ACCESS NUMBER: 30951-18177 

STUDY TITLE: Economic Effects of Changes in Oil and Gas Prices and Petroleum 

Resource Development in Onshore Louisiana and State Offshore Waters 

REPORT TITLE: Effects of Changes in Oil and Gas Prices and State Offshore 

Petroleum Production on the Louisiana Economy, 1969-1999 

CONTRACT NUMBER: 1435-01-99-CA-30951-18177 

SPONSORING OCS REGION: Gulf of Mexico 

APPLICABLE PLANNING AREA: Western, Central, and Eastern 

FISCAL YEAR (S) OF PROJECT FUNDING: 2002, 2003, and 2004 

COMPLETION DATE OF REPORT: May 2004 

COST (S): FY 2002: $38,439.32; FY 2003: $1,655.13; FY 2004: $43,335.55; 

CUMMULATIVE PROJECT COST: $83,430.00 

PROJECT MANAGER: O.O. Iledare 

AFFILIATION: Louisiana State University, Center for Energy Studies 

ADDRESS: Energy, Coast & Environment Bldg., Nicholson Extension, Baton Rouge, 

Louisiana 70803 

PRINCIPAL INVESTIGATOR: O.O. Iledare 

KEY WORDS: Gulf of Mexico; oil prices; gas prices; Louisiana economy; offshore 

BACKGROUND: This study was motivated by the MMS’ desire to undertake more 

socio-economic analyses of communities that are affected by the activities of the oil and 

gas industry under its jurisdictional mandate. The focus on Louisiana is motivated by 

the role of the state in meeting U.S. oil and gas consumption needs. Louisiana is the 

third leading producer of natural gas and fourth in crude oil production in the U.S. If 

offshore production activities are included, then the state is the second and third leading 

producer, respectively. 

OBJECTIVES: This study examines the inter-relationships between petroleum price 

changes and economic activities in Louisiana subject to the state of oil and gas 

production in the state offshore waters. The goal is to provide some baseline 

information that will be useful to policy makers and resource managers, such as MMS, 

to enhance their decision-making capability. 

DESCRIPTION: In this study, a time series econometric model has been developed to 

examine the impact of changes in crude oil prices on both the oil industries and relevant 
ACCESS NUMBER: 30951-18177 

Louisiana macroeconomic aggregates. The research uses recent econometric tools to 

provide quantitative estimates of the responsiveness and correlation between past and 

current activities of the oil industries in Louisiana. The analysis is restricted to the 

interaction between oil and gas production from Louisiana offshore waters and 

Louisiana state employment, personal income, and revenue growths. 

SIGNIFICANT CONCLUSIONS: The results seem to follow the pattern predicted by 

economic theory where oil and gas producers want to maximize their returns on 

investment in the long run. We would expect that as oil and gas prices increase 

(assumed positive shock), more oil and gas is produced, as the results show. To 

produce more, more workers are hired. Because such price shocks often occur in boom 

periods in the oil and gas industry, competition in the labor market forces the wage rate 

to increase. Given that the oil and gas industry usually pays higher than average wage, 

the overall effect is to raise the take-home pay of workers, and hence, the average 

personal income of Louisiana residents. At the given severance tax rates, but with 

increases in production and price, revenue derived by the government should also rise. 

The scenario above probably also extends to other non-oil sectors of the Louisiana 

economy in the short run. However, in the oil and gas-dependent sectors the situation 

may be mixed, even in the short run. For example, refineries and other chemical and 

allied industries may experience increases in input costs as a result of price increases, if 

the price shock is high enough. Thus, in these oil-using sectors, job losses may occur. 

This may reduce personal income and tax-base of the government as well. In the long 

run, this shock may lead to a decline or even recession in the U.S. economy, which 

implies a reduced demand for goods and services, including oil and gas. The result of 

such a development is the reverse of the previous scenario—job losses, reduced 

income, and less government revenue. In other words, all economic activities in 

Louisiana may eventually return to their equilibrium levels, as this study finds. 

Thus, the analyses above imply that what is finally observed following a positive price 

shock are overall net-effects. Our study shows that these net-effects in the short run are 

clearly positive for employment and personal income but mixed for revenue. The longterm prospects for a positive price shock in oil and gas indicate a net-effect that is 

significant only for employment and personal income. This long run result is 

understandable because, while industries may be forced to reduce output, in practice, it 

is not often easy to reduce wages and employment. Economic theory suggests 

stickiness in wages and rigidity in job markets characterized by contracts, as is often the 

case in the oil and gas industry. 

STUDY RESULTS: Our empirical results indicate some salient findings that will be of 

interest to policy makers and oil and gas resource managers. These findings point to 

differences and similarities as well as general conclusions, which are conditional on the 

interactions between state offshore oil and gas production and Louisiana economic 

activity. The salient features are highlighted as follows: 
ACCESS NUMBER: 30951-18177 

• Changes in oil prices are more important in forecasting changes in employment 

and personal income than changes in natural gas prices in the short run. 

• Both oil and gas price movements are equally important in explaining changes in 

Louisiana revenue, although the overall revenue impact is minimal. 

• The indirect effects of oil and gas price changes are more important than the 

direct, autonomous, changes that occur in oil and gas production in state waters 

themselves. In other words, in the absence of price shocks, autonomous 

changes in oil and gas production (e.g. technology-induced) have ceased to be 

very important to Louisiana economic activities. 

• In general, the effects of a gas price shock on the economy are more persistent 

than oil price shocks. That is, price volatility in the gas market has a potential to 

be more destabilizing to the economy than an equivalent change in the oil 

market. 

• Irrespective of the market, oil or gas, the employment effects of a price shock last 

longer than the personal income or revenue effects. 

• The fiscal exposure or vulnerability of the Louisiana budget to oil and gas price 

changes in the context of offshore production in state waters has declined over 

time. 

• The responsiveness of the macroeconomic variables to price changes indicate 

that when considering state offshore production, a considerably high and 

sustained change in prices is required to have an appreciable effect on Louisiana 

economic performance. 

STUDY PRODUCTS: Iledare, O.O. and W.O. Olatubi. 2004. Effects of Changes in Oil 

and Gas Prices and State Offshore Petroleum Production on the Louisiana Economy, 

1969-1999. U.S. Department of the Interior, Minerals Management Service, Gulf of 

Mexico OCS Region, New Orleans, La. OCS Study MMS 2004-052. 45 pp.