YOU DECIDE: Should we drill?

Date posted: May 10, 2013

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

Like many public issues today, drilling for energy resources in our country has both strong advocates and equally vocal critics. Supporters see domestic energy development as a route to national energy self-sufficiency and lower fuel prices. Detractors worry about possible costs to the environment, health and communities from accidents and other side effects from drilling.

North Carolina has joined this debate. Estimates show our state has the largest reservoirs of off-shore oil and natural gas of any east coast state. There are also thought to be significant supplies of natural gas underground in the central part of the state.

This information has led some to push for the development of North Carolina’s off-shore and on-shore energy resources, arguing that doing so will create substantial jobs, income and tax revenues for the state.

But what exactly will be the size of these economic impacts? And how significant might be the environmental and other costs? Since there is a high level of interest in this issue in North Carolina, I collected relevant geological information and applied standard economic analysis techniques to provide some answers. I present a summary here, with the full report available at http://www.ag-econ.ncsu.edu/faculty/walden/publications/drillingnc.pdf.

It appears the largest economic impacts for our state could come from off-shore drilling. Based on the mid-point estimates for off-shore energy quantities and forecasts of energy prices from domestic and international sources, I estimate that more than 1,100 jobs and $181 million of annual economic activity would be created during a seven-year period of building the necessary infrastructure for drilling off-shore.

Then, assuming a 30-year production period, off-shore energy operations could create almost 17,000 jobs and $1.9 billion of yearly economic activity. Importantly, the economic impact numbers for both infrastructure construction and production operations are only for North Carolina and do not include jobs or incomes going out of state. The numbers also include impacts on supplier and other supporting firms.

The average quantities of on-shore energy resources estimated by government geologists are significantly smaller than for quantities off-shore, so the economic impact estimates are also lower. I calculate that just shy of 500 North Carolina jobs and $80 million of new annual economic activity in our state would occur while wells are drilled and supporting infrastructure is constructed. Then, while the energy resource is being accessed and produced, 1,400 jobs would be supported and $158 million of yearly commerce would be created.

But — you probably knew there would be a “but” — I found these estimates are very, very, very sensitive to two factors: the quantity of energy resources that exists both off-shore and on-shore and the future prices of those resources.

The federal government gives a range of estimated energy resource quantities available off-shore and on-shore. I used the mid-point estimate for the above calculations, meaning this was the quantity the geologists were 50 percent confident was there. However, the government also gives a much lower amount that they are 95 percent confident exists and a much larger amount they are only 5 percent confident is there.

Forecasts of future energy prices are also fraught with uncertainty. Higher prices have two effects on the economic impacts from drilling. First, they increase the economic value of the energy. And second, they make it profitable for energy companies to spend more exploring and finding more energy. But lower prices send these two impacts in the opposite direction.

The point is that different assumptions about how much recoverable energy resources exist for North Carolina and the prices of these resources can dramatically change the estimated economic impacts — both up and down — sometimes by a factor of 100!

Now let me address the potential downsides of energy production in North Carolina. For off-shore production, I estimate the average annual cost of damage — primarily to coastal counties — of oil spills. Using actual average spillage rates for the last 40 years and estimates of costs per spill, I calibrated the likely yearly cost to be $83 million. Of course, we hope improved technology and safety would prevent or significantly reduce these costs.

On-shore energy development from hydraulic fracturing is relatively new, so less data are available. However, several studies have found a negative relationship between on-shore energy production activities and residential property values. Unfortunately, the potential range of the impact is quite large, but applying the results suggests possible — and I emphasize, possible – property value declines between $600 million and $4.7 billion in affected North Carolina counties. The lower property values reflect the perceived adverse impacts from drilling.

So, should we drill? I’m hopeful I’ve given you and our public decision-makers some useful information that will let us decide!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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