Economics of FrackingJuly 19, 2013

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Amanda WoodrumPolicy Matters

Dr. Amanda WeinsteinThe Ohio State University

Economics of FrackingJuly 19, 2013

Melanie HoustonOhio Environmental Council

Ohio Environmental Council

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What is Hydraulic Fracturing?

“Hydraulic Fracturing is a well stimulation process used to maximize the extraction of underground resources” (EPA)

Fracking is the process of using explosive charges, followed by the injection of millions of gallons of water, sand, and chemicals to break up rock miles beneath the surface of the earth. Horizontal drilling allows shale gas or shale oil to be extracted and pumped to the surface, along with the fluid used in the drilling operation. (University of Connecticut)

General oversight and regulation

Notification and reporting requirements during cementing, well completion, well stimulation and well production (ODNR)

Site restoration is required for urban and non-urban area well sites (ODNR)

Water withdrawal: the law requires registration if a facility has the capacity to withdraw 100,000 gallons per day (ODNR)

Air: permit-to-install and operate required for units or activities that emit air pollutants (Ohio EPA)

Radioactivity: solid waste disposal (ODNR, Ohio EPA, ODH)

*Source of information: Ohio’s Regulations: A Guide for operators drilling in the Marcellus & Utica Shales. Ohio EPA. March 2012.

What’s the true economic story?

Industry study (2011) by Kleinhenz and Associates predicted 200,000 jobs+ created in Ohio by 2015 and “economic output will increase by over $22 billion and wages by $12 billion by 2015”

Reuters reports(June 14, 2013): “state employment data, academic research and a week-long tour of half a dozen factories in Ohio suggests the shale gas revolution has been a disappointment when it comes to job creation”

Shale boom over-hyped?

Recent headlines (through 2013): "Utica Shale results not as big as expected"

Youngstown Vindicator (June 1, 2013)“Utica shale boom talk not as loud" Columbus

Dispatch (May 19, 2013)"Utica shale gas production ramping up slowly, Ohio

report shows” The Plain Dealer (May 16, 2013)

By Amanda Weinstein

Swank Program in Rural-Urban Policyhttp://aede.osu.edu/programs/swank

Weinstein.74@osu.edu

OEC WebinarJuly 19, 2013

The Economic Value of Shale in Ohio

Outline

IntroductionThe Shale BoomRealistic Economic Expectations for Ohio Shale Development

The Long RunSteps to Avoid a BustConclusion

MotivationInnovations in oil and gas extraction along with rising

oil and gas prices have led to shale development across the U.S.

Dramatically reversed trends in U.S. oil and gas markets as imports are now decreasing

Various impact studies have estimated large employment effects for Pennsylvania, Ohio, and other areas

Commenting on shale energy development, Aubrey McClendon CEO of Chesapeake Energy of Oklahoma was quoted in the Columbus Dispatch saying, “This will be the biggest thing in the state of Ohio since the plow.”

We are concerned that job numbers may be overinflated by the industry (or any industry)

Implications Policy makers and the energy industry itself have

used these job numbers to justify supporting the industry through tax breaks, favorable regulations, and other measures

Pennsylvania spent $1.7 Billion in subsidies to entice a Shell ethane cracker facility to locate in Beaver County, PA (near Pittsburgh)With an average employment of 400 in these types

of facilities, that amounts to $4.125 Million per jobTo have a meaningful discussion weighing all of the

benefits and costs of shale (including environmental), the economic benefits to local communities needs to be accurately assessed

Ohio Marcellus and Utica Shale

Marcellus Wells in Ohio

Utica Wells in Ohio

Tight Oil production

Shale Gas Production

The Employment Boom

Source: U.S. Quarterly Census of Employment and Wages

Prices - Booms and Busts

Source: U.S. EIA

North DakotaNorth Dakota oil and gas employment has shot up

from holding steady at about 1,800 in 2004 to11,700 in 2011.

