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Did Natural Gas Save the Pennsylvania Economy?

by Michael Levi
March 14, 2012

It’s become popular to point to record low unemployment in North Dakota in order to show how greater oil and gas production could transform the U.S. economy. I’ve argued on several occasions that the numbers simply don’t add up at the national level. Over the past couple days, Paul Krugman has gotten in on the game, hammering away at the fact that the North Dakota case simply doesn’t scale up.

His most recent post takes things a step further, going beyond making claims at the national level and taking on the contention that fracking has helped shield Pennsylvania from the recession. He presents two charts: the first one shows that the scale of the North Dakota and Pennsylvania booms are almost identical; the second shows how these add up very differently in the context of two states of very difference sizes. Hence he concludes:

“North Dakota has had a major employment boom, because 15,000 resource jobs are a big deal in a state with fewer than 700,000 people. Pennsylvania has not; it has done a bit better than the nation as a whole, but that probably has as much to do with the absence of a big housing bubble as with fracking.”

Somewhat to my surprise, the numbers back that up.

The plot below shows two numbers. The unemployment rate in Pennsylvania hasn’t climbed as much as the national rate has. The blue line is my estimate of the number of additional jobs that Pennsylvania would have lost had it followed the national unemployment trend since the recession started. I’ve used a total Pennsylvania labor force of 6.4 million people to get these numbers. The red line is my estimate of the gain in jobs due to the natural gas boom. I start with reported data for employment gains in the mining and natural resources sector. Then I take into account the fact that natural gas jobs spin off other ones: bobs are created in companies that supply the industry and in establishments that serve its employees. Including these indirect and induced jobs is normally misleading, but for an economy well away from full employment, it’s the correct approach. IHS-CERA (in, to be fair, a report commissioned by the gas industry) estimates that every job in the industry drives three jobs elsewhere. Some of these will be in other states, so let’s go with a 1:2 ratio for now.

The plot tells an interesting story. Pennsylvania did better than the rest of the economy through the worst of the recession. But that was before fracking took off. And Krugman is right that Pennsylvania housing didn’t tank in the same way that it did in the rest of the country:

It is indeed housing that appears to have partially spared Pennsylvania. Where natural gas development has become a force is in the last couple years – after the recession officially ended. Yet that’s a period over which the employment gap between Pennsylvania and the rest of the country has been closing.

What’s going on? There’s little question that the gas boom has helped the state grow in the aftermath of the recession. That’s fortunate, because it seems that while natural gas has delivered jobs, something else has been taking others away almost as quickly.

Post a Comment 5 Comments

  • Posted by Lee Black

    is this “something else has been taking others away almost as quickly.” a cliff hanger? Will we know what that something else is?

  • Posted by Andy Leahy

    Michael,

    Just as a layman, it seems to me you could measure the jobs impact of the boom in PA in maybe five different, sequential ways:

    1) Leasing, which was certainly going on before Jan. 2008, but which really took off and got lucrative soon afterward; 2) Drilling, which started an unprecedented upward climb in Jan. 2009, but which has since leveled off, after peaking in July 2011; 3) Fracking, which, by definition, is a “completion” step that is often applied long after the drilling rig has moved on; 4) Pipelines, which generally overlap or follow steps two and three; and, lastly, 5) Production, and the flow of royalties.

    The only early stage for which there seems to be good chronological statewide numbers would be drilling — either by state environmental department data, or by rig counts, such as summarized here:

    http://nyshalegasnow.blogspot.com/2012/03/pa-rig-count-looks-headed-below-100.html

    But I do challenge your conclusion that PA’s relative immunity to the recession doesn’t sync up very well with the shale gas boom. It’s true, the shale gas impact on diverse PA should be diluted by comparison to the shale oil impact on much sparser ND. But, looking at the whole sequence, a closer look suggests a good chunk of the boom hit PA sooner than you assume.

    The necessary precursor of leasing activity may have had relatively modest, direct, local jobs impact. It was all paperwork and closing deals. But those landowners who signed during this boom period were depositing some pretty big checks, 30 to 60 days later.

    Some Keystoners immediately paid down or paid off their mortgages. In fact, banks in certain key areas reported suddenly having too much money on their hands, in the form of cash. Others instead went shopping for new trucks or tractors, or they started beating the bushes for home-improvement contractors — long before the roughnecks and water truck drivers even got on the scene.

    I realize a lot of this trends toward the anecdotal. But many where I come from, Upstate New York, have either taken jobs in PA — or we’ve at least taken field trips across the state line. We have been smacking our foreheads at the hustle and bustle, the new vehicles parked out front, the remodels, and the dearth of for sale signs.

  • Posted by pjc

    The question is not “Did Natural Gas Jobs Save the Pennsylvania Economy?”. The question is “Did Cheap Natural Gas Save the American Economy?”.

    And the answer is yes. Prior to the crash, our natural gas prices were pretty similar to the global economy. Throughout the recovery, our natural gas prices have been significantly cheaper. This is why we are enjoying a manufacturing renaissance, and are the pre-eminent oil refiner to the world.

    It’s the jobs created by industries that appreciate our cheap gas that are key.

  • Posted by Raindog

    The new governor in PA laid off tens of thousands of state workers and teachers. Those job losses need to be accounted for when doing this analysis.

    I also agree with pjc that cheap natural gas has really helped the economy – much more than many people know. Unfortunately, production companies can’t make money at the current prices and the price will probably have to go back to at least $3.50-4/mcf for even the best shale plays to make sense. That is still really cheap though.

  • Posted by PA Natural Gas

    Interesting numbers! Also, caught a spelling error: “Then I take into account the fact that natural gas jobs spin off other ones: bobs are created in companies that supply the industry and in establishments that serve its employees.”

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