Update (12/27/12): It has been just over a year since the release of the Partridge-Weinstein report, and over fifteen months since the Ohio Oil and Gas Energy Education Program released their Economic Impact Study – conducted by Kleinhenz and Associates – which the Partridge report attempted to refute.

The Ohio State researchers’ prediction of 20,000 jobs – a number well below the 204,000 plus projected by OOGEEP – is broken down below, and EIDOhio.org was also fortunate to publish analysis of the study from expert economists Timothy Considine, Ph.D – Professor of Economics, Univ. of Wyoming, and Jack Kleinhenz, Ph.D – Principal and Chief Economist, Kleinhenz & Associates.

Jump forward to last week, and we can get an idea of just how off the mark the OSU report was in its low assessment of what kind of economic benefit Ohio would experience thanks to its development of the Utica Shale.

As the Columbus Dispatch and numerous outlets reported, a recent study conducted by IHS Cera for the U.S. Chamber of Commerce’s Institute for 21^st Century Energy shows Ohio is already seeing these benefits in the form of both jobs and investment. The report highlights the creation and support of nearly 39,000 jobs to date – a figure surpassing the Partridge projections by good margin. And, it’s important to highlight these numbers are coming out while we remain in the early stages of this development.

With these early indicators, it is easy to see why there is so much excitement of what’s to come, something the Chamber’s report provides more insight on. Echoing the OOGEEP impact study, the report projects the creation and support of 267,000 jobs in the coming years as a direct result of the oil and natural gas industry’s continued development of Ohio’s natural resources. That’s over a quarter of a million jobs – or enough to cut the number of currently unemployed Ohioans by over two-thirds.

– Original post from 12/20/11- 

EID breaks down report from Ohio State researchers predicting “only” 20,000 new jobs from Utica Shale development

British historian Thomas Carlyle is credited with coining the phrase “the dismal science” to describe the study of economics. But though he devised that expression in the 19^th century in reference to the work of Thomas Malthus, it may be an appropriate way to describe the report released last week by two researchers from Ohio State.

Authored by OSU professor Mark Partridge and graduate student Amanda Weinstein, the report seeks to attack a study prepared by the respected, Cleveland-based firm of Kleinhenz and Associates, released by OOGEEP in September, which found that responsible Utica development could produce and support more than 200,000 jobs in Ohio over the next four years. An interesting fact – and one unmentioned in the Partridge paper – is that a representative from Ohio State actually sat on the project committee for the OOGEEP report.

At its core, Partridge and Weinstein argue that the Kleinhenz’s estimate of 200,000 new jobs is too optimistic – suggesting instead that a more reasonable forecast is a scenario in which Utica development in Ohio nets only 20,000 new jobs by 2015.

Of course, with the state’s unemployment rate currently at nine percent, 20,000 new jobs is certainly nothing to sneeze at – not when those jobs carry average wages of $76,036, according to one analysis by the state of Pennsylvania. As a spokesman for Gov. Kasich put it in the Columbus Dispatch last week: “Whether it’s 20,000 jobs or 200,000, that’s tens of thousands of families living in a part of the state that’s starving for good economic news who would say, ‘Sounds good, sign me up.’  ”

Still, the question of whether Ohioans can expect 200,000 new jobs from the Utica or only 20,000 is an important one – and so is the matter of how Partridge and Weinstein arrive at figures so far below the ones produced by independent researchers not only in Ohio, but in similar studies released in other shale-producing states all across the country.

The answer, as it usual is, can be found in the methodology. Although you might expect to find lots of equations and algorithms and funny Greek letters in a macroeconomics modeling forecast, in the Ohio State report, the researchers arrive at their numbers in much simpler fashion.

First, Partridge and Weinstein argue that only 10,000 new jobs were created in Pennsylvania during the first four years of Marcellus activity, and then assume the same will hold true for Ohio. Next, to account for “indirect” jobs, they simply multiply that number by two. The researchers describe as “reasonable” their decision to use this multiplier – and indeed, it appears to fall roughly in line with the one used by Considine, et al. in their assessment of Marcellus jobs released this year. So if the problem with Partridge isn’t the multiplier, then where, exactly, are the discrepancies?

The chart included on page 12 of the OSU paper provides a straightforward answer to this question. As it turns out, the researchers only include a few basic employment categories in their analysis of the new jobs expected to be created from responsible resource development in Ohio – while leaving out many others (all of them relevant to the Utica) that any other reasonable, objective analysis would have incorporated.

