“I just want to say two words to you: Resource Extraction.”

From the slack wire:

Sign of the times

Interesting milestone in 2008, according to the BEA. For the first time ever (well, at least since 1947) manufacturing was no longer the largest recipient of US nonresidential investment. The new champ? Mining. $216 billion in new fixed assets in mining (mostly in oil and gas extraction), and only $208 billion in manufacturing.

I don’t remember seeing this written about anywhere, but it seems like it should mean something.

That’s incredible. I never thought that these two were neck-and-neck at any point during my lifetime. If you were to take a completely random day, say December 11th, 2000, the day before Bush v. Gore was decided, you would note that we spend something like 5 times as much on manufacturing than mining. Let’s get a graph of this data set:

Look at mining take off after 2000 (USA! USA!). How was that investment within mining? Graphing the mining subcategories:

Starting after 2000, we radically accelerated the amount of private fixed asset investment in oil and gas extraction in the United States. Two things:

1) What does this look like in practice? Can anyone recommend good journalism or energy financial analysts to read? This is a lot of money to spend and it feels like there was little in terms of fingerprints or discussion. I’m still reading what these numbers point to specifically, within the mining category especially. But if anyone who follows this knows good writing to explain how we’ve decided to become a third-world nation, changing from a nation that makes things to one where all our energy goes to getting resources out of the ground, I’d be happy to read it. How does this effect labor, or inequality? How does the overnight quality of this investment impact environments and communities?

2) Notice how the narrative of the BP Disaster changes when viewed through this data. There’s the David Brooks narrative that “the real issue has to do with risk assessment. It has to do with the bloody crossroads where complex technical systems meet human psychology.” In this narrative, complex systems have always been with us, and as they increase in complexity the ability to detect and deter trail risk becomes increasingly more difficult.

But the data here tells a different story: in 2001 we decided to lift a lot of rules and a massive amount of resource extraction went into place in a very short time span. This was done with the privatization of regulation (deregulation). We thought that the capital markets would be enough to oversee this massive change in our resources and handle the risk appropriately, and we did it in a really short amount of time. Instead of an eternal problem facing human society, it’s about a small group getting power in the White House and shredding the laws, oversight and process concerning how our environment and private companies interact, no doubt making themselves rich in the process. Less Icarus, more Cheney. What does this hold for the future? Notice that the regulators were put into crony sleep mode exactly at the moment where they were most needed.

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7 Responses to “I just want to say two words to you: Resource Extraction.”

  1. frankl says:

    usa becoming more like canada – look to canadian sources for discussions wrt resorurce economics/sectors/development

    not enough experienced engineers/managers in the global mining/petroleum-extractn sector to absorb or properly deploy that balloon budgeting that occurred post 2001 – the decade prior to 2001 saw engineering enrolment being lopsided towards electrical/computing/software engineering, so petroleum/mining/geological engineering didn’t get the numbers (or quality?) of the more favoured disciplines – not easily/quickly fixed – carry on

  2. mechawreck says:

    sigh…seeing demons of Cheney and Halliburton everywhere. You give them too much credit…only Government fraud on the order of magnitude of the GSEs could shift that much money into the furnace.

    Oil prices going triple digit, post-2001 urgency (by the NYT among others) to stop buying all of our oil from the ME, and perhaps most importantly the discovery of natgas all over the darn place in NA might have helped.

    Certain more conspiratorial folks might call this a graph of monetary/debt inflation (with the manufacturing series dampened by the contemporaneous shift of capacity to China).

  3. Owen says:

    There are a few things missing from your analysis:

    Oil and gas companies made huge investments following the oil shock in 72, meaning that a very large amount of physical hardware was nearing the end of its useful life by the start of this decade and needed replacement.

    The Oil and gas industries dramatically shrunk their headcounts through attrition and M & A related cutbacks in the late 80s and early 90s. Regardless of who was President they were going to need to make substantial investments in recruitment, training and equipping new workers as their workforces approached retirement en masse.

    Due partly to cheap credit throughout the decade there were a slew of very large deals like the $18B acquisition of Unocal by Chevron, Exxon’s purchase of XTO and dozens of other acquisitions in the Shale gas industries. Many statistics count acquisitions as investment, but it really isn’t related to an expansion of activity or infrastructure or to deregulation, it’s just moving an asset from one legal entity’s balance sheet to another.

    Much of the cost of investment in mining is related to the cost of things like steel and diesel fuel and real estate. As those spiked during the 00s, a constant level of replacement of kit, construction and maintenance of facilities and refining of ores would look on paper like a surge of investment. It really doesn’t reflect a change in either the level of activity or a response to deregulation.

    There was real technological progress (shale gas, coal bed methane development, hydrofrac drilling etc.) that justified an investment in new properties and equipment during the last decade. There is not necessarily any connection between Bush era rule changes and these investments. Actually, the extractive industry that was given by far the largest regulatory gift was coal mining which was suddenly allowed to silt up watersheds with the detritus of former mountaintops. Interestingly, the coal industry has had a much lower rate of new investment that Oil and gas (particularly shale gas and other non-traditional gas resources). Deregulation may actually have allowed Big Coal to reduce the level of investment needed to maintain operations (most of the operations that benefited from the elimination of regulations were in West VA and the Appalachians, whereas the highest levels of investment were in the Powder River Basin of Wyoming).

    This shouldn’t be a surprise, high levels of investment are more likely in industries where their is fierce competition and technological progress. Deregulation often reflects “investments” in lobbying that are more valuable to mature, cartelized industries like coal.

  4. JW Mason says:

    Mike – Thanks for the link! And thanks especially for drawing out the bigger questions, which I failed to do. Re BP, while I basically agree with you, it’s worth noting that AFAICT the bulk of new mining investment is in natural gas rather than oil.

    Owen – You make a number of good points. It is absolutely true that there was a previous big spike in oil and gas investment in the 1970s, as is visible in Mike’s chart. The magnitude of this earlier spike is very sensitive to the deflator one uses, since, as you point out, the cost of the inputs for mining investment varies much more than the price level in general. But even with a measure that would make the 1970s spike look bigger (e.g. percent of GDP), it still wouldn’t come close to manufacturing investment, partly because most of the same inputs are important to manufacturing too, but mainly because manufacturing investment, by any measure, was much higher then. In other words, this is a story at least as much about the decline of manufacturing, as it is about the rise of oil and gas.

    On acquisitions, however, you are mistaken. The BEA series refers strictly to new fixed assets.

  5. Owen says:

    JW M. I stand corrected as to whether the data sets counted acquisitions as investment. I was more broadly just listing reason why the surge in investment in extraction could be driven by cyclical and macro factors other than deregulation. The relative decline in manufacturing investment certainly wasn’t caused by American manufacturing being subject to increasing regulation (Unions for instance were much more militant in then 70s and are more cooperative now).

    I would be interested in seeing some data (preferably in chart form) that measured the relative openness of other countries to equity FDI in resource extraction compared to their openness to equity FDI in labor-utilising industries and see if the data for the US above correlated with the relative attractiveness of making manufacturing or mining investment abroad. Can anyone point me to a good data source?

  6. Mike says:

    Owen, JW Mason,

    I don’t have much to add, but thanks for helping to point to some stories behind this data. I’m trying to find some instrumental able measure of how much deregulation versus price mechanisms drove this increase, I’ll keep this blog up to date with what I’m finding.

  7. Jim says:

    I wonder what it would look if the price of oil was superimposed onto the graph above. (maybe change it all to percentage change since the start).

    Oil and gas companies had very strong profits through the oughts and I wouldn’t be surprised if that explained the bulk of the investment surge.

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