LONDON (Reuters) - Slumping oil and gas prices and a downturn in investment are proving to be major headwinds for the economies of the United States and other key important petroleum producers.

The flow of crude oil is seen in a container while an oilfield worker works on a drilling rig at an oil well operated by Venezuela's state oil company PDVSA, in the oil rich Orinoco belt, near Cabrutica at the state of Anzoategui April 16, 2015. REUTERS/Carlos Garcia Rawlins

Economists tend to think of oil and gas as simply an input into the production process for other goods and services, which is why they tend to think of falling fuel prices as a positive influence on economic activity.

But the production and refining of oil and gas is also a major industry in its own right, so a downturn in drilling can have a big negative effect on growth in the short to medium term, until the positive effects on other industries and consumption dominate in the long run.

By turnover and investment, petroleum exploration, production, refining, transportation and marketing is one of the largest industries in the United States and around the world.

In the United States, businesses engaged in oil and gas extraction and refining spent almost $200 billion on new equipment and structures in 2013, the most recent year for which data are available.

Oil and gas extraction and refining accounted for more than 14 percent of all new capital expenditures in the United States in 2013, according to the U.S. Census Bureau.

Oil and gas drilling and associated services on their own accounted for more than 13 percent of whole-economy capital expenditures (“Annual Capital Expenditures Survey” Table 4a).

The oil and gas drilling boom drove an enormous amount of extra expenditure and provided a significant boost to the entire economy.

Between 2003 and 2013, capital spending by oil and gas drillers quadrupled from $40 billion per year to almost $160 billion (tmsnrt.rs/1RZXXqS).

Capital expenditures surged even further in the first half of 2014 as the boom reached its peak but since then have been cut sharply.

Unsurprisingly, the collapse in investment spending has produced a measurable slowdown in the broader economy.

The downturn is evident in everything from data on industrial production to freight movements by road and rail.

Formerly booming states like Texas, North Dakota and Oklahoma, and cities like Williston and Calgary, in the heart of the oil patch, now face severe readjustment or even recession.

The slowdown has even caught the attention of New York Times columnist and Nobel Economics Laureate Paul Krugman, who blames the impact on an important nonlinearity in the effects of oil prices fluctuations.

“Small oil price declines may be expansionary through the usual channels but really big declines set in motion a process of forced deleveraging among producers that can be a significant drag on the world economy,” Krugman wrote in an article published on Saturday (“Oil goes nonlinear,” New York Times, Jan. 16, 2016).

In truth, nonlinearity is not required to understand what has been happening: any big change in relative prices affecting a large industry will have a measurable impact on whole-economy activity as the economy’s capital structure adjusts.

The impact is not confined to the United States. Oil and gas projects around the world worth $380 billion have been postponed or canceled since 2014 according to Wood Mackenzie, an energy consultancy.

Several hundred thousand jobs have been lost at exploration and production companies and oil field services firms.

But these are only the direct spending cuts and job losses. The downturn in oil and gas is rippling all along the supply chain.

The oil and gas industry is not just a major producer of inputs used by other manufacturers, service suppliers and households, it is also a major consumer of raw materials, manufactured items and services itself.

TABLEAU ECONOMIQUE

The relationship between industries and their supply chains is the subject of a branch of economics and statistics known as “input-output accounting” or “inter-industry analysis”.

The first simple input-output model was the Tableau Economique compiled by the eighteenth century French economist Francois Quesnay (1694-1774).

Quesnay used his input-output model to study how changes in the structure of demand, such as an increase in demand for luxuries, would influence net production and its distribution between social classes.

Quesnay’s work was taken up by the American economist Wassily Leontief (1906-1999) who produced a series of increasingly detailed input-output matrices for the U.S. economy between 1919 and 1939.

Leontief’s work was in turn taken up by the U.S. Bureau of Labor Statistics to help the federal government plan for the economic impact of demobilization at the end of World War Two.

The U.S. Air Force became a major user and funder of I-O analysis to work out resource requirements for the Korean War (“Leontief and the Bureau of Labor Statistics, 1941-54,” Kohli, 2002).

Input-output accounting became briefly controversial during the early 1950s. The U.S. government halted work on I-O accounts for a time because the same approach was being employed by Soviet central planners and it was seen as tainted by communism.

Ironically, the People’s Republic of China also abandoned the use of I-O tables a this time claiming this type of analysis was a tool of the capitalist West.

However, I-O tables are now accepted as an indispensable tool for cross-checking the consistency of other government statistics such as gross domestic product, as well as analyzing how a change in one industry will impact on others.

The U.S. Bureau of Economic Analysis prepares detailed input-output matrices for around 400 industries and commodities (“Concepts and Methods of the U.S. Input-Output Accounts,” Bureau of Economic Analysis, 2006).

I-O tables list coefficients or multipliers showing how much input of each commodity or industry output is required to produce $1 of output from another industry.

Unfortunately, benchmark I-O tables are only prepared every five years, and even then published with a delay, so the latest comprehensive inter-industry accounts are from 2007, before the shale boom.

But an extract from the I-O table for oil and gas extraction in 2007 shows some of the industries and commodities which are most exposed to the downturn in oil and gas drilling (tmsnrt.rs/1RZXmFH).

The input-output tables illustrate how deeply entwined the oil and gas industry is with the rest of the U.S. economy.

Oil and gas producers are large consumers of steel (for drilling pipe and well casings), aggregates like fracking sand, water, pressure pumping equipment, industrial valves and high-horsepower engines.

Oil and gas drilling also relies on tens of thousands of trucks to move equipment and materials to remote well sites, as well as construction contractors to build roads and buildings.

And drilling creates big demand for more obscure products and services like lawyers (to negotiate oil and gas leases), bankers, accountants and computer software engineers.

Oil and gas production is one of the largest industries in the United States. Oil prices have tumbled by more than 70 percent over the last 18 months.

In an highly interconnected system, it is hardly surprising that such an enormous shock is rippling out to the rest of the economy (“Falling oil investment will hit U.S. economy” Jan. 21, 2015).

(John Kemp is a Reuters market analyst. The views expressed are his own.)