To Partridge, only jobs related to the drilling of new wells, construction of new pads, geophysical surveying of new areas, and the manufacture of new pipe “count” as jobs that can be ascribed to the industry. Jobs in other sectors of the economy – from retail, to trade, to insurance, to manufacturing, to legal work and environmental consulting – simply don’t make the cut in this analysis.

The problems with the paper don’t end there. Importantly, it also fails to account for the downstream impact from billions of dollars in taxes, rents and royalties that Utica development is expected to produce for state and local governments and local mineral-owners. In Pennsylvania, Marcellus exploration resulted in the delivery of more than $2.06 billion to landowners in 2010, and another $1.085 billion to state and local governments, according to researchers from Penn State. Unfortunately, and remarkably, none of those revenues have the effect of creating a single job in the Partridge paper. They may as well just have been buried in the backyard.

Although the OSU paper is 35 pages in length, the calculations involved in arriving at its 20,000-job estimate are explained in just two pages. The rest of the study is best described as an extended op-ed, with the researchers laying out their views on the costs and benefits associated with producing natural gas (but strangely, not oil) from the Utica, citing various studies, news reports, and even scenes from Gasland before concluding – spoiler alert — that more research needs to be done before fully committing to shale development in Ohio.

Having identified the core weaknesses with the quantitative figures produced by Partridge and Weinstein (cited as “P / W” below), below we take a closer look at some of the other, more qualitative statements and conclusions found in the paper:

P / W: “[W]ith these assumptions, we assume that from 2004-2010, there was a gain of about 10,000 direct and indirect jobs in the natural gas industry in Pennsylvania.” (p. 12)

Facts:

Partridge and Weinstein employ two interesting tricks here to manufacture inexplicably low numbers for Marcellus employment in Pennsylvania.

• First, they choose a time range that starts roughly two years too early, and ends without including any of the enormous jobs numbers generated in 2011. According to PA DEP, only 13 Marcellus wells had been drilled in the entire state as of Jan. 1, 2007. The researchers’ decision to start their “tally” for Pennsylvania back in 2004 – a year in which exactly zero Marcellus wells were drilled – allows them to dilute their final number, and thus apply a lower figure as a baseline for Ohio.

• Second, as we suggest above and cite repeatedly below, the number of Marcellus-related jobs created in Pennsylvania within this date range was well in excess of 10,000. To arrive at this reduced figure, Partridge and Weinstein exclude from consideration tens of thousands of Marcellus-related jobs that were created in everything from agriculture to real estate. The reason that Penn State’s numbers are so much higher? Those researchers account for these jobs, and list them in a chart included on page 16 of this report.

• Here’s the amazing thing about Ohio – and something that largely didn’t happen in Pennsylvania: Thousands of jobs are being created right now even before serious development begins merely in anticipation of what might be possible from the Utica. Searching around a bit on the Internet, we came up with nearly 30 separate stories over the past year reporting on jobs either created or saved — not because of what the Utica is producing now, but because of what it might produce in the future.

• Tally all those up, and you get a back-of-the-envelope estimate closing in on 5,000 new jobs before you even drill your first well. The notion that only 10,000 direct jobs will be created over the next five years – when actual development, production, and royalty and revenue generation will actually take place – is a very difficult assertion to defend.

P / W: “As the number of wells drilled dramatically increased, so did natural gas production in Pennsylvania, especially in the northeast region.” (p. 10)

Facts:

While it’s certainly true that the volume of natural gas produced in Pennsylvania has increased dramatically over the past six years, those increases have been realized even while fewer wells were being drilled across the state.

• According to PA DEP, the total number of wells drilled in Pennsylvania over the past six years has dropped 29 percent, even as the volume of natural gas being produced on a daily basis has increased roughly 12-fold in that time. (DEP end-of-year report, Dec. 2010)

• For perspective, Pennsylvania was already home to more than 46,000 active natural gas wells before the first Marcellus well was ever spud back in 2005, according to EIA. Using the latest available data, Marcellus wells account for barely eight percent of all active natural gas wells in Pennsylvania – and only 1.1 percent of all total wells drilled.

