North Carolina Cooperative Extension

You Decide: Should we drill?

By Mike Walden | May 10, 2013

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!

 

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.

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