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UPDATE: Cracking the Nut on OSU’s Jobs Report

Mike - Campaign Manager

Posted Dec 27, 2012 1 Comment

Update (12/27/12): It has been just over a year since the release of the Partridge-Weinstein report, and over fifteen months since the Ohio Oil and Gas Energy Education Program released their Economic Impact Study – conducted by Kleinhenz and Associates – which the Partridge report attempted to refute.

The Ohio State researchers’ prediction of 20,000 jobs – a number well below the 204,000 plus projected by OOGEEP – is broken down below, and EIDOhio.org was also fortunate to publish analysis of the study from expert economists Timothy Considine, Ph.D - Professor of Economics, Univ. of Wyoming, and Jack Kleinhenz, Ph.D - Principal and Chief Economist, Kleinhenz & Associates.

Jump forward to last week, and we can get an idea of just how off the mark the OSU report was in its low assessment of what kind of economic benefit Ohio would experience thanks to its development of the Utica Shale.

As the Columbus Dispatch and numerous outlets reported, a recent study conducted by IHS Cera for the U.S. Chamber of Commerce’s Institute for 21st Century Energy shows Ohio is already seeing these benefits in the form of both jobs and investment. The report highlights the creation and support of nearly 39,000 jobs to date – a figure surpassing the Partridge projections by good margin. And, it’s important to highlight these numbers are coming out while we remain in the early stages of this development.

With these early indicators, it is easy to see why there is so much excitement of what’s to come, something the Chamber’s report provides more insight on. Echoing the OOGEEP impact study, the report projects the creation and support of 267,000 jobs in the coming years as a direct result of the oil and natural gas industry’s continued development of Ohio’s natural resources. That’s over a quarter of a million jobs – or enough to cut the number of currently unemployed Ohioans by over two-thirds.

- Original post from 12/20/11- 

EID breaks down report from Ohio State researchers predicting “only” 20,000 new jobs from Utica Shale development

British historian Thomas Carlyle is credited with coining the phrase “the dismal science” to describe the study of economics. But though he devised that expression in the 19th century in reference to the work of Thomas Malthus, it may be an appropriate way to describe the report released last week by two researchers from Ohio State.

Authored by OSU professor Mark Partridge and graduate student Amanda Weinstein, the report seeks to attack a study prepared by the respected, Cleveland-based firm of Kleinhenz and Associates, released by OOGEEP in September, which found that responsible Utica development could produce and support more than 200,000 jobs in Ohio over the next four years. An interesting fact – and one unmentioned in the Partridge paper – is that a representative from Ohio State actually sat on the project committee for the OOGEEP report.

At its core, Partridge and Weinstein argue that the Kleinhenz’s estimate of 200,000 new jobs is too optimistic – suggesting instead that a more reasonable forecast is a scenario in which Utica development in Ohio nets only 20,000 new jobs by 2015.

Of course, with the state’s unemployment rate currently at nine percent, 20,000 new jobs is certainly nothing to sneeze at – not when those jobs carry average wages of $76,036, according to one analysis by the state of Pennsylvania. As a spokesman for Gov. Kasich put it in the Columbus Dispatch last week: “Whether it’s 20,000 jobs or 200,000, that’s tens of thousands of families living in a part of the state that’s starving for good economic news who would say, ‘Sounds good, sign me up.’  ”

Still, the question of whether Ohioans can expect 200,000 new jobs from the Utica or only 20,000 is an important one – and so is the matter of how Partridge and Weinstein arrive at figures so far below the ones produced by independent researchers not only in Ohio, but in similar studies released in other shale-producing states all across the country.

The answer, as it usual is, can be found in the methodology. Although you might expect to find lots of equations and algorithms and funny Greek letters in a macroeconomics modeling forecast, in the Ohio State report, the researchers arrive at their numbers in much simpler fashion.

First, Partridge and Weinstein argue that only 10,000 new jobs were created in Pennsylvania during the first four years of Marcellus activity, and then assume the same will hold true for Ohio. Next, to account for “indirect” jobs, they simply multiply that number by two. The researchers describe as “reasonable” their decision to use this multiplier – and indeed, it appears to fall roughly in line with the one used by Considine, et al. in their assessment of Marcellus jobs released this year. So if the problem with Partridge isn’t the multiplier, then where, exactly, are the discrepancies?

The chart included on page 12 of the OSU paper provides a straightforward answer to this question. As it turns out, the researchers only include a few basic employment categories in their analysis of the new jobs expected to be created from responsible resource development in Ohio – while leaving out many others (all of them relevant to the Utica) that any other reasonable, objective analysis would have incorporated.

To Partridge, only jobs related to the drilling of new wells, construction of new pads, geophysical surveying of new areas, and the manufacture of new pipe “count” as jobs that can be ascribed to the industry. Jobs in other sectors of the economy – from retail, to trade, to insurance, to manufacturing, to legal work and environmental consulting – simply don’t make the cut in this analysis.

The problems with the paper don’t end there. Importantly, it also fails to account for the downstream impact from billions of dollars in taxes, rents and royalties that Utica development is expected to produce for state and local governments and local mineral-owners. In Pennsylvania, Marcellus exploration resulted in the delivery of more than $2.06 billion to landowners in 2010, and another $1.085 billion to state and local governments, according to researchers from Penn State. Unfortunately, and remarkably, none of those revenues have the effect of creating a single job in the Partridge paper. They may as well just have been buried in the backyard.

