Measuring The Economic Value of Shale Energy Development Presented for the BU/SRSA Shale Workshop Mark Partridge & Amanda Weinstein Presented at Bucknell.

Measuring The Economic Value of Shale Energy

DevelopmentPresented for the

BU/SRSA Shale Workshop

Measuring The Economic Value of Shale Energy

DevelopmentPresented for the

BU/SRSA Shale Workshop

Mark Partridge & Amanda Weinstein

Presented at Bucknell UniversityJuly 31, 2012

Swank Chair in Rural-Urban Policy([email protected])

Department of Agricultural, Environmental & Development Economics

Ohio State University Extension

Shale: Economic Development Game Changer?Shale: Economic Development Game Changer? I will follow Weinstein and Partridge

(2011) and Farren et al. (2012). I will focus on economic

development. Of course, shale development also has major implications on world and US energy markets—see map.

For those interested in local/regional growth, long-term economic outcomes receive more weight than temporary booms revolving around construction. 2

Shale Energy is found all over US and the world.

Is Shale a Game Changer?Is Shale a Game Changer? Commenting on Ohio’s shale energy

development: “This will be the biggest thing in the state of Ohio since the plow…This is truly extraordinary.” Aubrey McClendon CEO of Chesapeake Energy of Oklahoma.

Quoted in the Columbus Dispatch “Realism on Renewable Energy.” September 22, 2011, Pp. B1-B2.

Economists have 150 years of evidence on natural resource booms and the evidence is often negative (e.g., Papyrakis, E. and R. Gerlagh, 2007; Kilkenny and Partridge, 2009; James and Aadland, 2011). E.g., Natural Resources Curse & Dutch Disease

More cases like LA, WV, Venezuela, Nigeria vs Norway4

Is shale a game changer?Is shale a game changer? In the latest year, PA has gained

about 6,000 mining jobs (minus coal mining) and about 40,000 total jobs. Since 2006, PA has gained about 18,500 mining jobs (minus coal mining). PA’s total employment is over 5.7million

Ohio has gained about 500 mining jobs and 100,000 total jobs. Source U.S. Bureau of Labor Statistics CES measured over June 2011-June 2012.

5

6

Figure 7: Total Employment and Previous Oil Booms in the U.S.: 1969=100

Shale: Game Changer?Shale: Game Changer?1. Economists point out that ‘projects’ and

policies should be judged on their net benefits and costs, and NOT net job creation. E.g., CO2 content of coal vs natural gas. E.g., lower energy costs (but energy

security is not a large issue since NG replaces US coal).

2. The best source of an industry’s actual economic impact is NOT the industry itself, studies paid for by the industry, or sympathetic politicians and newspapers. This is not a surprise . In serious research, we use peer review to

weed out poor studies. We create counterfactuals.

7

Shale: Game Changer?Shale: Game Changer? A counterfactual is what would have

happened if there was no shale industry. The difference between the number of jobs that happened and the counterfactual is the actual jobs created.

3. So-called ‘impact studies’ that estimate direct and indirect effects are over-estimates of new job creation and serious regional economists have not viewed them as anywhere near best practice for decades. NOT COUNTERFACTUALS! At best, an impact study should tell how

many jobs are ‘supported’ by an industry, not how many jobs it ‘created’ and explain the difference.

Energy is a capital intensive industry—fewer jobs.

8

Shale: Game Changer?--#3 cont.Shale: Game Changer?--#3 cont. Even in good impact studies, the

“employment” effects are not continuous but in a piecemeal fashion. Construction, then drilling, then pipelines, and so on.

They are usually based on slightly dated national input-output estimates. Heavily weigh the Oil-Patch supply chain response, not actual PA/OH response.

9

10

Taken from: http://www.donnan.com/Marcellus-Gas_Hickory.htm

New drilling activity and its capital intensive nature in PA.

Shale: Game Changer?--#3 cont.Shale: Game Changer?--#3 cont.

