Local Economic Development Strategies for Energy Boomtowns

Shale Energy Development Economic Impact Analysis
CDFS-SED-5
Date: 
06/23/2016
Nancy Bowen, Associate Professor and Field Specialist, Community Economics, OSU Extension, Community Development
Eric Romich, Assistant Professor and Field Specialist, Energy Development, OSU Extension, Community Development
David Civittolo, Associate Professor and Field Specialist, Community Economics, OSU Extension, Community Development

This fact sheet series is based on the original research from the project “Maximizing the Gains of Old and New Energy Development for America’s Rural Communities.” This series summarizes the research into six chronological fact sheets to inform the reader of economic impacts related to energy development. 

Introduction 

Simply defined, energy boomtowns are communities undergoing rapid growth due to sudden economic shock. Boomtown economies are usually tied to natural resources, which are known to peak, then drop off over a relatively short time period. This type of sudden economic shock allows precious little time for strategic planning or implementation of strategies that leverage long-term growth. 

Despite the vibrant nature of energy development, boomtowns should take early steps to develop a plan to address economic, social and environmental changes. Economic development strategies can be developed and implemented to leverage the positive impacts needed to transcend a potential bust. A proactive approach mitigates the inevitable downturn, while capturing and retaining economic opportunities during the upswing to ensure future growth. 

Economic Sustainability Opportunities and Challenges 

According to Tsvetkova and Partridge (2015), the economic effects of energy sector booms are negligible to negative in metropolitan areas, mostly due to metro areas being large and energy being a relatively small sector in terms of employment. Even though there are positive net spillovers for several sectors in rural areas, the longer-term positive effects are on non-traded goods employment (e.g. public service, construction, tourism), not the manufacturing sector. Of the sectors that benefit in rural areas, construction benefits the most. Other sectors that benefit in rural areas are transportation, warehousing, retail and wholesale trade. According to Tsvetkova and Partridge (2015), there is no appreciable population change in metro or non-metro areas because the workforce is typically from outside the area. 

Challenges and opportunity costs are also discussed in the literature. Boomtowns should weigh the costs and benefits of energy development to better inform economic sustainability strategies. Challenges range from environmental impacts to strains on infrastructure and local government services. Since the workforce is often non-local, the availability of affordable housing for both existing and new residents is typically a challenge in many energy boomtowns. Understanding and quantifying costs to the impacted locality is an important first step in developing sustainability strategies. 

Economic Sustainability Strategies

Strategies for economic sustainability are discussed in the research paper by Tsvetkova and Partridge (2015), “Economics of Modern Energy Boomtowns: Do Oil and Gas Shocks Differ from Shocks in the Rest of the Economy?” The authors’ primary premise and advice for communities is to insist that oil and gas developers “do no harm in the long run” so that the costs that inevitably occur are mitigated through oversight and policies that generate revenue to offset costs and pay for needed repairs. 

Table 1 lists strategies discussed in this paper that have been put in place in Pennsylvania and North Dakota, two states that have a long history of oil and gas development. These are strategies that have been tested and, given each individual state’s policy and regulatory environment, might be replicated in other impacted areas. 

Table 1: Economic Sustainability Strategies
Strategy Description Benefit
Severance tax or impact fee Non-permanent taxes on natural resource extraction paid by energy company Tax revenues increase commensurate with natural gas extraction or mining to mitigate impacts.
Legacy or trust funds (i.e. schools fund, infrastructure fund, property tax relief fund) Permanent funds to capture new, finite revenues for long-term benefit Recognizes a limited time frame for oil and gas development. Sets asides restricted funds for future generations.
Pay-as-you-go approach An approach to financing public improvements Funding improvements as they are needed and avoiding long-term funding commitments that may not happen.
Diversification (fund) Maintain a diversified economy Target funding for Business Retention and Expansion, entrepreneurship and attraction efforts that focus on diversification.
Hidden costs approach (i.e. road use agreements) Ensure hidden extraction costs are compensated Through tax or impact fees, ensure that marginal costs are equal to marginal benefits and that industry bears the burden.
Leveraging approach Leveraging wealth and economic activity into permanent advantages Leveraging wealth to focus on long-term strategies such as diversification of the economy to increase economic resiliency.
Invest in workforce development Using a targeted approach to invest in workforce development Invest in workforce training to help increase share of local employment during drilling and to support a diversified economy.
Strengthen capacity of local governments Educate local officials about the challenges and opportunities of energy development Regional entities are in place that can help local governments facilitate communication and cooperation across jurisdictions. A shared position can be created focused on oil and gas and funded by state government.
Transparent approach Increase transparency of local government and governance institutions Building a pro-active energy development network across jurisdictions requires trust. Transparency can be a stated goal of all partners. 

Conclusion

The anticipated types of economic impacts for energy boomtowns are based on limited research that offers a window into the past. Although studies vary on the type and degree of impact, many agree that energy boomtowns should take a comprehensive and forward thinking approach to economic development. Since on average, employment spillovers from economic shocks in other industries are stronger, policy-makers should concentrate on leveraging opportunities that a boom provides to diversify local and regional economies. 

Research shows that oil and gas development as an economic development strategy is ineffective at stimulating employment in supply-chain industries, and is especially ineffective in rural areas since in many cases their economies are not of sufficient size and scale to support many of these spinoff activities. According to Tsvetkova and Partridge (2015), “Overall, given that energy booms are relatively small in magnitude relative to the rest of the economy, local economies would appear to be better off when they experience broad-based growth rather than energy booms both in terms of multiplier effects and in terms of enhancing the diversity of their economies.” (p. 25). 

Acknowledgment

This material is based upon work that is supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, Agriculture and Food Research Initiative, under grant #11400612 titled “Maximizing the Gains of Old and New Energy Development for America’s Rural Communities.” The authors acknowledge and appreciate the support of both the USDA AFRI grant and the project team from The Ohio State University, College of Food, Agricultural, and Environmental Sciences, and Department of Agricultural, Environmental and Development Economics. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture.

References

Tsvetkova, A. and Partridge, M. (2015). Economics of modern energy boomtowns: do oil and gas shocks differ from shocks in the rest of the economy? (MPRA Working Paper No. 65754). Retreived from The Munich Personal RePEc Archive website: https://mpra.ub.uni-muenchen.de/65754/

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