The economic impact of uncertainty about U.S. regulations of the energy sector
It is frequently said that uncertainty is bad for business: firms, investors, consumers — economic agents, more generally — need to know what they can count on when making decisions, in particular decisions with implications for the future.
Public policy (e.g., government regulations) provide a particularly important source of uncertainty. A recent study examines the economic impact of uncertainty regarding regulation of the energy sector in the US.
A first contribution is to construct a measure of regulatory uncertainty related to oil and gas production. The index, of monthly frequency, is based on natural language processing on more than 600 thousand newspaper articles published in the US from 1985 to 2021. The authors find regulation-relevant articles by searching for words and sentences starting with “regulat” and “deregulat.”
They then quantify the level of uncertainty expressed in the news using a lexicon-based approach. Specifically, they use the list of uncertainty-related words included in a previously-constructed dictionary (e.g., “uncertain,” “ambiguity,” “confusion,” “doubt,” “vague”).
The figure below shows the evolution of the uncertainty index resulting from this process. As can be seen, the index is stationary over time but shows several spikes throughout the period in question. For example, the high values around 1990-1991 are likely associated with the natural gas market de-regulation process.
The authors then proceed to estimate a structural Vector Autoregression Model (VAR) to study how regulatory uncertainty influences a variety of outcome variables. Based on the estimated coefficients, the results can be presented in terms of the responses to a one-standard upward shock to the level of regulatory uncertainty.
The figure below shows the results from this exercise, where the solid line indicates point estimates and the gray areas correspond to 68 percent confidence intervals. The horizontal axis measures months from the uncertainty shock.
As can be seen, there is considerable variation in the estimates, which suggests the uncertainty index is itself a noisy measure. In terms of the sign of the effects, the results are broadly consistent with the idea that uncertainty is “bad for business.” For example, “world oil production jumps initially but quickly declines and remains at a lower level than the pre‐shock trend. Oil prices, on the other hand, do not significantly respond to the shock. Economic activity scales down, with slight declines in both industrial production and world economic activity.”
In conclusion, the paper “highlights the importance of a predictable regulatory environment: […] inconsistent or ambiguous regulatory changes can lead to broader, negative economic consequences.” This implies that “policymakers should prioritize clear and transparent communication and establish predictable regulatory frameworks to mitigate the negative impacts of uncertainty.”
Xiaohan Ma and Zhoudan Xie
The economic impact of uncertainty about U.S. regulations of the energy sector