Youngstown Daily Legal News

Researchers warn of potential boom/bust cycle for Ohio economy

RICK ADAMCZAK
Special to the Legal News
Published: June 19, 2012

If Ohio is to avoid a traditional boom-and-bust cycle as it stands on the brink of a boom in natural gas and crude oil production, it will have to take action to buttress against such fluctuations, according to a new Ohio State University policy brief.

The lack of any long-term moves to ensure that Ohio benefits from the growing development of the Marcellus and Utica shale oil and gas reserves could result in the state entering a boom-bust cycle that could have long-lasting negative effects, the analysts said.

“Future growth might stagnate because the natural capital and public capital, like infrastructure and amenities, will be degraded by the boom, by the rush to economic windfall,” said Michael Farren, a doctoral student and graduate research associate in Ohio State University’s C. William Swank Program in Rural-Urban Policy.

In the past year, thanks to advanced technologies in drilling, more natural resource companies are drilling in Ohio, mostly in the eastern half of the state, to extract natural gas and oil from the Marcellus shale reserves and, to a lesser extent, the Utica shale.

As a result many landowners in that part of the state are starting to receive financial windfalls from royalties and drilling rights.

Those drilling companies also are hiring more workers and peripheral businesses such as steelmaking are growing, all leading to an improved economy.

But the brief’s authors warn that while the “boom” is just getting started, state policy makers need to prepare for an eventual slowdown.

Farren said there are ways to prevent the boom from causing a worse bust in the future.

The analysis is included in a new brief, “Making Shale Development Work for Ohio,” written by Amanda Weinstein, a doctoral candidate in the Swank program, and Mark Partridge, chairman of the program and a professor in the Department of Agricultural, Environmental and Development Economics, and Farren.

The brief recommends that the state apply an appropriate level of severance taxes on companies that extract shale gas, oil and other resources to pay for the immediate costs of the industrial activity, including the upgrade and maintenance of roads, bridges, water supplies and other public amenities.

The revenues also should pay for long-term costs, particularly to help boost education and economic diversification.

Ohio’s severance taxes on the oil and gas industry are among the lowest in the nation, amounting to 3 cents per thousand cubic feet of natural gas and 20 cents per barrel of oil, the researchers said.

The funds are used to pay for costs borne by the Ohio Department of Natural Resources to regulate the industry.

“That in itself is not a bad thing. You want to make sure the regulatory costs of the industry are compensated. But over the course of the boom there are going to be a lot more economic effects than just the cost of regulation,” said Farren.

The analysts say recent proposals to increase taxes on the oil and gas industry in Ohio, by Gov. John Kasich and by Democrats in the Ohio legislature, lack key ingredients that would help Ohio avoid the natural resource curse.

The governor’s proposal would use the extra taxes to reduce the state’s income tax, which, the authors say, “may not be the most effective method to avoid the adverse effects of the resource curse.”

The Democrats’ proposal would use extra money to generate increased employment in schools and public service positions, but, while a step in the right direction, wouldn’t be as effective as directing funds toward specific degree programs that would contribute toward economic growth and diversity.

“We have this wealth that is literally a part of the land. That natural wealth is leaving, and, because we can never get it back, we want to make sure we do something to retain some of the value lost,” said Farren.

Ohio can learn from other regions’ mistakes as well as their good practices, Farren said, to avoid the “natural resource curse.”

“It’s counterintuitive that having higher resources would lead to lower long-term growth, but it happens so often that it has become its own area of academic study,” he said.

The authors say it’s important for the drilling companies to offset the expenses incurred by a boom in natural resource exploration.

“You want to make sure all the relevant costs are paid for by the industries that are benefiting from the resource so the costs aren’t pushed onto others. The economics literature suggests that you should improve infrastructure and education, and then find a way to share revenues with the affected communities,” said Partridge.

The authors use the Appalachian coal boom of the 1970s as an example of where a boom in one sector of the economy leads to a strong, often sudden, growth in low-skill, high-paying jobs in that sector.

That’s followed by an availability of such jobs that leads young workers away from advanced education or other high-skill training opportunities.

Other industries avoid the region because of the reduced job skills in the workforce and the higher wages in the area, according to the authors.

As the availability of the natural resource drops, or when its value decreases due to other economic forces, employment in the sector also falls and with no other viable options, the economic decline causes workers to migrate out of the area in search of other opportunities.

Weinstein said policymakers should strive for balance.

“For example, the boom might increase the benefit of not pursuing higher education, but you could counteract that effect by decreasing the costs of going to school,” he said.

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