A policy brief from a rural development center says rural communities wanting to cash-in on energy jobs should consider their options carefully.
Amid the grim news about a decline in rural employment, one bright spot has been the growth in energy-production jobs in regions like the Bakken shale formation of North Dakota.
These jobs are the result of new energy-production technology like hydraulic fracturing (“fracking”) and horizontal drilling, which allow extraction of oil and gas trapped in shale. But the energy employment boom has environmental, economic and social costs, say Ohio State University researchers Mark Partridge and Amanda Weinstein.
In a paper released by the National Agriculture & Rural Development Policy Center, the researchers offer guidelines for communities and policy makers to use as they determine whether to encourage or discourage oil and gas production as an economic development strategy.
In sparsely populated rural areas, the addition of even relatively few jobs can have a big impact, they say. But the first thing to watch is that industry and media reports tend to overestimate the number of jobs that will come with shale oil and gas development:
Industry funded impact studies often find significantly larger economic impacts than studies that rely on the most modern statistical approaches. For example, an industry funded study authored by Considine et al. (2011) suggests that shale natural gas extraction was associated with 140,000 Pennsylvania jobs during 2010. A similar study by Kleinhenz & Associates (2011) predicted that the natural gas industry would create and support 200,000 jobs in Ohio by 2015, though drilling did not begin in earnest until 2012. These estimates, though large, pale in comparison to a recent study that finds California’s Monterey shale play could create up to 2.8 million jobs by 2020 (USC Global Energy Network, 2013; Vekshin and Nash, 2013).
These predictions seem unrealistically high, especially when compared to what has actually happened in booming areas like North Dakota’s Bakken. That region added only 49,000 jobs from 2003 to 2012, and not all of that growth was necessarily related to energy development. That actual growth is a fraction of the growth projected in the industry-backed studies for Pennsylvania, Ohio and California.
Communities should also be realistic about how many non-energy jobs will be generated in the local economy to serve oil and gas workers.
“The influx of oil and gas workers increases the demand for services such as restaurants and hotels, creating jobs in the local non-tradable goods sector, producing a multiplier effect,” Partridge and Weinstein write. But the overall employment impact is lower than economists initially projected. “Additionally, many of the oil and gas workers are temporary and may come from out of state, reducing the benefits to the local residents. Yet, there are clear earnings impacts due to lease and royalty payments and additional high-paying jobs.”
Gains in employment also come with other costs, the researchers write:
Many impact studies also fail to account for possible offsetting negative effects from energy development that may offset the positive effects such as any crowding out of other economic activity that would have occurred otherwise (e.g., entrepreneurs outside of energy may try other locations with more stable labor markets). Higher prices (especially for housing) may also offset some of the benefits of higher wages potentially negatively affecting quality of life in the area. In addition, many of the benefits may trickle away to other areas due to commuting workers, purchases outside the region, and absentee landowners receiving the lease payments. Finally, perceived or real environmental degradation may frighten some current residents and potential residents away— especially in the long-run. The take-away is that communities should be wary of industry funded economic impact studies (regardless of the industry) and should try to verify economic impact estimates with independent experts.
Communities should also consider the long-term economic impact of energy development, Partridge and Weinstein write. “The general lesson is that short-term energy booms do not necessarily translate into long-term economic prosperity.”
Williston, North Dakota, for example, experienced an energy boom in the 1970s and early ’80s when oil prices peaked. But the boom was followed by a bust.
[After the bust,] Williston’s economy subsequently greatly lagged the U.S. up until the most recent shale boom. Williston (Williams County) did not surpass its 1981 peak in employment until 2010. Generally, poor long-term economic performance is common in extractive resource based economies. This natural resource curse has been documented at every level of geography from countries, to U.S. states and counties. Some reasons for this include weak or corrupt governance, lack of economic diversity, a weak climate for innovation and entrepreneurship in the broader economy, and a reduced human capital development.
The policy brief includes the following conclusions:
The short-term impacts of energy development often include increased employment, though the largest impact appears to be on local incomes of select groups. An accurate estimate of the short and long term economic impacts of shale development is essential for a community to manage its economic future. In particular, communities should take steps to mitigate the long-term effects associated with the resource curse and ensure they benefit from energy development in the long term. These include taxing the industry to account for negative spillovers, diversifying their economies, building enhanced infrastructure, and investing in education and training. Likewise, local communities need to ensure the environment is adequately protected in order to promote long-term sustainable growth after the boom ends.
Partridge is the C. William Swank Chair of Rural-Urban Policy at Ohio State University and a professor in the Agricultural, Environment, and Development Economics Department. Weinstein is graduate research associate for the C. William Swank Program in Rural-Urban Policy at Ohio State University.