Could U.S. Oil and Gas Boom Lead to “Dutch Disease” in U.S. Economy?

If you’re familiar with the concept of “Dutch Disease” – “a concept that explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector.” – you’re undoubtedly aware that it’s not a good thing for a country’s economy. You’re also undoubtedly aware that “Dutch Disease” isn’t limited to any specific country, that it’s a general concept applicable anywhere.  Which leads us to the question, raised by the American Security Project: “Will Dutch Disease Follow the American Energy Boom?” As the American Security Project points out, this concern isn’t just theoretical:

There are two major industrialized countries that have undergone commodities booms over the past decade: Canada and Australia. They are both showing signs of suffering from Dutch Disease, with the Canadian dollar increasing in value vs. the American dollar (Canada’s #1 trading partner by far) by over 50% in the last ten years, and the Australian dollar increased in value compared to world currency rates by almost 70% in the past decade.

What this situation has led to in both Canada and Australia, not surprisingly, is concerns – and some evidence – that currency appreciation is hurting these countries’ manufacturing sectors, with one top Canadian leader saying it has “cost a half-million jobs,” and Australian statistics showing that the country’s “manufacturing base has shrunk by almost 100,000 jobs over the past four years.”

The question is, will “Dutch Disease” happen in the United States as well, given the boom in oil and natural gas production going on here? According to the American Security Project, at the minimum the United States needs to “keep an eye open” for signs of trouble, while considering whether there is “anything else that the government should do to alleviate or avoid a currency appreciation that harms manufacturing.” The broader point is that increased oil and gas production isn’t all upside potential, as fossil fuel boosters would have us believe. In fact, there’s significant downside potential as well, particularly if the U.S. economy contracts “Dutch Disease” as a result.

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