P / W: “In 2010, tourism employed approximately 400,000 people in Pennsylvania whereas the natural gas industry employed closer to 26,000.” (p. 5)

Facts:

• According to the Pennsylvania Dept. of Labor and Industry (DLI), the natural gas industry hired nearly 48,000 new workers in 2010 alone. Those numbers came on top of the more than 141,000 other jobs that Marcellus-related industries generated in Pennsylvania since 2005. (“Marcellus Fast Facts,” PA DLI, Dec. 2011)

• As reported by the Harrisburg Patriot-News: “Nearly 48,000 people have been hired in the last year by industries related to drilling in the Marcellus Shale, and 71 percent of those people were Pennsylvania residents. Nine thousand of them were hired in the first three months of 2011. The average salary was higher than the statewide average. And the rate of hiring is accelerating.” (“Marcellus Shale creates 48,000 jobs, report says”; Harrisburg Patriot-News, May 29, 2011)

P / W: “Overall, there are no clear employment effects for heavily drilled counties. We are not saying there are no drilling employment effects, but that they are not large enough to be detected …” (p. 15)

Facts:

• According to another report from PA DLI: “The Northern Tier [workforce investment areas] experienced the most rapid growth in Marcellus Shale core industries of all WIAs in terms of both volume and percentage; Northern Tier saw an increase of 1,806 employees from 2008Q1 to 2011Q1, for an increase of over 2,000 percent.” (PA DLI report, Dec. 2011)

• More: “The Central Workforce Investment Area (WIA) was second in terms of employment growth by volume and percentage, increasing employment by more than 660 percent.” (ibid)

• And more: “Areas with significant Marcellus Shale drilling activity have seen notable decreases in unemployment rates. From October 2009 to October 2011: The six Workforce Investment Areas with substantial Marcellus drilling saw a combined decrease in unemployment rate of 1.6 percentage points.” (ibid)

P / W: “Thus, [natural gas’s] effects on ‘energy security’ are rather limited in the foreseeable future as increased electrical demand and the growing reliance on US natural gas will primarily be at the expense of US coal.” (p. 5)

Facts:

Here, the OSU researchers appear to be arguing that, just because the vast majority of natural gas from shale is expected to be used domestically in the United States, the energy security benefits of the energy source will be limited in a global and/or geopolitical context.

• But that’s not what researchers at Rice University found in a study released earlier this year. According to that paper: “Rising shale gas supplies have significantly reduced U.S. requirements for imported liquefied natural gas (LNG), which has already had geopolitical implications. For example it has played a key role in weakening Russia’s ability to wield an ‘energy weapon’ over its European customers by increasing alternative supplies to Europe in the form of LNG displaced from the U.S. market.” (Baker Institute study, p. 10)

• More: “North American shale gas developments are having effects far beyond the North American market, and these impacts are likely to expand over time.” (p. 11)

• According to the Wall Street Journal: “[Vladimir Putin] is worried about the impact of surging shale gas supply will have on state-owned gas giant Gazprom. … The extra competition isn’t a great prospect for Gazprom – or Russian politicians, who rely on oil and gas tax revenues to balance the books.” (“Putin’s Frack Attack,” WSJ, Dec. 15, 2011)

P / W: “Innovations in hydraulic fracturing are the reasons natural gas extraction has recently been developing in the Marcellus shale regions in Pennsylvania and Ohio and now expanding to the Utica shale regions in Ohio.” (p. 7)

P / W: “Horizontal wells and hydraulic fracturing in conjunction with advances in micro-seismic technology aiding both exploration and the drilling process have allowed the energy industry to extract natural gas at greater depths.” (p. 7)

Facts:

• In fact, advancements in horizontal drilling technology – not just hydraulic fracturing — have allowed producers to access abundant sources of oil and natural gas from previously uneconomic shale formations. Hydraulic fracturing is a technology that’s been commercially deployed since the late 1940s; in contrast, the first patent for horizontal drilling was awarded in 1981.

• According to the Dept. of Energy: “A key element in the emergence of shale gas production has been the refinement of cost-effective horizontal drilling and hydraulic fracturing technologies. These two processes, along with the implementation of protective environmental management practices, have allowed shale gas development to move into areas that previously would have been inaccessible.” (Modern Shale Gas Development: A Primer; DOE/GWPC; April 2009)

• Finally, the combination of horizontal drilling technology and hydraulic fracturing has not allowed industry “to extract natural gas at greater depths.” In Ohio, long before lateral wells were envisioned, producers have accessed energy resources at depths well below the Utica Shale.

• According to the Ohio Geological Survey, productive strata below the Utica in Ohio include the Trenton Black River, the Rose Run sandstone, and the Copper Ridge dolomite – just to name a few. (OGS map, accessed on ODNR page on Dec. 18, 2011)

P / W: “Figure 3 on the next page shows that most natural gas is still used to supply electricity.” (p. 5)

Facts:

• According to the Energy Information Administration (EIA), more than 7.3 trillion cubic feet of natural gas was used to generate electricity in 2010 (latest data available). But that figure only represents 30.4 percent of total natural gas consumption in the United States.

