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Ohio Grad Students Pen Report on Avoiding Shale Boom/Bust

Two graduate students at The Ohio State University say their state's policymakers should levy appropriate taxes on the oil and gas industry, be wary of hidden shale extraction costs and commit to good governance if they want to avoid the perils of boom-and-bust cycles common to other regions of the country rich in natural resources.

In a 26-page policy brief titled "Making Shale Development Work for Ohio," doctoral students Michael Farren and Amanda Weinstein assert that Ohio's leaders need to look no further than places like Houston, Tulsa and Williston, ND, to see examples of local economies that are at the mercy of energy prices, a phenomenon they called a "natural resource curse."

"Their differing economic outcomes offer evidence that the first step in mitigating the boom-bust cycle is to foster a diverse economy, like that of Houston, which can weather the sudden changes in fortune that energy resources can bring," the students said.

Mark Partridge, an Ohio State economics professor, served as adviser to the students.

Although Ohio's severance taxes on oil and gas (20 cents/bbl and 3 cents/Mcf, respectively) are among the lowest in the nation, Farren and Weinstein said the tax increases proposed by Gov. John Kasich, but ultimately derailed by the state House of Representatives, were problematic (see Shale Daily, April 30; March 6).

"The use of severance taxes to displace income taxes may not be the most effective method to avoid the adverse effects of the resource curse unless it somehow promotes diversification," the students said, later adding that any income tax cuts "would likely not be realized until just before Governor Kasich's [campaign for] reelection."

Farren and Weinstein said the impact hydraulic fracturing (fracking) would have on Ohio's roads was the "clearest example" of hidden costs related to shale extraction, but they also cited the added expense of training first responders, increased demand on rural infrastructure and hiring additional public safety workers, especially police and medical personnel.

"Ohio must maintain, and if possible improve upon, its public services, amenities and infrastructure in order to mitigate the direct impacts of oil and gas extraction and to compensate for the permanent loss of nonrenewable resources," the students said. "However, if these costs are not paid for by the energy industry, these costs will be pushed onto other industries, reducing the competitiveness of the broader Ohio economy."

On the issue of good governance, Farren and Weinstein cautioned their political leaders from becoming complacent. The temptation to allow "resource rent" activities or to cut oil and gas taxes are both potential threats to the state's economy, and are outright acts of corruption, they said.

"The temptation to use revenues from the shale resources in Ohio in the pursuit of political ideology or favor-currying by those in power might be difficult to resist for any politician," the students said. "However, the position of power can also be twisted to create a situation where energy companies exert undue influence on government officials to act in the companies' interests, rather than the citizens'."

In another report published last December, Partridge and Weinstein said the oil and gas industry and its supporters overestimated the number of jobs that would be created in Ohio with the development of the Marcellus and Utica shales (see Shale Daily, Dec. 20, 2011). The duo said they believed 20,000 new jobs over the next four years was a more realistic number than the 200,000 which had been forecast by the Ohio Oil & Gas Energy Education Program (see Shale Daily, Sept. 23, 2011).

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