The shale revolution has undoubtedly changed energy markets across the county and across the world. Thanks to innovations in oil and gas extraction from shale formations – mainly hydraulic fracturing – Ohio is getting a piece of the action as natural gas drilling has ramped up along Ohio’s eastern border.
Researchers from Kent State University (Dr. Shawn Rohlin), The Ohio State University (Dr. Mark Partridge) and The University of Akron (Dr. Amanda Weinstein) teamed up to uncover how the recent oil and gas boom has affected businesses in Ohio and across the country. In a paper titled “Firm formation and survival in the shale boom,” recently published in Small Business Economics, they find that this sudden shock from energy development decreased sales in existing firms in drilling counties and prevented new businesses from forming.
As the researchers noted, natural gas production in Ohio had been relatively flat for years before its sudden increases in 2012. In just five short years between 2012 and 2017, natural gas production in Ohio was over 20 times larger (2,000% of its 2012 natural gas production levels – from over 84 billion cubic feet to over 2.3 trillion cubic feet – U.S. Energy Information Administration). This increase in natural gas production in Ohio and elsewhere has lowered the energy prices in Ohio and across the country, benefitting industry and households – as well as replacing less environmentally friendly energy resources – namely coal. Drilling counties in Ohio are helping to provide these benefits to energy consumers across the country, but are drilling counties in Ohio reaping the rewards?
Impact of energy activity
Innovations in oil and gas extraction have made an already productive industry in the U.S. even more productive. Like many capital-intensive industries that rely on machines and automation, this means that growth in production in the industry is not matched equally by growth in employment. Although natural gas production is at over 2,000% of what it was in 2012 in Ohio, employment and the number of establishments have only both increased a mere 29% (total wages are only slightly higher at about 38%).
In other words, energy activity prevented firms from forming that would have otherwise. Rather than starting their own firms, some potential entrepreneurs may accept relatively high-paying jobs in the oil and gas industry instead.
Though some new oil and gas firms may be created in addition to firms in other industries (upstream suppliers to the energy industry, for example), on net there is some crowding out of new business that puts downward pressure on employment.
New business creation critical
Over time, firms do seem to recover and rebound —adjusting to the disruption — but it doesn’t happen overnight. It takes time for entrepreneurs in Ohio and elsewhere to understand how to capitalize it – and new firms seem to be in the best position to do so. After 10 years of the energy boom, a one standard deviation increase in drilling activity is associated with a 9% increase in firm formations, a 35% increase in sales for new firms, and a 0.5% increase for existing firms. Ohio has not yet hit this 10-year mark as its boom didn’t begin in earnest until about 2012 or 2013. Still, the researchers maintain some concerns for the long-run prospects for drilling counties in Ohio. It is not clear if the types of retail and service firms created especially in more rural counties will generate long-term growth for these counties as they are aimed more at servicing a transient workforce.
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“The overall pattern is that while the nation has likely benefited from the technological advances that produced the shale boom, at least in terms of energy independence, the localities may be adversely affected if new business creation is dampened before the boom ends, making those locations more vulnerable when the inevitable energy bust sets in,” Partridge said.
Their research suggests that state and local policymakers should consider investing in programs in these counties that encourage start-ups and local entrepreneurs especially those businesses that are not closely tied to energy production to help these counties in the event of an energy bust.
For more information about the research, contact:
Dr. Shawn Rohlin, associate professor of economics
Kent State University
Dr. Amanda Weinstein, assistant professor of economics
The University of Akron
Dr. Mark Partridge, professor of rural-urban policy
The Ohio State University