Although the OSU paper is 35 pages in length, the calculations involved in arriving at its 20,000-job estimate are explained in just two pages. The rest of the study is best described as an extended op-ed, with the researchers laying out their views on the costs and benefits associated with producing natural gas (but strangely, not oil) from the Utica, citing various studies, news reports, and even scenes from Gasland before concluding – spoiler alert — that more research needs to be done before fully committing to shale development in Ohio.

Having identified the core weaknesses with the quantitative figures produced by Partridge and Weinstein (cited as “P / W” below), below we take a closer look at some of the other, more qualitative statements and conclusions found in the paper:

P / W: “[W]ith these assumptions, we assume that from 2004-2010, there was a gain of about 10,000 direct and indirect jobs in the natural gas industry in Pennsylvania.” (p. 12)

Facts:

Partridge and Weinstein employ two interesting tricks here to manufacture inexplicably low numbers for Marcellus employment in Pennsylvania.

P / W: “As the number of wells drilled dramatically increased, so did natural gas production in Pennsylvania, especially in the northeast region.” (p. 10)

Facts:

While it’s certainly true that the volume of natural gas produced in Pennsylvania has increased dramatically over the past six years, those increases have been realized even while fewer wells were being drilled across the state.

P / W: “In 2010, tourism employed approximately 400,000 people in Pennsylvania whereas the natural gas industry employed closer to 26,000.” (p. 5)

Facts:

P / W: “Overall, there are no clear employment effects for heavily drilled counties. We are not saying there are no drilling employment effects, but that they are not large enough to be detected …” (p. 15)

Facts:

P / W: “Thus, [natural gas’s] effects on ‘energy security’ are rather limited in the foreseeable future as increased electrical demand and the growing reliance on US natural gas will primarily be at the expense of US coal.” (p. 5)

Facts:

Here, the OSU researchers appear to be arguing that, just because the vast majority of natural gas from shale is expected to be used domestically in the United States, the energy security benefits of the energy source will be limited in a global and/or geopolitical context.

P / W: “Innovations in hydraulic fracturing are the reasons natural gas extraction has recently been developing in the Marcellus shale regions in Pennsylvania and Ohio and now expanding to the Utica shale regions in Ohio.” (p. 7)

P / W: “Horizontal wells and hydraulic fracturing in conjunction with advances in micro-seismic technology aiding both exploration and the drilling process have allowed the energy industry to extract natural gas at greater depths.” (p. 7)

Facts:

P / W: “Figure 3 on the next page shows that most natural gas is still used to supply electricity.” (p. 5)

Facts:

P / W: “In the 1980s, the Barnett shale in Texas became the first natural gas producing shale. More than a decade of production from the Barnett shale in Texas has helped improve the hydraulic fracturing process, leading the way for it to be used in other areas such as the Marcellus shale in Pennsylvania and the Utica Shale in Ohio.” (p. 7)

Facts:

Actually, America’s “first natural gas-producing shale” well was developed in the state of New York, not Texas. In 1825, not “the 1980s.”

P / W: “In 2005, hydraulic fracturing methods were exempted from the Safe Drinking Water Act and Clean Water Act.” (p. 5)

P / W: “Representatives of the natural gas industry have made similar claims that hydraulic fracturing has never contaminated drinking water sources. These claims were used to exempt the natural gas industry from the Clean Water Act and the Safe Drinking Water Act when Congress enacted the 2005 Energy Policy Act.” (p. 22)

Facts:

This claim is false. Hydraulic fracturing has never in its nearly 65-year history been regulated under the Safe Drinking Water Act, and it is in no way exempt from the Clean Water Act. It has, however, been aggressively regulated by the states, which have compiled an impressive record of enforcement and oversight over the past six decades.

P / W: “There may be other toxic chemicals in the hydraulic fracturing fluid mix though energy companies have continually refused to disclose these chemicals for proprietary reasons.” (p. 23)

Facts:

P / W: “Impact analysis is usually based on an old input-output technology that is typically not used today by economists to estimate actual economic effects.” (p. 11)

Facts:

Partridge and Weinstein may not personally approve of input-output analysis, but the committee that awards the Nobel Prize in economics disagrees.

P / W: “One other issue is that proponents of natural gas expansion in Ohio often claim that lower natural gas prices will provide a major stimulus to overall employment, especially in manufacturing. While we will not assess whether natural gas prices are a sufficient share of a typical firm‘s cost structure to make a tangible difference, we do note that there are reasons to be skeptical of those claims (though we hope we are wrong).” (p. 13)

Facts:

According to a report issued last week by the National Association of Manufacturers (and authored by researchers at PricewaterhouseCoopers):

P / W: “During the October 2007-October 2011 period … the entire state of North Dakota added about 39,000 jobs. It is highly unlikely that this is all due to energy as high commodity prices (for example) have supported North Dakota‘s relatively large farm economy.” (p. 13)

Facts:

Once again, the actual numbers for the Bakken are quite a bit higher than Partridge and Weinstein suggest.

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