New West Feature

Economists on Rockies Energy Boom: How’s It Working Out for Us This Time?

By Brodie Farquhar, 4-27-11

	Cover photo for a new study by Headwaters Economics analyzing the impact jobs tied to fossil fuel has had on the Western economy.

Back in the 1980s, when fossil fuel development fell off a cliff in Western states, there was a popular sticker pasted on the bumpers of aging pickups, rolling on tires of diminishing tread: “Dear Lord, please give me another boom, and I promise I won’t p*** this one away.”

So how have Western states handled the latest 2003-2008 boom and bust? Have we gotten smarter about handling booms, or did we do what we did the last time?

The answer, according to a new study by Headwaters Economics, is it depends on the state, the counties, the fuel and the presence, or absence, of political and industrial leadership at the right time and place.

The core finding was that tax revenues have greater impact and sustainability than highly volatile energy jobs, which can vanish as fast as they appear.

“Fossil Fuel Extraction and Western Economies” compares the importance of the fossil fuel economy in the five Rocky Mountain energy-producing states—Colorado, Montana, New Mexico, Utah and Wyoming—and analyzes the relative success that states and communities have had in maximizing benefits and minimizing the costs of energy development.

Written by Julia Haggerty, the report makes three key findings at the state level:

Fossil fuel extraction plays a limited role in state economies, and energy-related jobs (except for Wyoming at 8.5 percent), providing less than 3 percent of both total employment and total personal income for other states.

Price—not policy—is the primary driver of oil and gas development activity, making it highly volatile. Employment and income from mining, including energy development, in the five-state region follow commodity price trends, and income compensation from mining shrank by the largest percent—16.1 percent from 2008 to 2009—of any economic sector.

Tax revenue from fossil fuel extraction—rather than jobs—is the longest-lasting economic legacy of fossil-fuel development. While energy revenue varies because of price volatility, it continues to accrue long after most jobs have left a region. By maximizing collection of fossil-fuel revenue and ensuring it is adequately distributed, states increase the benefits of energy development, while minimizing, or at least covering, the costs.

Headwaters Economics, an independent research group based in Bozeman, had examined the costs and benefits of the boom years in a series, “Energy in the West,” published in 2008 and 2009.

“We had looked at the energy economy at the height of the boom,” said Haggerty. She and her fellow economists became curious how things worked out with the resultant bust.

“It wasn’t as steep as the last bust,” she said. A key marker of the last bust was when Exxon pulled the plug on the oil shale industry on the Western Slope of Colorado.

Haggerty found that while Wyoming has a great system for capturing energy revenues and holding them in a rainy-day fund, the Cowboy State does a poor job of allocating revenues to local governments that are struggling with the costs of an energy boom. Conversely, she found that Colorado does a good job of getting funds to struggling communities, but taxes at a low rate and doesn’t have much saved for the future. The two states’ permanent mineral-revenue funds would support their respective state’s general fund for six years, versus two weeks.

While Colorado reformed its energy assistance program for impacted communities and counties in 2007, Wyoming largely makes local officials rely on local sales tax revenues, which always have a lag between expensive, initial impacts on roads and schools, and money to address those impacts. Colorado shares half of its energy revenues with energy-impacted towns and counties. For Wyoming, the locals get 5 percent, according to the study.

During the early 1980s boom, Wyoming’s Rock Springs realized it needed to replace an aging sewer system. Money to address that infrastructure problem, said Haggerty, didn’t show up until the most recent boom. After Rock Springs fixes its sewer system, said Haggerty, it isn’t going to have much left in the bank.

The report recommended hiking tax rates on the industry and to drop revenue limits like Colorado’s TABOR law (Taxpayer Bill of Rights), which can force communities to forgo higher revenues. The report compares and contrasts Garfield and Mesa counties on Colorado’s Western Slope. Garfield managed to vote down the TABOR limits and Mesa did not. According to the report, Garfield County had more money and was more successful in addressing boom growth pains, than neighboring Mesa County.

