The U.S. upstream oil and natural gas sector helped boost overall domestic capital investments during 2017 and the first half of 2018, but lower commodity prices, which led to operator cutbacks, marred this year’s outlook, according to the Federal Reserve Bank of Dallas.

The Dallas Fed, as it is known, said Tuesday the drag in fixed investment growth followed a 15% decline overall in oil prices during the second half of 2018. Consequently, exploration and production (E&P) companies, along with their oilfield services (OFS) brethren, put the brakes on activity and spending.

Those cutbacks are showing up in capital spending overall.

To illustrate the point, researchers noted that the share of upstream spending in nonresidential fixed investments has doubled since 2008, 6.4%, on the heels of unconventional drilling boom. That uptick compares with the previous decade, when upstream spending averaged 3.4%.

The only recent period when upstream spending declined was from late 2014 into 2016, after the bottom fell out of the oil market.

Fast forward to 2Q2018, and total U.S. nonresidential fixed investments grew 7.9%. The upstream sector alone provided about 2.7% of the total. The situation then again reversed in the second half of 2018, as the price of oil fell. E&Ps and the OFS sector then reduced their spending plans going into 2019.

“In second quarter 2019, total nonresidential fixed investment contracted 0.6%, with upstream oil and gas investment accounting for virtually the entire decline,” the researchers said. “Put another way, absent the oil and gas sector, fixed investment would have been little changed rather than negative.”

Unsurprisingly, investments by upstream operators closely track oil prices. As commodity prices decline, however, U.S. consumers tend to increase oil and gas consumption. The negative impact from a decline in investments by the upstream sector offset the consumer spending gains.

“The exact extent of oil prices’ effects on investment remains unclear,” according to the Dallas Fed. “Breakeven prices -- the price that producers need to profitably drill new wells -- play a role and likely produce a nonlinear relationship between oil prices and investment.

“For example, with average breakevens of around $50/bbl across the U.S., a $10 oil price decline from $55 to $45 might have a much larger effect on investment than a $10 decline from $85 to $75.”

Looking at the “underlying shocks” that drive oil prices also is key, said researchers. If prices were to fall because of an unexpected downturn in the global economy, the slowdown at the same time could influence all types of investments, not only oil and gas.

“Overall, the oil and gas sector has become more important to swings in nonresidential fixed investment,” researchers noted. “A damping effect on total investment is likely in the presence of persistent oil price declines. This will likely partially offset the positive effects of lower oil prices on consumers.”