“Penn State (Considine) Impact Studies” funded by the shale industry is an example. It predicts 111,000 jobs in 2011 and 212,000 in 2020 using the IMPLAN software. {see Kelsey et al. (2011) for a different point of view} Kleinhenz & Associates (2011) funded by the

industry predicted over 200,000 jobs in Ohio by 2015.

Ohio Shale Coalition (2012) predicted 66,000 by 2014.

11

#3 Continued#3 Continued Impact studies typically ignore

displacement effects and do not compare development impact to the counterfactual. Example of a coal counterfactual is Black et

al. 2005 in Economic Journal. Multiplier of 1.25.

PA and OH studies estimate 95% of shale industry purchases are in PA and 90% in Ohio. Examples of other problems: No Price Effects or crowding out. Entrepreneurs do other things. Nationally, more natural gas means less coal needed for electricity and fewer coal jobs. [oil is new jobs]

12

http://graphics8.nytimes.com/images/misc/pixel.gif

Example of displacement or labor shortages elsewhere in the economy in North Dakota Bakken region.

http://graphics8.nytimes.com/images/misc/pixel.gif

What we do in our comparison Ohio to Pennsylvania?

What we do in our comparison Ohio to Pennsylvania?

(1) Assessment of impact analysis (2) Statistical regressions on the entire

state of Pennsylvania (3) Compare PA to North Dakota’s

Bakkan shale region which has had a similar employment change in ‘mining.’

(4) Examine the employment life cycle effects of natural gas and coal per kwh.

(5) Compare drilling counties with similar non-drilling counties in PA.

(6) Show the industry is too small to materially affect Ohio/PA employment.

14

Findings for OH based on PAFindings for OH based on PA We conclude Ohio’s expected

employment effects are near 20,000 workers (not counting displacement).

There are relatively “large” income effects in affected counties.

We do a difference in difference assessment of those with heavy mining vs similar counties w/o mining to get a handle on the actual income and job creation.

15

16

Estimates of the number of jobs required to produce a kWh by energy source

Source: Weinstein et al. (2010) chart using data from Kammen et al. (2004)

Total kWh from Coal

2009Change in

JobsChange in Energy Costs (millions)

Change in Emissions (lbs)

Ohio 113,711,997,000 -195 -$491,804 -23,822,663,372

Pennsylvania 105,474,534,000 -181 -$456,177 -22,096,914,873

Source: EIA and Weinstein et al. (2010)

Table 3: Effects of Displacing Coal with Natural Gas

17

2001 2002 2003 2004 2005 2006 2007 2008 2009 201070

80

90

100

110

120

130

140

150

160

170

OH PENN

OH and PA Natural Gas Related Employment 2001=100

Source: U.S. Dept. of Labor QCEW http://data.bls.gov/pdq/querytool.jsp?survey=en Note: 21111-Oil and gas extraction 213111 - Drilling Oil and Gas Wells 213112 - Support Activities for Oil and Gas Operations 541360 - Geophysical Surveying and

Mapping Services 238912 - Nonresidential Site Preparation Contractors 333132 - Oil and Gas Field Machinery and Equipment Manufacturing 333911 - Pump and Pumping Equipment Manufacturing for natural gas wells 486210 - Pipeline Transportation of Natural Gas 237120 - Oil and Gas Pipeline Construction

18

2001 2002 2003 2004 2005 2006 2007 2008 2009 201010000

12000

14000

16000

18000

20000

22000

24000

26000

28000

30000

OH and PA Natural Gas Related Employment

Source: U.S. Dept. of Labor QCEW http://data.bls.gov/pdq/querytool.jsp?survey=en Note: 21111-Oil and gas extraction 213111 - Drilling Oil and Gas Wells 213112 - Support Activities for Oil and Gas Operations 541360 - Geophysical Sur -veying and Mapping Services 238912 - Nonresidential Site Preparation Contractors 333132 - Oil and Gas Field Machinery and Equipment Manufacturing 333911 - Pump and Pumping Equipment Manufacturing for natural gas wells 486210 - Pipeline Transportation of Natural Gas 237120 - Oil and Gas Pipeline Construction

