Crude oil price slumps likely to disrupt U.S. investment activity

U.S. producers have sharply cut down on production and new investment in response to consistent declines in energy prices. The energy sector represents 7.5% of total investment and about 1% of GDP. We estimate that capex cuts have shaved about 0.5% (annualized) from GDP growth over the past three quarters.

The positive side is that this round of capex cuts is coming to an end and that investment outside of the oil & gas sector has remained healthy. The adverse news is that crude prices are declining again and threatening another round of consolidation in the energy sector. We estimate that it will trim an additional 0.1% from growth.

We reckon that much of the slowdown can be traced to the energy sector which was forced to consolidate after the dramatic declines in crude oil prices. Rig counts, which are a good coincident indicator of investment, have contracted by 60% since peaking last summer. Because energy investment tends to expand and contract by roughly half of the growth rate of rig counts, investment in the sector has probably contracted by about 30% since the correction began (detailed data on this is only available annually).

Our estimate lines up nicely with the guidance from energy producers, who earlier this year indicated plans to cut spending by about 30-40% and to shed about 100,000 jobs. If our estimates are correct, the oil & gas sector shaved 0.5% from GDP growth over the past three quarters, with the bulk of the correction likely behind us.