• Again, according to EIA, more than 17 trillion cubic feet of natural gas was used in 2010 for purposes that have nothing to do with electricity – everything from heating and cooling homes, business and schools, to serving as a fuel for natural gas-powered vehicles. A narrow plurality of the nation’s natural gas supply was used to generate electricity – but it’s not accurate to say that “most natural gas is used to supply electricity.”

P / W: “In the 1980s, the Barnett shale in Texas became the first natural gas producing shale. More than a decade of production from the Barnett shale in Texas has helped improve the hydraulic fracturing process, leading the way for it to be used in other areas such as the Marcellus shale in Pennsylvania and the Utica Shale in Ohio.” (p. 7)

Facts:

Actually, America’s “first natural gas-producing shale” well was developed in the state of New York, not Texas. In 1825, not “the 1980s.”

• According to the State University of New York, Fredonia, “[T]he first documentation of a well being drilled was found in the Fredonia Censor dated August 31, 1825. A contemporary newspaper account published in the November 30, 1825 issue of the Fredonia Censor declared that the ‘hole was drilled 27 feet into a slaty rock.’ Even that first person record was incorrect as the rock in this area comprises of shale, not slate.” (Fredonia Shale Research Institute, accessed Dec. 18, 2011)

• Although the Barnett Shale is often cited as the first formation in America in which horizontal drilling and hydraulic fracturing was used to generate commercial volumes of natural gas, that distinction more accurately resides with the Austin Chalk formation in the Pearsall fields of Texas, according to EIA.

• From an EIA report issued in 1993: “Horizontal drilling technology achieved commercial viability during the late 1980’s. Its successful employment, particularly in the … Austin Chalk of Texas, has encouraged testing of it in many domestic geographic regions and geologic situations.” (Drilling Sideways: A Review of Horizontal Well Technology, EIA, April 1993)

P / W: “In 2005, hydraulic fracturing methods were exempted from the Safe Drinking Water Act and Clean Water Act.” (p. 5)

P / W: “Representatives of the natural gas industry have made similar claims that hydraulic fracturing has never contaminated drinking water sources. These claims were used to exempt the natural gas industry from the Clean Water Act and the Safe Drinking Water Act when Congress enacted the 2005 Energy Policy Act.” (p. 22)

Facts:

This claim is false. Hydraulic fracturing has never in its nearly 65-year history been regulated under the Safe Drinking Water Act, and it is in no way exempt from the Clean Water Act. It has, however, been aggressively regulated by the states, which have compiled an impressive record of enforcement and oversight over the past six decades.

• Language adopted in 2005 simply reaffirmed the fact that states have always taken the lead in regulating the fracturing process. And incidentally, the 2005 energy bill passed with overwhelming bipartisan support — with 74 “yea” votes in the U.S. Senate, including ones from the top Democrat on the Energy Committee; current Interior secretary Ken Salazar, then a senator from Colorado; and then-Sen. Barack Obama. In the U.S. House, 75 Democrats supported the final bill, including the top Democratic members on both the Energy & Commerce and Resources Committees.

• Fmr. Clinton EPA administrator Carol Browner explains: “EPA does not regulate – and does not believe it is legally required to regulate – the hydraulic fracturing of methane gas production wells under its UIC program [under the Safe Drinking Water Act].” (Browner letter to David Ludder, May 5, 1995).

P / W: “There may be other toxic chemicals in the hydraulic fracturing fluid mix though energy companies have continually refused to disclose these chemicals for proprietary reasons.” (p. 23)

Facts:

• This point is directly rebutted by PA DEP: “Drilling companies must disclose the names of all chemicals to be stored and used at a drilling site … These plans contain copies of material safety data sheets for all chemicals … This information is on file with DEP and is available to landowners, local governments and emergency responders.” (PA DEP Marcellus FAQ, accessed Dec. 18, 2011)

• More from Pa. code: “Within 30 calendar days of cessation of drilling or altering a well, the well operator shall submit a well record to the Department that includes the following information. … A descriptive list of the chemical additives in the stimulation fluid, including any acid, biocide, breaker, brine, corrosion inhibitor, crosslinker, demulsifier, friction reducer, gel, iron control, oxygen scavenger, pH adjusting agent, proppant, scale inhibitor and surfactant.” (25 Pa. code chapter 78.122, accessed Dec. 18, 2011)

• On the federal level, operators are bound by requirements of the Community Right-to-Know Act (passed in 1986), which mandate that detailed product information sheets be drawn up, updated, and made immediately available to first-response and emergency personnel in case of an accident on-site. (OSHA Standards, accessed Dec. 18, 2011)

• More recently, an effort led by the U.S. Department of Energy and the Ground Water Protection Council (GWPC) culminated in the creation of a searchable, nationwide database with specific well-by-well information on the additives used in the fracturing process. Just six months after it was launched in April, GWPC announced in October that information on more than 5,200 wells is now posted on FracFocus.org. (E&E News, Oct. 21, 2011)

P / W: “Impact analysis is usually based on an old input-output technology that is typically not used today by economists to estimate actual economic effects.” (p. 11)

Facts:

Partridge and Weinstein may not personally approve of input-output analysis, but the committee that awards the Nobel Prize in economics disagrees.

