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Deep Wells, Deep Pockets, and Deep Impact: Part 1

Shale Gas Industry

Imagine: You live in a small rural community. Its once-thriving main street is now pockmarked with deserted storefronts. Its population, steadily dwindling. Its factories, shuttered by manufacturing’s decline. These problems, badly exacerbated by the Great Recession, have left your town reeling from high unemployment and shrinking tax revenues.

Now imagine that an industry with deep pockets walks in, promising to create jobs, replenish city coffers, and build wealth in your region. If this sounds too good to be true, it’s because it just might be.

These promises—coming from the oil and gas industry—have a price. In exchange for jobs, tax revenue, and wealth creation, the community must cope with costs like increased traffic, the potential for more expensive housing, and the risk of environmental degradation; combined, they can change the dynamics of the community.

What’s To Be Done?

Communities across the country increasingly face this dilemma as the oil and gas industry, using new technology, has been aggressively pursuing previously unrecoverable deposits and igniting a boom in shale gas. This has been especially true in the region the Cleveland Fed serves. Parts of Ohio, Pennsylvania, and West Virginia—each state can claim communities at various stages of the extraction process. The breakneck speed at which this development occurs makes it all the more important for a community to consider the long-run implications before drilling begins.

Immediate Impact

Drilling for oil and gas is not necessarily new to Ohio, Pennsylvania, and West Virginia, where thousands of conventional wells have been drilled since the mid-1800s. What is new is that the rate of drilling and volume of production have increased dramatically since unconventional drilling began a few years back (see figure 1). For example, a conventional vertical well produces around 250 cubic feet of natural gas per day. A hydraulically fractured well, though exponentially more expensive, produces four to five million cubic feet per day.

Natural gas production
Sales tax revenue growth in Ohio shale counties

Costs. Although increased production is a boon for the oil and gas industry, it subjects communities to more concentrated, intense drilling than ever before. For example, a shale gas well typically requires hundreds of trucks to ferry water, sand, pipe, and other supplies back and forth. This traffic rapidly degrades roads and bridges, congests streets, and increases the risk of accidents

Often, outside of states such as Texas and Oklahoma, which have historically been centers of oil and gas drilling expertise, a region’s workforce lacks the skills the industry requires. Out-of-state workers must be imported, filling hotels, campgrounds, and the few available rental units. In rural communities, the increased demand for scarce rentals may raise rents, pricing current residents out of the market.

In addition, nearby residents may experience noise, light, air, and water pollution: Drilling occurs around the clock, exposing communities to the din of diesel compressors and intensified light at night. In certain circumstances, natural gas may be flared off and burned, and large amounts of the water, sand, and chemical mixture used in the hydraulic fracturing process may eventually be stored on-site in large retention ponds with the potential to leak.

Benefits. The increased production can also be a boon for some community residents. The terms for leasing mineral rights typically include a signing bonus and a royalty percentage awarded to landowners, based on the volume of oil and gas recovered on the property. According to a case study of Carroll County by Policy Matters Ohio, signing bonuses could be up to $5,800 per acre and royalty payments to at least 12.5 percent. Landowners, some of whom became millionaires overnight, are paying off mortgages and buying farm equipment and other durable goods.

The influx of workers from outside the region fills local restaurants and hotels and can create new businesses or enable existing ones to expand. This beefed-up purchasing can bolster sales tax revenues, and the leasing of land by cities and school districts can ease tight budgets. Figure 2 shows the change in sales tax revenue for the eight Ohio counties where most of the state's drilling occurs, compared with the rest of Ohio. Even though the eight counties accounted for only 3.8 percent of the state’s total revenue in 2013, that share was 0.6 percentage points larger than four years earlier and has been increasing at a faster rate since 2012.

Longer-Term Implications

Two specific issues have the potential to jolt a community in the long run: the boom-bust cycle and what is known as the natural resource curse. Because the supply of shale is finite, it tends to create a boom-bust cycle with three stages: First, a flurry of activity as drilling begins and infrastructure is built. Next, a period of slower development as drilling slows while production plateaus and enters a maintenance period. And finally, the bust, when production stops and the industry moves out of the region.

The natural resource curse is the tendency for a region’s strong dependence on one industry to crowd out investment in others. It also increases economic volatility as the region is tied to the success of a single commodity, such as coal, oil, or natural gas and subject to international price fluctuations. For example, the presence of the oil and gas industry may move investment into industries that supply the products it needs; the well-paid jobs it offers may induce workers to migrate out of other industries. The problems arise when the dominant industry exits the region, leaving behind underdeveloped industries and few job opportunities for the newly unemployed workers.

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