Even though oil prices are up from their January lows, many people are focused on the current economic hardships, business bankruptcies and layoffs, and the question naturally arises – was the boom worth it?
Two recent economic analyses show that the boom was economically beneficial and that local governments report stronger fiscal health than before the boom.
In addition, and contrary to some media reports, the crime rates did not go up in areas with increased oil and gas development.
Burdens and Benefits on Local Governments
A recently released multi-year study from Duke University finds that through the fall of 2015, oil and gas development had positive impacts on most local governments, even though they bore the brunt of the responsibility for maintaining roads damaged by truck traffic and filling increased demand for public services, such as sewer, water, fire protection, emergency medical services and law enforcement.
Several county and city case studies within the 16-state study found that as drilling and production declined, a minority of smaller, geographically isolated and less diversified communities face significant fiscal risks.
Richard Newell and Daniel Raimi lead the Duke University Shale Public Finance project, which examined the major onshore oil and gas-producing regions of the United States from 2013 through 2015. Ongoing research examines fiscal issues associated with decreased oil and gas activity in 2015 and beyond.
Using 2013 data and interviews, the researchers found that as oil and gas exploration and production surged, some local governments’ revenue did not keep pace with rapidly increasing costs and demand for services. Finding money to maintain roads damaged by increased truck traffic was a major problem for most local governments. Other impactful costs to local governments included: sewer and water services, fire, EMS and law enforcement, and the difficulty of hiring staff in competition with industry. However, the financial burden was much less in places with existing infrastructure or where industry operators made in-kind or cash contributions directly to local governments.
Variations in the financial burdens on local governments also depended on how oil and gas revenue was allocated to local governments. In the major oil producing states, the local allocation varied from 0.5 percent (Ohio) to more than 9 percent (Wyoming) in 2013.
There are a few caveats to the Shale Public Finance analysis.
The analysis does not tally sales tax, which is important to municipalities and correlates with changes in the population and economic activity associated with oil and gas production. In addition, these numbers do not include the important benefits of some states’ grant programs, which allocate revenue to local governments where industry impacts were the greatest.
In the fall of 2015, even with falling oil prices and drilling activity, local governments in North Dakota reported that their fiscal health was better than before the Bakken development. In 2015, population growth and related demand for local services had declined. In addition, the North Dakota Legislature passed laws in 2015 providing additional revenues to local governments. One potential downside or risk is that many local governments took on additional debt during the boom but now have less revenue to service the debt. More diversified economies can better weather downturns in a single industry. However, the rural nature of many of the shale development areas makes it hard to diversify the economy and maintain economic activity.
Another case study looked at Garfield County and Rio Blanco County, adjacent counties in the Piceance basin of western Colorado. The counties experienced rapid growth then decline in drilling and production activity related to the tight gas boom that preceded the shale cycle by several years. Piceance basin gas drilling rapidly expanded in the early 2000s; drilling peaked in 2011 and gas production peaked in 2012. State impact grants helped both counties. Garfield County government experienced a large boost from the drilling boom, helped in part from an industry partnership for road maintenance. Rio Blanco County, on the other hand, has less population and infrastructure and is not faring as well. The county’s net assets increased but not enough to balance the costs of needed road repairs.
Another study confirms the economic benefits of the drilling boom. A 2015 analysis of income, employment and crime statistics by Dartmouth economics and business faculty (National Bureau of Economic Research Working Paper 21624) found that the areas surrounding extraction operations enjoy significant economic benefit: for every million dollars of oil and gas extracted, wages increased $117,000 within 100 miles of production. The researchers also found no significant change in crime rates in areas with oil and gas extraction.