct employment and production of the upstream and downstream industries analyzed (Tables 1–6).
• The oil and natural gas industry’s contribution to employment and production is highest in Midland, followed by Houston and Texas as a whole (Tables 1–6).
• When the indirect and induced effects are considered to arrive at the total effects of the contributions to employment and production, both the extraction of oil and natural gas, and petroleum refineries and petrochemical manufacturing are similar in impact (Tables 1–6).
• The Midland MSA is highly dependent on the contribution of the upstream oil and gas industry (Tables 3 and 6).
• Employment in upstream industries requires less industry revenue compared with downstream industries, possibly reflecting the higher use of labor in the upstream industries compared with downstream industries (Tables 7–12).
• Creation of direct jobs in downstream industries requires more revenue to be generated to support those new jobs (Tables 7–12).
• The multiplier effect in the creation of indirect and induced jobs is higher in downstream industries (Tables 7–12).

Based on the findings, researchers conclude that when declining oil prices cause employment and output to fall in the upstream sector of the oil industry, the decline cannot be fully mitigated by an increase in downstream industries. This is because the upstream sector is much more labor intensive than the downstream. It would take an inordinately large increase in the level of sales in the capital-intensive downstream industries to offset the losses in the upstream sector.

Dr. Torres ([email protected]) is research economist with the Real Estate Center at Texas A&M University.