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Abstract
This paper concerns the economic impact of uncertainty about U.S. regulatory policies of the energy sector. We first use natural language processing to create an oil regulatory uncertainty index based on more than a million news articles from a wide range of U.S. newspapers published between January 1985 and December 2021. We then conduct empirical analysis via structural VAR models with regulatory uncertainty and aggregate data. The impulse response functions suggest that an increase in oil regulatory uncertainty reduces oil production and operations, while also having negative effects on nationwide and state-level economic outcomes.
Introduction
The energy sector, which mainly consists of oil and gas operations, plays an important role in fueling U.S. economic activities. It is identified as a critical sector because it provides an “enabling function” for other economic sectors. Government energy-related policies thus can have substantial economic and social influence.
U.S. regulations of oil and gas operations have existed for over a century in various forms. In principal, these regulations can address market failures by eliminating adverse externalities on the environment, improve efficiency of resource allocation and reduce resource waste, and promote economic and social benefits, such as health and safety of the public. On the other hand, poorly designed or executed regulations may impose excess burden on energy companies, which can potentially yield negative effects on the aggregate economy. The economic role of energy regulatory policies is therefore an important issue, especially for
jurisdictions with extensive oil and gas operations, such as Texas and New Mexico.