You Can Avoid The Boom-Bust Cycle

I recently read a policy working paper authored by Susan Cristopherson and Ned Rightor entitled “How Should We Think About the Economic Consequences of Shale Gas Drilling?” . In the paper, Susan provides a description of the potential for communities to experience an economic ‘boom-bust’ cycle. To describe the driving reason for the potential, she cites two experts in the field:

“Shale production is characterized by a steep decline curve early in its productive life. The more oil and/or gas that you can make up front the better the economics.” (McFarland 2010).

“Production rates commonly exhibit abrupt, catastrophic departures from hyperbolic decline as early as 12-18 months into the production cycle but, more commonly, in the fourth or fifth years for the control group.” (Arthur Berman 2009)

The Challenge

It is important to note that shale gas commercialization tends to follow a predictable sequence of events.

  • Preparation – geologic assessment and acquisition of landowner mineral rights.
  • Expansion – characterized by rapid development marked by high level of drilling.
  • Production – commercialization of shale gas and economic prosperity
  • Contraction –a precipitous decline in activity as wells become less productive.
  • Recession – industry withdrawal resulting in destruction of both jobs and tax revenue

The bad news is, that left unaddressed, the natural outcome for a community impacted by shale gas commercialization will be an economic boom period followed by a rapid and devastating bust. Physical infrastructure built to accommodate population expansion built during the expansion and production phases, suddenly becomes a liability by generating ongoing debt and maintenance cost without an offsetting tax revenue stream. Residents with ties to the community are left holding the proverbial bag.

The Opportunity

The good news is that the economic impacts on a community during each phase are predictable.  That is good news, because predictability means communities can create strategic plans to minimize the downside economic risks. I believe, that through effective strategic planning, a community can break the sequence successfully avoiding the recession phase and actually be in a stronger economic position post contraction than it was before the drilling ever started.

One of the biggest challenges to strategic planning is the required time horizon. To be effective, the community’s strategic plan should address a time period of no less than 10-years. This is obviously outside the typical cycle time for most elected officials. Therefore, the development and deployment of the strategic plan needs to be a collaborative exercise between business leaders and public officials in the community.

Susan does a nice job in her paper describing some of the predictable impacts that will need to be addressed in the strategic plan. These include:

  • Training of local labor to be employable by the industry.
  • Planning for infrastructure (from roads to housing to schools and public services) upgrades to handle increased demand.
  • Effective investment of increased tax revenue.
  • Environmental stewardship.
  • Purposeful diversification of the local economic portfolio to absorb idled labor created during the contraction phase.

While the list above is not comprehensive, it does paint a representative picture of the types of choices that will need to be made and documented in the strategic plan.

Most of the shale gas drilling will take place in rural areas. A significant percent of the Marcellus and Utica Shale play activity will be in our nation’s Appalachian Region. Economist Jannette Barth cautions that studies suggest rural regions whose economies are dependent on natural resource extraction frequently have poor long-term development outcomes, and may end up worse off after the boom-bust cycle than they were before it started. I believe for many Appalachian communities, shale gas commercialization is a platform opportunity to finally move from a position of economic poverty to at least the national standard of prosperity. But, that opportunity will only be realized through effective strategic planning and deployment. Local business leaders and elected officials need to be committed to creating the plan and then have the discipline to work the plan.

The Key To Success

Economic development professionals are key to catalyzing the collaboration between local business leaders and elected officials. Time and energy should be invested in helping educate the leadership and community on the facts about shale gas. Meetings with representatives from the business community, academia, elected officials, industry representatives and relevant third-party organizations should be coordinated. Early and frequent communication is important. If your community is being impacted (or expects to be), you will have absolutely no problem getting people to attend meetings with a well-constructed agenda. The impact of shale gas commercialization on a small community is so transformational that people will be eager to participate. In fact, if done well, this presents an opportunity to create unprecedented model for positive collaboration that can be leveraged to help address community challenges well beyond the impact of shale gas commercialization.

Discussion

Stay tuned. In future posts, I plan to systematically explore the topic of effective community strategic planning in greater detail. I’ll address both the structure of a plan and the process for design and deployment.

In the interim, I’d love to hear your experience. I would greatly appreciate case studies or articles you might know of, or personal experiences/contacts you’d be willing to share that help dimensionalize the ‘in the trenches’ impact of shale gas commercialization on a small community.

Your Thoughts?

Please leave a comment with any perspective or questions you might have. I am eager to hear and learn from you.

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5 Comments so far

  1. Charley Bowman

    November 17, 2011

    I read the first half with some amount of detail – in particular, the sections dealing with local governments. My first comment is a supposition about the financial health of the local governments in Ohio that are in the Marcellus Shale area. I seriously doubt that many have fund balances as large as 25% of their expenditures. The second supposition is the engineering and construction of roadways. Having traveled through all of the counties potentially seeing impact, there are short term and long term infrastructure condition issues and the fiscal impact to confront them. There are more, but I will concentrate on these two.

    I was trained as an Administrative Assistant to the Village Manager to encourage fiscal policies that require to build to and maintain a General Fund balance (as to extend this idea to proprietary funds) of 25% of expenditures. To prepare for a boom/bust cycle that may take 30 years to complete, it will be incumbent on the communities in this area of Ohio to first develop that 25% reserve. Further, it will be important to increase that balance each year during the “boom” period, invested in very conservative instruments. This will take a great deal of fiscal restraint by elected and appointed officials.

    The idea of impact fees has been discussed by Ohio city managers since the Beavercreek case (2000?). Regardless, it will be incumbent upon the State of Ohio to enact legislation enabling cities, villages and county governments to enact impact fee legislation. What strikes me from the article is the a perception that this boom period may last a period of thirty to forty years. If we apply the boom period to “useful” life of roadways, drainage facilities, bridges, water/wastewater lines and plants, the aforementioned reserves become crucial.

    The predetermined period of “useful life” of public infrastructure may outlast the boom period, but probably not more than ten to maybe 20 years. Rural roads will more than likely not be built to a useful life of more than twenty to twenty five years. This will leave communities, counties and the State of Ohio scrambling to rebuild main highways, collectors and local collectors. Infrastructure maintenance will be an important task of local officials.

    After I read some more, I may comment on development policies and the tendency of communities to open their arms to any and all development as good development.

  2. Ed Burghard

    November 17, 2011

    Here is a ‘must read’ article that gives an excellent, fact-based overview of the shale gas industry.

    http://fuelfix.com/blog/2011/11/04/could-shale-gas-reserves-reignite-u-s-economy/

  3. Neil Warren

    December 6, 2011

    As a web site owner I think the material here is really magnificent. I appreciate it for your time. You must maintain it and keep it up forever! Excellent work.

  4. […] We need to focus energy on the defining moments. It has been my experience that 80% of the real impact will come from 20% of the activities you engage in. The same is true in strengthening local economies.  Unfortunately, we often get too caught up in managing the zillion tasks of keeping programs running and solving problems that pop up every day disguised as crises. It is important to proactively identify the defining moments for our communities and ensure adequate leadership and resources are brought to bear on handling them. Defining moments are those that present options and opportunities. They can meaningfully change the course of a community’s future. An example playing out today in many Appalachian communities is the impact of the emerging shale gas/oil industry. Leaders in these communities need to create strategic development plans that will minimize the risk of their community experiencing a boom-to-bust cycle. […]

  5. […]   […]

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