Economists: Stay diversified while enjoying shale’s economic benefits

Posted November 6, 2015

Michael Bradwell
Observer Reporter

Three economists who follow the impact of shale gas extraction in Pennsylvania and Ohio said Thursday the economic benefits from the activity can be significant for communities, but they cautioned municipal officials against relying too heavily on one industry.

The speakers, Leslie and Robert Dunn, both associate professors of economics at Washington & Jefferson College, and Amanda Weinstein, assistant professor of economics at the University of Akron, led off the daylong seminar entitled “An Energy Policy Summit on Shale Gas Development and the Local Economy: Opportunities and Challenges for Municipal Leaders” at W&J’s Rossin Campus Center.

The program was sponsored by W&J’s Center for Energy Policy and Management, the Federal Reserve Bank of Cleveland and the Local Government Academy.

The trio of economists set the stage for other panel discussions for about 60 municipal officials on understanding and assessing fiscal conditions in local governments and ways of leveraging shale gas development through economic growth and diversification.

Leslie Dunn, who looked at various countries with strong resource extraction from agriculture, forestry, fishing and mining, reviewed studies that found some countries ultimately suffer from a “resource curse” because they become too dependent upon their resources at the expense of other aspects of their economies.

According to Dunn, the studies found many resource-dependent countries often don’t invest enough in education, and when commodity prices are high, borrow more, then are unable to pay off the debt when prices fall.

She acknowledged that there is no universal rule for how countries treat their resources as a component of their overall economies, noting that there doesn’t appear to be a resource curse in the United States, which has a large, diversified economy, and in other developed countries like Norway, which is the third-largest exporter of natural gas and the seventh-largest exporter of oil.

Dunn’s husband, Robert Dunn, followed with a discussion of how various resource-dependent states have performed.

He showed oil and gas as a percentage of gross domestic product in Pennsylvania moving at a multiple of 10, from 0.09 percent in 2004, the year before shale drilling began here, to 0.9 percent at the end of 2013.

During the same period, West Virginia more than doubled, moving from 0.8 percent to 1.9 percent.

The two local states’ percentages pale in comparison to large resource-dependent states like Wyoming, Alaska and Texas, where natural resources as a percentage of state GDP are far higher.

Nothing was as dramatic as North Dakota, however, where production from the Bakken Shale moved the oil and gas industry’s contribution to that state’s GDP from 0.6 percent in 2004 to 6.3 percent in 2013.

While there is no denying that the Marcellus drilling had a big impact on many communities in the Marcellus Shale fairway, Dunn noted that the state has a large, diverse economy, which tends to flatten out the impact on a statewide basis.

By way of comparison, Dunn looked at Pennsylvania’s economy in 1965, when the steel industry represented 11 percent of the state’s GDP, compared to 2014, when the industry contributed 2 percent.

And despite its resource-rich status with regard to the Marcellus Shale, the state and the region are maintaining educational attainment. Dunn’s study found that in Pennsylvania, the percentage of residents with a bachelor’s degree or higher was 27.9 percent – near the U.S. average of 28.8 percent.

The same parameters held true when he looked at the six-county Pittsburgh region, where the oil and gas industry now contributes 3 percent of GDP, or almost twice the U.S. metro average of 1.65 percent, but still boasts an educational attainment of 29.9 percent, just below the U.S. metro average of 30.8 percent.

Weinstein said officials should guard against becoming dependent on one industry, especially with energy’s volatile prices, which can lead to booms and busts.

She also cautioned officials against putting too much stock in economic impact studies that make broad projections about the number of jobs that can be created by oil and gas in an area.

“Hydraulic fracturing has changed the face of the industry,” she acknowledged, adding as a result, the drilling business is very capital-intensive.

She added people often misinterpret impact studies’ reference to “supported jobs“ as “created jobs.”

According to Weinstein, when she looked at employment data for jobs created (not supported) in Pennsylvania, the multiplier effect was two times, not the five or seven times that was stated in two earlier impact studies, which she said relied on computer modeling as opposed to actual employment numbers. She also noted that impact studies don’t take into account jobs that are displaced by growth of oil and gas hiring in an area.

“Drilling for natural gas provides gas for homes and electricity generation, but also for a reduction in coal jobs,” she said, adding that the higher pay for drilling-related jobs can also have a negative impact on lower-wage industries.

But states like Ohio and Pennsylvania have a big advantage over places like North Dakota when the oil and gas industry goes into a downturn.

“If you lose a job in North Dakota, you leave that state, but if you lose a job in Pennsylvania or Ohio, you stay,” she said, noting that those two states’ diversified economies make it easier to find other employment to replace lost jobs.