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Room for One More Response to Partridge?

Having reviewed the thorough responses to the recent Ohio State Utica jobs report posted on this site this week by Dr. Kleinhenz and EID’s Mike Chadsey, I’m not certain there’s much more for me to add. But I did want to take just a moment to share a few initial thoughts, particularly given the OSU researchers’ frequent citation of the updated report we released earlier this year characterizing what we expect will be significant economic gains as a result of continued Marcellus development in Pennsylvania.

Before I go any further, I must mention that our report was commissioned by the Marcellus Shale Coalition, an industry trade association based outside of Pittsburgh that represents many of the most prominent natural gas producers in the region. To the authors of the OSU paper, this fact alone apparently constitutes irrefutable evidence of our team’s inability to produce an “independent” report.

It is a charge entirely without basis, and one that is presumably being made because the researchers could not identify substantive examples of weakness or error in our analysis. Absent that substance, Partridge, et al. resort to what can only be described as an ad hominem attack, dismissing our report not on the merits, but as a reflexive reaction to its funding source.

Candidly, I neither know, nor am I particularly interested in knowing, what individual or organization provided the funding for the OSU project. What I do know is that some of the most important research ever conducted in this country – and indeed, around the world — has been made possible through the financial support of industry.

Certainly Bell Laboratories stands as the most obvious example of this phenomenon, with public-private partnerships helping to fuel the research that ultimately gave us the laser beam, the transistor, and C++ programming – netting seven separate Noble prizes in the process (including one by our current Secretary of Energy). Earlier this decade, Stanford University received a grant of nearly a quarter of a billion dollars from ExxonMobil to fund research on climate change and energy sustainability. Does anyone genuinely believe that Stanford’s work is no longer “reliable” or “independent” because of its acceptance of that grant? Of course not.

Having now read both the Partridge paper and the Kleinhenz and Chadsey rebuttals, I attempt below to identify a few specific areas of the OSU report (not discussed by Kleinhenz or Chadsey) that may be worthy of additional discussion. Over the next several months, we may be revisiting these and other issues often, as we look to assemble a broader report on shale’s current and prospective economic impact on an entire region, and not just a single state.

1) Partridge’s reference to the “Dutch disease” in the context of shale development in Ohio is not a fair comparison.

The Dutch disease refers to a scenario in which oil and gas development raises workers’ wages and, thereby, reduces competitiveness of manufacturing and other trade related industries in a given country. While this may occur in some extreme cases, there are other more powerful forces from oil and gas development that act as powerful stimulants to economic growth and prosperity.

First, the build-out of oil and gas infrastructure generates new business for basic material industries and a broad range of manufacturing sectors. Most economic studies of the Dutch disease, including the recent study by OSU, run their econometric models after this phase of development, totally missing the investment stimulus to the economy from oil and gas infrastructure construction. Moreover, governance and protection of property rights are much more important factors affecting economic growth. The nationalization of many industries in Venezuela and the pandemic corruption in Nigeria are major factors behind their poor economic performance – not the presence of oil and gas production.

2) Partridge assumptions on displacement of coal- and tourism-related jobs are not correct.

The expansion of industries tied to natural gas development in the Northeast has yet to come at the expense of coal, but rather by displacing imported natural gas from Canada and supplies from the rest of the United States. The OSU conjecture about natural gas development displacing tourism in Pennsylvania is unlikely because the counties with the most intensive development — Bradford, Tioga, Susquehanna, Washington, Green, and Fayette — have very small tourism industries. Indeed, the major tourist attraction in northwestern Pennsylvania is none other than Drake Well in Titusville, site of the world’s first-ever commercial oil discovery.

3) The researchers’ attempt to dismiss input-output as an “old” and “unreliable” methodology is without basis.

Referenced by both Kleinhenz and Chadsey in previous rebuttals, I believe it’s worth mentioning once again that input-output analysis remains a mainstay methodology of economic impact modeling.  The OSU study offers no methodological alternative. Instead, it adopts an extremely narrow definition of the shale industry, and then arbitrarily applies a multiplier of 2.0 without grounding it in one scintilla of empirical data or analysis.

This narrow definition ignores most of the supply chain. The study we compiled in Pennsylvania uses a methodology devised by Miller and Blair for introducing a new industry. As part of this method, the expenditures made by the companies are identified in terms of their standard industrial codes and introduced as a new industry in the model. In a critique of our studies, a professor from Bucknell University found this to be a reasonable approach. There are alternative economic models, such as computable general equilibrium models, but they are plagued with out-of date parameters, many of which are drawn from studies done 30 to 40 years ago. In contrast, our estimates from our 2011 report include econometric demand models for energy with linkages to the input-output model.

For a full cost-benefit analysis of Marcellus Shale development, please see the study that our team compiled for the Manhattan Institute available here. This study concludes that the environmental impacts of shale development are manageable and the potential for related damages pale in comparison to the economic benefits. This study conducts precisely the type of analysis that the OSU study recommends. Its conclusions are not materially different from the research we conducted in Pennsylvania, although it does include an environmental impact analysis.

4) OSU researchers’ assumptions and models on North Dakota don’t account for all the facts.

The comparison that Partridge, et al. attempt to make between Ohio and North Dakota needs to correct for differences in the number of wells drilled. Believe it or not, there were actually more wells drilled in Pennsylvania (1,405) than in North Dakota (954) during 2010.   According to North Dakota State University, there were 18,328 direct jobs and another 46,800 indirect jobs for a total of 65,128 jobs associated with oil and gas drilling, implying 68 direct and indirect jobs per well drilled.

Our team’s 2011 study finds total direct and indirect employment of 83,973, or 60 jobs per well. The total employment impact we found of roughly 140,000 comes from the direct and indirect impacts mentioned above along with the induced impacts as households spend additional income and as landowners spend lease and bonus payments of nearly $2 billion. This brief comparison suggests that our study is well within the range of estimates found by other researchers.  Moreover, the omission of lease and bonus payments absolutely mystifies us, which only can be explained by their belief that these payments do not exist when, in fact, all surveys that have been run in these areas report significant lease and bonus payments.

 

 

 

 

 

 

 

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