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You Decide: Should we drill?
Story Date: 5/10/2013
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Source: Dr. Mike Walden, NCSU COLLEGE OF AG & LIFE SCIENCES, 5/10/13
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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