19

Source: U.S. Dept. of Labor QCEW http://data.bls.gov/pdq/querytool.jsp?survey=en and U.S. Bureau of Labor Statistics CES, Total Nonfarm Employment by state, www.bls.gov.Note: 21111-Oil and gas extraction 213111 - Drilling Oil and Gas Wells 213112 - Support Activities for Oil and Gas Operations 541360 - Geophysical Surveying and Mapping Services 238912 -

Nonresidential Site Preparation Contractors 333132 - Oil and Gas Field Machinery and Equipment Manufacturing 333911 - Pump and Pumping Equipment Manufacturing for natural gas wells 486210 - Pipeline Transportation of Natural Gas 237120 - Oil and Gas Pipeline Construction

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.0

0.1

0.2

0.3

0.4

0.5

0.6

OH PA

Percent Natural Gas Non-Farm Employment Share: OH and PA

http://www.bls.gov/

Population 2005

Per Capita Income

2005

Employment Growth Rate 2001-2005

Employment Growth Rate 2005-2009

Income Growth Rate 2001-2005

Income Growth Rate 2005-2009

Non-Drilling Counties

255,508 $32,187 5.3% -0.4% 12.6% 13.6%

Drilling Counties

124,928 $27,450 1.4% -0.6% 12.8% 18.2%

Table 1: Pennsylvania County Descriptive Statistics

Source: BEA

PA Counties considered in our simple difference in difference counterfactual

22

Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

80

85

90

95

100

105

110

Three Mining Counties

Southern PA Matched Employment Pairs

23

Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.go

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

90

95

100

105

110


Northeastern PA Matched Employment Pairs

24Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

65707580859095

100105110115120125130


Southern PA Matched Per Capita Income Pairs


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

65

70

75

80

85

90

95

100

105

110

115

120


Northeastern PA Matched Per Capita Income Pairs

26

Regression Approaches—the current gold standardRegression Approaches—the current gold standard

The need to establish a counterfactual in peer-reviewed research.

Many approaches. The three I consider are (1) matching, (2) 2SLS, and (3) difference in difference.

Matching uses trend and level attributes to identify otherwise equal locations when the treatment began—identify counter factual. Regress the sample of matched and non-matched counties using an indicator for treatment (drilling). Complex methods can use trends as well (GHM, JPE, 2010).


Drilling may be endogenous because places that accept drilling may be different than other places.

2SLS—find an instrument that is only related to the outcome through indirectly affecting the treatment. E.g., geology only affects economic activity through indirectly affecting shale energy employment. Instrument is then used to predict where drilling takes place.

My results are OLS.

27


Difference in Difference Take the change in the economic outcome and regress it on the change in treatment.

E.g., difference in the percent change in employment growth regressed on the change in the number of wells in periods t, and 0. [period t is say 4 years after shale drilling and period 0 is say 4 years prior to drilling. Need to pick initial periods carefully due

to anticipation effects.28

Regression Approaches—the current gold standardRegression Approaches—the current gold standard You can include trend effects. D in D’s key advantage is it

differences out county fixed effects that influence long-term growth—e.g., culture, or demographics.

One can still condition on other variables that may affect near term economic growth. For instance, initial income or population. 29

The ModelThe ModelC is county fixed effectPeriod 0:Yi0= β0 + β1(Number of Wells)i0 + Ci + εi0

Period 1:Yi1= β0 + β1(Number of Wells)i1 + Ci + εi

Difference the 2 equations and C falls out:

