Originally Aired: July 19 - The Economics of Fracking The second webinar will discuss the economic realities of fracking including economic costs, long term implications of resource extraction, and a summary of interviews covering economic impacts in the gaslands of Ohio (Carroll County). Presenters: Melanie Houston of the Ohio Environmental Council Amanda Weinstein of the Ohio State University Amanda Woodrum of Policy Matters Ohio

1. Economics of Fracking
July 19, 2013
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2. Amanda Woodrum
Policy Matters
Dr. Amanda Weinstein
The Ohio State University
Economics of Fracking
July 19, 2013
Melanie Houston
Ohio Environmental
Council

3. Ohio Environmental Council
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4. 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)

5. 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.

6. 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‖

7. 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)

8. By Amanda Weinstein
Swank Program in Rural-Urban Policy
http://aede.osu.edu/programs/swank
Weinstein.74@osu.edu
OEC Webinar
July 19, 2013
The Economic Value of Shale in
Ohio

9. Outline
 Introduction
 The Shale Boom
 Realistic Economic Expectations for Ohio
Shale Development
 The Long Run
 Steps to Avoid a Bust
 Conclusion

10. Motivation
 Innovations 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

11. 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 job
 To have a meaningful discussion weighing all of
the benefits and costs of shale (including
environmental), the economic benefits to local

13. Ohio Marcellus and Utica Shale

14. Marcellus Wells in Ohio

15. Utica Wells in Ohio

16. Tight Oil production

17. Shale Gas Production

18. The Employment Boom
Source: U.S. Quarterly Census of Employment and Wages

19. Prices - Booms and Busts
Source: U.S. EIA

20. North Dakota
 North 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

21. Impact Studies
 140,000 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: 28
 Economists 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
years
 Even if all 110,000 jobs directly or indirectly from shale
development (highly unlikely), this implies an economic
multiplier of 5.2

22. 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 expect
 Output 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

23. 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 decades
 At 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

24. What about the local area?
 Even small employment gains may be big for rural
and remote counties in Ohio and Pennsylvania
 Match 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

25. Economic Theory
 The modest impact on jobs is not surprising
 More capital intensive than labor intensive
 Displacement 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 benefits
 37% of Marcellus PA employment has gone to non-
residents (Kelsey et al., 2011)
 55% of royalty/leasing money saved (Kelsey et

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

27. 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 Sign in front of Taco John‘s in North
 Displacement effects and effects on other industries
(‗Dutch Disease‘) reduce the employment effects
 The effect on the coal industry and tourism
 The impact of bid up wages on industries that rely on low
wages

28. In the Long Run
 Economists 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 Causes
 Volatile energy prices can lead to booms and busts
 Dutch Disease crowding out other economic activity

29. Previous Natural Resource Shocks
50
100
150
200
250
300
350
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Employment Growth
Dallas, TX
Houston, TX
Tulsa, OK
Casper, WY
Williams, ND
US
Source: U.S. Quarterly Census of Employment and Wages

30. 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
communities
Infrastructure and public services
Environmental amenities
Replacing the permanent loss of physical
capital by investing in human capital
 Taxes set appropriately to cover these costs

31. Severance Taxes (Oil)

32. Effective Natural Gas Tax Burden

33. Conclusion
 The 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

34. Amanda Weinstein
Research Associate for the Swank Program in Rural-
Urban Policy
Dept. Agricultural, Environmental & Development
Economics
The Ohio State University
(weinstein.74@osu.edu)
Thank You
34

35. Extra Slides
The following slides may be helpful in answering questions.

36. Environmental Impact
 A 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

37. 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
 ―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

38. Energy Price Comparison

40. Actual and Projected Production

41. Actual and Projected Production (EIA)

42. 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

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

44. Hydraulic Fracturing

45. www.policymattersohio.org
Fracking Economics
Costs and Benefits to Local
Communities

46. 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

47. 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.

48. www.policymattersohio.org
Project Goals
1. 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

49. 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

50. 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‖

51. 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

52. 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

53. www.policymattersohio.org
Jobs
Benefits
• Oil & Gas industry jobs
created. These jobs pay
good wages.
• Jobs in supportive
industries. Local jobs
created in truck
driving, concierge
services, cleaning, resta
urant 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.

54. 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)

55. www.policymattersohio.org
Housing Market
Benefits
• 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

56. 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%)

57. 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

58. 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

59. 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

60. www.policymattersohio.org
awoodrum@policymattersohio.org
www.policymattersohio.org
Amanda Woodrum
Researcher

61. Any
Questions?