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)
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 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.
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.
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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