State Budget Woes

The Headwaters report acknowledges that energy-producing states like Wyoming, Montana, North Dakota and Texas avoided significant deficits at the beginning of the Great Recession – enough to make some analysts believe that oil and gas production lent these states some sort of immunity to the recession.

But not forever.

Today, Montana and Texas face budget gaps of $400 million and $4.3 billion, respectively. Montana saw its tax revenues decline 16 percent between FY 2009 and FY 2010, while severance taxes declined by 30 percent. Wyoming avoided budget shortfalls because the state’s budget was cut 10 percent across the board in FY 2009.

Severance taxes in Wyoming made up 48 percent of total general government revenue in FY 2009, but only 37 percent a year later. The decline could have been worse, save for a stable coal market.

Outlier

Haggerty found that Wyoming was a special case in her study. No other state has an economy so dependent on mining and energy production. She found the Cowboy State served as a useful window on the pluses and minuses of such narrow dependence.

After all, Wyoming’s number of jobs declined more than 10 percent in the early 1980s recession. Recovery in the late 1980s wasn’t in the energy fields, she said, indicating Wyoming was developing a more diverse economy. But as the energy boom surged in the early 2000s, energy jobs paid more than other sectors and that reinforced the state’s energy dependence.

One positive aspect is that a delayed decline in energy prices helped buffer the impacts of the recession in Wyoming. Job losses and unemployment were less than in neighboring states. That could be because Wyoming had an extreme labor-shortage before the recession, said Buck McVeigh at the Economic Analysis Division of Wyoming’s Department of Administration and Information.

On the negative side, for the duration of the recession, Wyoming saw the largest percentage decline in personal income of the five states – down 5.4 percent, followed by Colorado at -4.8 percent, Utah at -4.2 percent, Montana at -2.9 percent and New Mexico at 0.6 percent.

Coal prices have remained stable and the Wyoming coal mines have hired more workers. Still, said Haggerty, Wyoming’s dependence on fossil-fuel energy is what she calls “high risk.” The gamble, she added, is that U.S. and world demand for fossil fuels will outweigh factors that could put a brake on energy development – such as an endangered species listing for the sage grouse or a tax on carbon.

Doing It Smarter

Haggerty said she hopes industry and governments will learn from the past decade, when oil and gas leasing grew exponentially and industry managed to drill itself into over-supply (and lower prices) – as much as 1.4 billion cubic feet of natural gas per day.

Why the rush? Arguably, the mad rush of development did not maximize profits for industry and brought many costs to industry and residents alike.

The explosive growth of the energy boom in Wyoming’s Pinedale Anticline, for example, knocked down the local deer herd numbers and left residents with an ozone air pollution problem more typical of Los Angeles than Wyoming.

“I think the lesson is you need to raise taxes to pay for the impacts, redirect revenues to locals and energy development should go under the precautionary approach,” she said. Municipal, county, state and the federal government also need to coordinate their plans, she added.

“If we can’t make it work in Wyoming,” she said, “that’s a bad sign for everywhere else.”

With state legislatures wrapping up their winter/spring sessions, the release of this new report has not been as timely as Haggerty had hoped. “There is a lot of talk about adjusting revenues, but most of the talk is about repealing taxes, rather than improving tax revenues.” That would be unfortunate for local governments scrambling to deal with an emerging Niobrara shale development rush.

While Haggerty wasn’t involved in the community-level interviews for the boom cycle report, she was struck that locals in Colorado, Wyoming and Montana felt “this boom will be different, that there’d be no decline in natural gas prices. As we’ve since learned, that just isn’t true. Maybe the bust wasn’t as hard a fall as last time, but there’s still been real, cumulative impacts.”

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Haggerty’s study acknowledged her data might have missed some seasonal energy workers or those incorrectly categorized into other industries. A 2009 PriceWaterhouseCoopers study for an energy trade group said oil and gas workers constituted about seven percent of the jobs in each state. Wyoming received some 29 percent of its jobs from the oil and gas industry.

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