Source: U.S. Quarterly Census of Employment and Wages

Impact Studies140,000 jobs created in just 1 year (2010) in

Pennsylvania (Considine et al., 2011)Total direct natural gas extraction employment was just

under 26,000 in 2010 (after adding approximately 5,000)Implied multiplier: 28Economists generally find multipliers closer to 2 for this

sector North Dakota

From 2003-2013, the total nonfarm employment increased by 110,000

Mining employment increased by 21,000 in these 10 yearsEven if all 110,000 jobs directly or indirectly from shale

development (highly unlikely), this implies an economic multiplier of 5.2

Unemployment barely changed from 3.6% (2003) to 3.2% (2013)

Mining is still just a small share of the ND’s economy at 6%

Implications for Ohio Based on the Considine report, Kleinhenz &

Associates (2011) estimated 200,000 jobs would be created in Ohio by 2015

Using actual natural gas extraction data from Pennsylvania (and a multiplier of 2), we estimate the total jobs created was closer to 20,000 in this timeframe which better estimates the impact Ohio should expectOutput multiplier for natural gas in Pennsylvania may be

closer to a range between 1.86 to 1.90 (Kelsey et al., 2009)

Forthcoming journal paper finds the U.S. multiplier is closer to 1.3

Ohio Shale Coalition Answer: Ok how about 65,000 by 2014?

Why the Difference?‘Impact studies’ that estimate direct and

indirect effects are over-estimates of new job creation and serious regional economists have not viewed them as best practice for decadesAt best, a well done impact study should tell you

how many jobs are ‘supported’ by an industry, not how many jobs it ‘created.’

At worst, the economic effects can be double counted and unrealistic assumptions applied to the model to increase estimates

Don’t account for displacement effects and other negative effects of drilling

Rely on a computer model not actual employment data

NOT COUNTERFACTUALS!

What about the local area?Even small employment gains may be big for rural

and remote counties in Ohio and PennsylvaniaMatch drilling counties with similar non-drilling

counties in PA (the counterfactual) and find modest employment effects and more significant earnings impact

Statistical regressions on counties in PA and the U.S. show employment impacts are modest and the earnings impact is about double, but that impact decreases over time

Every $1 million in shale gas production results in just 2.35 jobs within counties in TX, CO, and WY (Weber, 2012)

Economic TheoryThe modest impact on jobs is not surprising

More capital intensive than labor intensiveDisplacement effects – coal industry, tourism,‘Dutch

Disease’Even with impressive growth rates, the energy

sector is still a small share of the total Ohio economy at 5.34 million in Apr. 2013 (U.S. BLS) at approximately 0.3%

Leakage in the economic benefits37% of Marcellus PA employment has gone to non-

residents (Kelsey et al., 2011)55% of royalty/leasing money saved (Kelsey et al.,

2011)Absentee landowners may be receiving

leasing/royalty payments

Major Holders of Utica Shale Right in Ohio (April 2012)

Major Holders of Utica Shale Right in Ohio (April 2012)

Displacement Effects

“Among the inconveniences the boom has caused for locals -- including a higher cost of living, more traffic and higher turnover rates among businesses that lose employees to the oilfields -- there's a huge housing shortage.” (CNN Money, 2011)

Sign in front of Taco John’s in North Dakota

Displacement effects and effects on other industries (‘Dutch Disease’) reduce the employment effects The effect on the coal industry and tourismThe impact of bid up wages on industries that rely on low

wages

In the Long RunEconomists have 150 years of evidence on natural

resource booms and the evidence is often negative.A number of studies have shown that countries are

actually hindered and not helped by their resource abundance in terms of economic growth termed the ‘natural resource curse’

A similar trend has been shown for U.S. states and counties

The Natural Resource Curse CausesVolatile energy prices can lead to booms and bustsDutch Disease crowding out other economic activityInstitutions- corruption, overspendingPersonal incentive for investing in human capital

Previous Natural Resource Shocks

50

100

150

200

250

300

350 Employment GrowthDallas, TXHouston, TXTulsa, OKCasper, WYWilliams, NDUS

Source: U.S. Quarterly Census of Employment and Wages

Steps to Avoid the Bust and the Curse

Shouldn’t rely on short term benefits in employment and earnings

Address the short term and long term costs to communitiesInfrastructure and public servicesEnvironmental amenitiesReplacing the permanent loss of physical capital by investing in human capital

Taxes set appropriately to cover these costs

Severance Taxes (Oil)

Effective Natural Gas Tax Burden

ConclusionThe real question of shale investment is not job

creation, but net benefits vs. costs (including environmental costs)Having an accurate estimate of the economic benefits of

shale development allows us to better weight the benefits and costs

In this question for the Marcellus shale in PA and OH, natural gas should be compared to coal, the true alternative

Shale natural gas is lower cost, less carbon, and like coal has local pollution impacts. Shale natural gas will also reduce natural gas imports

Ohio should consider higher severance taxes to counteract some of these costs and pay for long-term benefitsSchools, infrastructure, environmentInvest in assets to account for the lost extracted assets

Amanda WeinsteinResearch Associate for the Swank Program in

Rural-Urban PolicyDept. Agricultural, Environmental &

Development EconomicsThe Ohio State University(weinstein.74@osu.edu)

Thank You

34

Extra SlidesThe following slides may be helpful in answering

questions.

