Thursday, December 13, 2012

THE EMPEROR HAS NO NATURAL GAS BOOM (Pub Date TBD)

On December 10th Governor Earl Ray Tomblin convened his annual Governor’s Energy Summit at which leaders from industry, academe, and government gathered to studiously avoid addressing the only question that should have been on the agenda. Why has West Virginia’s natural gas boom so far proven to be an economic non-event?

You remember the hype. The process known as fracking would enable drillers to tap West Virginia’s vast Marcellus shale natural gas reserves generating tens of thousands of new jobs and hundreds of millions of dollars in new tax revenue that would put the state on the road to sustained economic prosperity. “Game-changing” was a favorite descriptor among politicians and pundits.

But an accidentally more accurate description was uttered when a state official called the prospects, “mind boggling”. That’s because a comparison of the boom’s actual economic effects to those that were predicted suggests that minds were indeed “boggled”.

The problem isn’t that that natural gas production hasn’t grown as predicted. It has. Since 2008 volume has risen by 87%. But, the jobs, tax revenues, and economic prosperity that were supposed to grow as well are an altogether different story.

In November Workforce West Virginia reported that since 2008 oil and gas employment has risen not by tens of thousands or even by 1,000. Just 916 jobs have been added – less than 10% growth in four years. And the severance tax that was expected to produce tens of millions of dollars in new revenue has grown not at all. Despite the huge rise in production, severance taxes in 2012 are no greater than they were in 2008.

But, if the effects on the state’s economy aren’t great, surely the counties where drilling is concentrated must be prospering. The State Journal recently reported that four counties – Marshall, Wetzel, Doddridge, and Harrison – account for 87% of Marcellus shale gas production in West Virginia. Are they booming?

Since 2005, just before the dawn of the Marcellus shale era, the combined populations of these four counties have grown by 1,001 people – less than 1%. The size of their workforces has actually declined by almost a thousand. And the number of jobs has dropped by more than 2,000, causing the combined unemployment rate to rise from 4.4% to 6.9%.

Yes, but we’re just coming out of recession, so aren’t the Marcellus counties at least doing better than the rest of West Virginia where there is little drilling activity?

No.

The rest of the state has actually experienced slightly more population growth and less job loss. And, while the unemployment rate in these four counties is half a point below the state rate, it was half a point lower before Marcellus drilling began.

In short, by every important metric, West Virginia’s Marcellus shale natural gas boom has failed to produce any measurable benefit for the people of West Virginia.

Why?

It’s hard to quantify the dynamics underlying a phenomenon the existence of which few are aware or willing to admit -- least of all the captains of industry, government, and academe who sold us on “the Marcellus Miracle” and, in most cases, continue to believe in it. But, four factors almost certainly play roles.

First, amid the glut of inventory brought about by fracking, the price of natural gas dropped even more than the volume increased, which explains why severance taxes failed to grow. It also means that property owners’ royalty checks are much smaller than they had hoped.

Second, many landowners who receive royalties don’t live in West Virginia. The last study I could find on absentee land ownership was done in 1981 and, at that time, a majority of the state was owned by out-of-state individuals and corporations while 15% was owned by the government, which means that residents of West Virginia owned only about a quarter. There’s little reason to think the situation has improved and much reason to suspect it has worsened.

Third, companies doing the drilling and their investors are almost entirely out-of-state entities, so any profits go out-of-state as well.

Finally, many and probably most of the drilling jobs that have been created are held by out-of-state workers.

If some of this sounds vaguely familiar, it’s because West Virginia has seen this picture before. In our southern coalfields, as much as 80% of the land is owned by out-of-state interests and the historical result has been a massive repatriation of wealth that has left those counties among the poorest in the nation despite their mineral treasure.

Still, there are some flickers of hope that West Virginia’s natural gas boom will not be a replay of the state’s dismal experience with coal. Gas prices may rebound a little, although not to the degree that many expected even a year ago. And, as the Clarksburg Exponent Telegram recently reported, some companies are beginning to locate headquarters and natural gas processing centers in West Virginia, which may finally produce some job growth.

But, the problem of out-of-state ownership of land and production is immense and structural, meaning wealth will continue to drain from the state. For this, there is no market solution and government’s ability to address the problem is limited. Yet, if the problem isn’t addressed, future phases of West Virginia’s gas boom may be as barren as the current phase has been.

That’s why it’s time for the exaggerations about the economic impact of natural gas in West Virginia to end and the hard work of finding solutions to begin.

Sean O’Leary can be contacted at seanoleary@citlink.net. A version of this column containing links to references and statistical sources may be found at www.the-state-of-my-state.com.

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