• This description comes from the award issued to the method’s founder, Dr. Wassily Leontief: “The input-output system has found extensive use especially in forecasting and planning, both in the short and in the long run. The wide usefulness of the input-output technique is indicated by the fact that it is used in forecasting and planning in quite different types of economic systems – decentralized market economies with mainly private enterprise as well as centrally-planned economies dominated by public ownership.” (Nobel committee site, accessed Dec. 19, 2011)

• According to Dr. Tim Considine, author of the Marcellus jobs report: “The IMPLAN model has been used to estimate the economic impacts of development in other energy sectors, including a study by the Pennsylvania Department of Labor (2010) estimating the economic impacts of green jobs in renewable energy and energy efficiency. Input-output models have also been used in studies that estimate life-cycle environmental impacts of energy commodities, including natural gas (Jaramillo, et al., 2009) and Pennsylvania electricity production (Blumsack, et al., 2010).”

• And these folks aren’t exactly the only ones who use input-output analysis. Here’s a study produced in 2006 by researchers at Cornell studying the importance of child care in the context of economic development: “Regional economic developers typically use input-output modeling to compare the linkage effects of different targets for economic development policy. Using input-output models for all 50 states in the United States, the authors compare child care linkage effects to economy-wide averages and median multiplier values for agriculture, manufacturing, and services.” (Warner, Liu; Cornell Univ., Feb. 2006)

• Even Cornell professor Susan Christopherson – a vocal opponent of Marcellus development and someone cited by Partridge and Weinstein as a critic of input-output analysis – teaches a class in which, according to the syllabus, “[m]ethods to model impacts of energy choices (eg. input/output analysis)” is a “skill you will acquire in this course.” (CRP 6890 syllabus, Fall 2011, Cornell Univ.; accessed Dec. 18, 2011)

P / W: “One other issue is that proponents of natural gas expansion in Ohio often claim that lower natural gas prices will provide a major stimulus to overall employment, especially in manufacturing. While we will not assess whether natural gas prices are a sufficient share of a typical firm‘s cost structure to make a tangible difference, we do note that there are reasons to be skeptical of those claims (though we hope we are wrong).” (p. 13)

Facts:

According to a report issued last week by the National Association of Manufacturers (and authored by researchers at PricewaterhouseCoopers):

• “Lower feedstock and energy costs could help U.S. manufacturers reduce natural gas expenses by as much as $11.6 billion annually through 2025.

• “In 2011, 17 chemical, metal and industrial manufacturers commented in SEC filings that shale gas development drove demand for their products, compared to none in 2008.”

• “U.S. manufacturing companies could employ approximately one million more workers by 2025 due to benefits from affordable energy and demand for products used to extract the gas.” (NAM/PwC report, Dec. 2011)

P / W: “During the October 2007-October 2011 period … the entire state of North Dakota added about 39,000 jobs. It is highly unlikely that this is all due to energy as high commodity prices (for example) have supported North Dakota‘s relatively large farm economy.” (p. 13)

Facts:

Once again, the actual numbers for the Bakken are quite a bit higher than Partridge and Weinstein suggest.

• According to researchers from North Dakota State Univ.: “Additional measures of the petroleum industry’s economic importance to the state include direct employment for 18,328 full-time jobs, economy-wide personal income of $4.9 billion, statewide retail sales of $3.3 billion, direct contributions to local and state government tax revenues of $822 million, indirect contribution of $188 million in state government general tax collections, and secondary employment of 46,800 full-time equivalent jobs.” (Bangsund, Leistritz; NDSU, Dec. 2010)

READ MORE

• IPAA Report: Ohio oil and gas industry currently supports more than 53,000 jobs in the state
• Welcome to EID-Ohio: OOGA chief Tom Stewart explains what EID’s Ohio campaign is all about
• Secret’s Out: Rhonda Reda of OOGEEP lays out what the Utica could mean for Ohio’s economy
• Akron Beacon Journal column: Why the Saudis are afraid of Ohio