Environmental ImpactA bridge to more environmentally friendly energy

production Carbon benefits may be slightly less due to the

trucking requirements, but carbon emissions remain significantly less than coal

A Small Share of Total Employment

Even with impressive growth rates, the energy sector is still a small share of the total Ohio economy at 5.34 million in Apr. 2013 (U.S. BLS)

Ohio and Pennsylvania Direct Oil and Gas Employment

“The 36,000 jobs specifically created to drill for oil and gas… came in well below direct hiring in other industries.” (CNN Money, April 25, 2012)

The construction industry created 69,000 in 2011

Energy Price Comparison

Actual and Projected Production

Actual and Projected Production (EIA)

Perspective on Environmental Impact

Coal ash spill –In 2008, the New York Times reported that

experts called the Tennessee ash flood that dumped over 1.1 billion gallons of coal ash waste “one of the largest environmental disasters of its kind”

2011 Coal ash spill in Lake Michigan

Source: U.S. Quarterly Census of Employment and Wages

Hydraulic Fracturing

www.policymattersohio.org 

Fracking Economics

Costs and Benefits to Local Communities

www.policymattersohio.org 

Multi-State Shale Research Collaborative

• PA: Keystone Research Center, Pennsylvania Budget and Policy Center

• NY: Fiscal Policy Institute• Virginia: Commonwealth Institute• West Virginia Center on Budget and Policy• Policy Matters Ohio

• Advisory Group: Academics and Experts

www.policymattersohio.org 

Economic Impact: Costs v. Benefits • We’ve heard much about the job benefits of fracking,

some about potential long-term environmental and health impacts. This is only part of the story.

• Net Benefit or Net Cost: The overall local economic impact - positive or negative – will largely be determined by: 1. No. of Jobs & who gets them, temporary or permanent?

2. Local economic activity & how many of the dollars stay in the community

3. Royalties & the local share of them, and

4. Costs to the community, in the short run and the long term.

www.policymattersohio.org 

Project Goals1. Develop and disseminate factual information

on social, economic and fiscal impacts of natural gas drilling

2. Improve understanding about the size and character of social impacts

3. Help local officials anticipate, plan for, or avoid negative drilling related impacts

4. Improve capacity to factor actual costs and impacts into decision making

www.policymattersohio.org 

Phase I• Review of literature on local impacts• Studies in regions where industry more developed

Phase II• Case Studies • Ohio – Carroll County

Phase III• Policy Development• Discussions, Best Practices

www.policymattersohio.org 

Economic Context

• Fracking is occurring largely in rural communities

• Struggling economically for decades• Population stagnating, young people leaving • Hard hit by the recession

Fracking has been “a shot in the arm”

www.policymattersohio.org 

Mineral rights: Signing Bonuses, Royalties

Benefits • Now, can get more than

$3000/acre signing bonus, as high as $6,000/acre + 20% royalties. Stories of new millionaires

• Signing bonuses spent locally, generating local economic activity

• Farmers are using signing bonuses to modernize their equipment, invest in farms

• Government leasing of mineral rights. Covers reduction in school funding

Costs / Negatives• Not everyone got such good

deals. Some folks locked in 100 year old oil & gas leases. # of citizens underestimated the opportunity and signed “bad” deals. Told “should have gotten a lawyer.”

• Mandatory pooling, pressure• Citizens have yet to see much in

the way of royalties. Some previous experience suggests fracking wells tend to taper off dramatically, so royalties may be fleeting

www.policymattersohio.org 

Local Economic Activity Benefits

• Oil & Gas industry folks try to buy local. Local businesses selling trucks, equipment, and gear (some of which is made in Ohio)

• Hotel is full, restaurants busy, gas stations selling more gas

• With signing bonus, money for home and farm repairs, modern and more efficient farm equipment

• Increased sales tax revenue – ie courthouse renovations

Costs / Negatives

• Oil and gas industry is largely out-of-state companies, profits leaving state.

