There has been tremendous research that talks about the impact of natural resource, or energy production, abundance on undesirable economic outcomes at the county, state or country level.
In economics, this is known as the “resource” curse.
However, the impact of resource abundance on decisions at the individual level has been less studied. Here in Kern County, we know that people respond to oil prices; when oil prices are high, many individuals look to the oil and gas sector for employment, knowing that extraction activities will increase, providing high-paying jobs not commensurate with traditional education levels.
But this movement between sectors can also create “externalities,” unintended benefits (or consequences) of interindustry movement by workers.
Education and workforce demand are also tied to one another. For instance, high oil prices can actually lead to a more segmented, and more unequal, labor force. A small select group of individuals may take advantage of the math-heavy engineering majors available to them at colleges. Many, however, may choose to take advantage of their lack of responsibilities to others (children or spouses) to move straight from high school to the oil and gas sector, taking advantage of high pay.
Let’s take a look at the important dynamics that come into play.
In a paper published in the journal Energy Policy titled “Oil price fluctuations and employment in Kern County: A Vector Error Correction approach,” Dr. Nyakundi Michieka and I found that, in Kern County, lowered oil prices impact unemployment only in the longer-run. This means that energy production in Kern County is largely immune to short-run fluctuations in oil prices and is (in fact) a relatively stable sector in the long-run to provide economic benefits to Kern County.
Though the sector did experience an impact recently, with the collapsing of oil prices, it was only sustained low oil prices that significantly impacted the economy. Likewise, though oil prices have remained stable, employment growth in the oil and gas sector has been cautious.
Michieka and I have been exploring this impact on various other employable sectors in Kern County (a paper that has been conditionally accepted at a journal). We find that a 10 percent increase in oil prices does lead individuals to leave other sectors, leading to a 1.4, 0.6 and 1.0 percent decline in the construction, manufacturing and service sectors, respectively.
This indicates that movement between oil and gas and other employable sectors leads to opportunities for employment by others in the county. This is an important dynamic; if the gaps in employment are potentially filled by those out of work, increases in oil prices not only spur economic production, they are able to reduce unemployment in other sectors of our local economy, further increasing economic spending, providing yet another indirect benefit of the energy production here in Kern County.
However, in another paper in Energy Economics titled “Do changes in oil prices affect welfare programs? Evidence from Kern County,” Michieka finds that the stable employment situation of the oil and gas sector actually provides even further benefits to Kern County. He finds that a 10 percent reduction in unemployment leads to a 3.3 percent decrease in CalFRESH participation, the state-level version of food stamps. This again highlights the important economic contributions of the oil and gas sector the economy here in Kern County.
But there is an important dynamic that is also coming into play: energy technology disrupting the labor market and alternative energies coming into the fore.
Most talk about labor-replacing technology has focused on the service or fast-food sectors of the economy. However, if oil hovers around $60 to $70 in the long term, it may incentivize the use of newer technologies that may replace some of the traditional, more labor-intensive jobs in the oil and gas sector.
Though this may be years (or decades) into the future, it can have long-term economic impacts on Kern County.
We have already found that the rest of the economy (service, construction and manufacturing sectors) can (and are able to) absorb people fleeing the oil and gas sector in the long term, which mitigates some of the welfare impacts of these job losses.
Intriguingly, we can expand this research to see the impacts on future energy technology. According to the U.S. Geological Survey, Kern County has 4,581 wind turbines, which is the highest absolute number (and highest density) of any county in the United States, with capacity and generation being able to power between 1.2 million and 2.9 million homes annually.
These employment impacts can be seen in alternative energy production and generation. For instance, storage of excess power generated is an issue of utmost importance, as well as degradation of the storage units. This provides an alternative vehicle for those in the oil and gas sector to “escape to” in the event of another negative oil shock.
Richard Gearhart is an assistant professor of economics at California State University, Bakersfield, and managing editor of the Kern Economic Journal, a publication that tracks and analyzes local economic trends and data.