Yi1- Yi0= β0 + β1(Δ Number of Wells) + εi

Add in other X variables to condition on.β1 measures the positive indirect and

induced effects net of any displacement

30

31

Change in Percent Employment Growth 2005-2009 Compared to 2001-2005

Parameter Estimate t-value

Total Wells 05-09 min. 01-05 Wells 1.769E-05 1.142001 Log Population 0.023 2.64

2001 Log Per Capita Income -0.096 -1.55N 67

R2 0.118 Adjusted-R2 0.076

Short-term Employment and Income Effects of Drilling

Change in Percent income GrowthParameter Estimate t-value

Total Wells 05-09 min 01-05 Wells 2.515E-05 2.112001 Log Population 0.084 2.53

2001 Log Employment -0.086 -2.76N 67

R2 0.205 Adjusted-R2 0.167

Source: BEA and PA DEP Date

32

Employment Growth Using National Data.Employment Growth Using National Data.1. Yi0= β0 + β1(Oil and Gas Employment Growth)i0 + Ci

+ εi0

2. Yi1= β0 + β1(Oil and Gas Employment Growth)i1 + Ci + εi1

3. Yi1- Yi0= β0 + β1(Δ Oil and Gas Employment Growth) + εi

Equation 3 estimates the impact of the difference in oil and gas employment growth (from the 2001-2005 time period to the 2005-2011 time period) on the difference in employment growth between period 1 and period 0 (2001-2005).

The county fixed effect is differenced out and thus there should not be omitted variable bias.

β1 measures the positive indirect and induced effects net of any displacement.

Change in Employment Growth Rate:2005-2011 minus 2005-2001Change in Employment Growth Rate:2005-2011 minus 2005-2001

Dependent Variable

VariableEmployment Growth

Rate t-statisticOil and Gas Employment Growth 0.00011 2.10

2000 Log Population -0.01000 -3.912001 Log Average Wage 0.13218 7.43

2000 Percent College -0.17863 -3.452000 Unemployment Rate -0.00034 -0.31

Industry Controls YesState Fixed Effects Yes

R2 0.2292Adj-R2 0.2143

N 3065

Earnings Growth Rate: 2005-2011 minus 2005-2001Earnings Growth Rate: 2005-2011 minus 2005-2001

Dependent VariableVariable Earnings Growth Rate t-statistic

Oil and Gas Employment Growth 0.00027 2.902000 Log Population -0.02100 -4.66

2001 Log Average Wage 0.28632 9.132000 Percent College -0.36531 -4.00

2000 Unemployment Rate 0.00156 0.79Industry Controls Yes

State Fixed Effects YesR2 0.2494

Adj-R2 0.2350N 3065

Growth Rate of Establishments : 2005-2011 minus 2005-2001Growth Rate of Establishments : 2005-2011 minus 2005-2001 Dependent Variable

VariableEstablishments

Growth Rate t-statisticOil and Gas Employment Growth 0.00006 0.89

2000 Log Population -0.04986 -15.332001 Log Average Wage 0.11602 5.13

2000 Percent College 0.02788 0.422000 Unemployment Rate 0.00699 4.91

Industry Controls YesState Fixed Effects Yes

R2 0.4480Adj-R2 0.4373

N 3065

Tentative Estimated Impact on the Pennsylvania Marcellus RegionTentative Estimated Impact on the Pennsylvania Marcellus RegionAverage county employment in the Pennsylvania Marcellus Shale region that increased the number of wells drilled (34 counties) was 56,885 in 2005 (total employment in the region was 1.9 million).Direct oil and gas employment [NAICS 2111 and 2131] in the Marcellus drilling region of PA went from 3,911 in 2001 to 4,922 in 2005 to 15,335 in 2011 (an increase in the percent growth of 186%)Expected percent growth in total employment is 0.038% (1.86*0.00011) which amounts to 22 (0.00038*56885) workers per county (735 total workers for the region)Expected percent growth in total earnings 0.049% or $985,821 ($33.5 million for the region)Expected percent growth in total establishments 0.011% or 0.35 establishments per county (12 for the region)

Top Counties by Percent Oil and Gas Employment GrowthTop Counties by Percent Oil and Gas Employment Growth