• No real value-added facilities in community.

• Water & sewer infrastructure limitations for development

• Fracking waste water • Housing crunch• Road & traffic impacts• Hard to predict future activity

levels– hard to plan for it

www.policymattersohio.org 

JobsBenefits

• Oil & Gas industry jobs created. These jobs pay good wages.

• Jobs in supportive industries. Local jobs created in truck driving, concierge services, cleaning, restaurant jobs, mechanics

Costs / Negatives

• Questions about the number of jobs that will actually be created

• Most of these jobs, however, are not going to local workers. They are also largely temporary in nature, and follow the industry.

• Worker safety is an issue. These are hard jobs, some injuries, even fatalities.

• Support jobs don’t pay nearly as well • Some workers bring families, enroll

children in school temporarily. ESL instruction is increasingly needed.

www.policymattersohio.org 

Related Studies• Industry studies on Ohio jobs potential inflated: 20,000 not

200,000 jobs, negative impacts on other industries like tourism (OSU study, Partridge/Weinstein, 2011)

• Economic activity increased significantly in shale gas regions of Ohio but employment numbers haven’t increased at the same rate, possibly indicative of employment of out-of-state workers (CSU study,Thomas, 2013)

• Penn State study estimates between 25 & 35 percent of new hires in gas companies and related industries are non-state residents who likely send some earnings home (Brundage, 2011).

• 12 County survey of local officials in PA – only 4% of respondents reporting gas activity reported increases in income tax (Kelsey 2011)

• Penn State study suggests costs to local government may be greater than revenues. Urban areas like Fort Worth, Texas with mature industry better able to absorb costs and take advantage of benefits than rural areas (What Local Governments Need to Know)

www.policymattersohio.org 

Housing MarketBenefits

• Increased demand for rental housing, rental income vastly increasing

• Work for rental agent• Rehab of properties for

rental market, business at local hardware store

• Market for second-hand furniture developed

• Investment properties go quickly, when on market

Costs / Negatives

• Fast turnover of rental properties • Rental prices rise dramatically,

locals have trouble with higher rents

• Locals fear eviction, and lower quality housing if have to move

• Cloud over residential properties near drilling

www.policymattersohio.org 

Related Studies

• Sublette County, Wyoming (Ecosystems Research Group, 2009). Large population increases, boosted housing prices, shortage of housing.

• Headwaters study of counties in Colorado, difficulty of non energy industry employers recruiting workers because of sharp rise in housing

• Two studies in Pennsylvania found value of homes located near drilling activity were negatively impacted (well water, 4%; agricultural lands, 7.2%)

www.policymattersohio.org 

• Traffic

• Road Damage & Repair

• Traffic accidents

• Increased traffic congestion, increase in heavy and overweight trucks

• Increased wear and tear on roads from heavy trucks, costs for road repair, need for large-scale road improvements

• Increase in traffic-related accidents involving large trucks, related injuries and some fatalities,

• Damage to roads, guardrails, signage.

Traffic, Roads

Roadway Use & Maintenance Agreement (RUMAs): includes travel routes for heavy trucks, Addresses some of the road impact costs

Chesapeake contributed $1 million toward road widening and

resurfacing project in Carroll County

www.policymattersohio.org 

Other issues looked for, but did not find in Ohio

• Crime has been issue in other areas, not found evidence of issue in Ohio– Ecosystems (2009): increased crime, need for law enforcement

personnel, EMS runs, arrest grew faster than population– Headwaters study (2009): sharp increase in crime. Chief of

Rock Springs Policy – narcotics arrests rose from 90 to 450. Caseloads for judges quadrupled.

• Increase in uncompensated health care from patients without health insurance – – A community-owned hospital in PA estimated loss of ¾ of a

million dollars from uncompensated care for subcontractors working on drilling operations

www.policymattersohio.org 

Phase II & III• Case Study of Counties in respective states• Conducted interviews, looking through data,

possible focus groups • Shooting for August-September series of

releases• Fall 2013 Legislative Caucus to discuss policy

implications

www.policymattersohio.org 

awoodrum@policymattersohio.org www.policymattersohio.org

Amanda Woodrum Researcher

AnyQuestions?