Concerned About Fracking? — Part 3: Community Disruption — Who Pays the Bill?

By Bernhard Debatin

The fracking frenzy comes, as we have seen, in waves. First, there’s the leasing frenzy with landmen going from door to door, and lawyers and gas companies trying to make their leases palatable to the landowners. Second, the drilling operation with an invasion of workers and the installation of drilling pads and rigs, freshwater reservoirs, waste-water impoundments, and other construction. Third, the actual fracking and the ensuing gas or oil production, which can stretch over some years. Another wave, running parallel to the fracking activities and literally creating its own shockwave, is the disposal of the fracking fluids into injection wells, or — by way of the surface application loophole (see also ORC 1509.226) — as dust and ice control on public roads.

Whose Benefits and whose Costs?

While fracking obviously has some economic benefits for involved individuals, companies, and communities, critics have pointed out that the expected benefits are vastly overstated by the industry and the Ohio government. The recent study The Economic Value of Shale Natural Gas in Ohio, conducted by OSU economists Weinstein and Partridge, showed that the widely touted creation of 200,000 jobs in Ohio through fracking is more likely to be in the vicinity of 20,000 jobs. A similar number of fracking-related jobs was in fact created in Pennsylvania between 2004 and 2010, although the industry prediction was much higher (between 100,000 and 200,000).

While 20,000 additional jobs may still be welcome in a shaky economy, the researchers point out that “like virtually every other economic event, there are winners (e.g., landowners or high-paid rig workers) and losers (e.g., those who can no longer afford the high rents in mining communities and communities dealing with excessive demands on their infrastructure).”  The authors also emphasize that industry-funded studies usually don’t address the fact that most fracking jobs are temporary but “long-term regional economic development requires permanent jobs” [p. 2]. If most of those 20,000 jobs are only short-term jobs and (as seems to be typical) are mostly held by out-of-state workers, then the boom will be quite short-lived.

Moreover, while some landowners may end up with a considerable amount of money, one must seriously question the assumption that there is an overall net positive economic effect of drilling.  A study cited by Weinstein and Partridge submits that “previous industry-funded reports have focused on the benefits while ignoring the costs and risks associated with natural gas extraction” and that they “haven’t properly accounted for other impacts, including the costs of environmental degradation,” nor for “the impact on infrastructure, property values, and the ‘displacement impact’ pollution can have on other industries such as tourism and fishing” [p. 5].

Who pays for the infrastructure?

This raises the suspicion that the fracking boom in Ohio may create a fair amount of private wealth while passing the buck for the impact costs entirely to the general public. This strategy is known as cost externalization, which “occurs anytime a company makes money while damaging the environment or another element of the public interest (e.g., human rights, public health and safety, the dignity of employees or the welfare of our communities).” [Robert Hinkley] How much a company or an industry is allowed to externalize its costs is mostly a question of taxation and regulation, which in turn are an issue of political will and a government that is interested in the common good.

Ohio is particularly poorly positioned because its severance tax, which is incurred when natural resources are extracted, is extremely low: According to the study Beyond the Boom by Wendy Patton of the organization “Policy Matters Ohio,”  severance tax on gas is about 0.37% in Ohio, whereas other states with considerable shale gas resources have much higher rates, such as Texas (7.5%), Oklahoma (7%), West Virginia (5%), or Kentucky (4%) [see table 4, and table 6]. In other words, Ohio makes only minimal demands on the industry to contribute to the common good.

Asking the fracking industry to contribute to the common good is not an appeal for charity, nor is it an unjust imposition on businesses by “big government.” Instead, it is the public’s right to request proper compensation.

Here’s an example for what compensation is needed: Fracking takes a massive toll on roads, highways, and bridges. Assuming that over the next four years, as predicted by the industry,  ca. 4000 fracking wells will be drilled  in Ohio, and assuming that each well requires about 1000 tank truck deliveries with fracking fluid during its lifetime, then Ohio’s roads will have to absorb 4 million tank truck trips of varying distances, depending on the location of the fracking well, the chemicals, and the freshwater sources. Disposal of wastewater in injection wells may add another million or more tank truck deliveries.

This is just one example for the impact on infrastructure. Other externalized costs include things such as traffic noise and air pollution through increased truck traffic, but also the loss of quality of life, of health, and of well-being for local residents, devaluation of property value, and many more such issues.

Contrary to common assumptions — that taxes deter business and make Ohio unattractive for investment — various studies have shown “that severance tax rates have little effect on production” and “raising taxes had a
negligible effect on production” [Beyond the Boom, p. 17]. Policy Matters Ohio therefore makes the following recommendation:

As the industry ramps up for expansion, the state and local communities can expect known, up-front costs of rapid industrial development as well as unknown costs associated with possible mitigation of air and water pollution. At a 5 percent severance fee on shale gas, Ohio should see increased revenues of $538 million just on new production – the shale gas  production forecast by the end of 2015 by the industry – to help with these costs.
[Beyond the Boom, p. 19]

They also propose installing a severance tax trust fund to alleviate the impact and unintended consequences of extracting unconventional oil and gas. “Mineral wealth belongs to the people; the state owes it to the residents to ensure a share of the wealth is retained to build a better future,” states the author [p. 20]. The severance tax funds could be used to fund schools and lifelong education, remediate environmental impacts, maintain and upgrade local infrastructure, and other needs of the community.

Extraction of non-renewable resources follows a predictable and unavoidable pattern from boom to bust. It is imperative that the shale gas and oil boom does not repeat this pattern of leaving people and communities impoverished and worn out when the resources are depleted.

…to be continued…