Rank County State 2000 Population Shale Oil and Gas

GrowthOil and Gas

Growth

1 White AR 67,165 63% 166,413% 1,664

2 Bradford PA 62,761 100% 105,321% 1,053

3 Lycoming PA 120,044 93% 75,981% 760

4 Faulkner AR 86,014 59% 36,452% 1,059

5 Wyoming PA 28,080 100% 27,209% 272

6 Cleburne AR 24,046 80% 23,308% 233

7 Barrow GA 46,144 0% 12,069% 121

8 Conway AR 20,336 83% 11,827% 118

9 Tioga PA 41,373 100% 11,598% 116

10 Robertson TX 16,000 1% 9,142% 102

Top Counties by Oil and Gas Employment GrowthTop Counties by Oil and Gas Employment Growth

Rank County State 2000 Population Shale Oil and Gas

GrowthOil and Gas

Growth

1 Harris TX 3,400,578 0% 30% 20,054

2 Williams ND 19,761 100% 404% 5,663

3 Midland TX 116,009 0% 56% 5,183

4 Oklahoma OK 660,448 0% 63% 5,089

5 Ector TX 121,123 0% 109% 4,206

6 Tarrant TX 1,446,219 100% 105% 4,145

7 Denver CO 554,636 100% 72% 2,880

8 Kern CA 661,645 20% 28% 2,343

9 Dallas TX 2,218,899 32% 34% 2,188

10 Lafayette LA 89,974 0% 17% 2,174

39

Conclusions PA Shale natural gas is associated with

significant income effects but modest employment effects.

The real question of shale investment is not job creation, but net benefits vs costs including pollution costs. In this question, 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.

States should consider higher severance tax for long-term needs. Schools, infrastructure, environment.

Mark PartridgeSwank Chair in Rural-Urban PolicyDept. Agricultural, Environmental &

Development EconomicsThe Ohio State UniversityGoogle “Partridge Swank” and you will get my website(614) 688-4907([email protected])

40

Individual County Graphs FollowIndividual County Graphs Follow

41

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

80

85

90

95

100

105

110

115

120

Washington(Mining)

Washington-Cumberland Matched Employment Pair

Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov.


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

80

85

90

95

100

105

110

115

120

Greene(Mining) Perry(Non-Mining)

Greene-Perry Matched Employment Pair


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

80

85

90

95

100

105

110

115

120

Fayette(Mining)

Fayette-Franklin Matched Employment Pair


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

85

90

95

100

105

110

Susquehanna(Mining)

Susquehanna-Carbon Matched Employment Pair

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

90

95

100

105

110

Tioga(Mining) Union(Non-Mining)

Tioga-Union Matched Employment Pair


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

90

95

100

105

110

Bradford(Mining)

Bradford-Columbia Matched Employment Pair


48

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

70

75

80

85

90

95

100

105

110

115

120

125

Washington(Mining)

Washington-Cumberland Matched Per Capita Income Pair



1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

65707580859095

100105110115120125130135

Greene(Mining) Perry(Non-Mining)

Greene-Perry Matched Per Capita Income Pair

50


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

65

70

75

80

85

90

95

100

105

110

115

120

125

Fayette(Mining)

Fayette-Franklin Matched Per Capita Income Pair

51


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

65707580859095

100105110115120125

Susquehanna(Mining)

Susquehanna-Carbon Matched Per Capita Income Pair

52


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

65

70

75

80

85

90

95

100

105

110

115

120

Tioga(Mining) Union(Non-Mining)

Tioga-Union Matched Per Capita Income Pair

53


1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

65

70

75

80

85

90

95

100

105

110

115

120

Bradford(Mining)

Bradford-Columbia Matched Per Capita Income Pair

Measuring The Economic Value of Shale Energy Development Presented for the BU/SRSA Shale Workshop Mark Partridge & Amanda Weinstein Presented at Bucknell.

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