The Fuse

In the Shale Patch, Research Shows Early Signs of a “Resource Curse”

by Nick Cunningham | July 16, 2015

The shale revolution that started roughly a decade ago brought a sudden influx of cash, people, and jobs to certain areas of the United States. First, the gas rush hit Pennsylvania, Louisiana, and Texas. After that came the tight oil boom, which spread to North Dakota, Colorado, and large swathes of Texas.

The oil and gas boom created thousands of very high-paying jobs throughout the supply chain: Upstream production, downstream processing and refining, and even spin off industries were formed—manufacturing saw a resurgence and new billion-dollar petrochemical complexes sprung up along the Gulf Coast as abundant natural gas offered a cheap feedstock. The demand for labor was so great that even when national unemployment rates were at recent highs, at times companies had difficulty filling positions.

This was a boon to many areas of the country, particularly in the aftermath of the 2008 global financial crisis, which left the American economy reeling.

Job boom turns to bust

However, a new study finds that the alluring job prospects in the shale industry for young men might have had a significant downside: Higher high-school dropout rates. The study, authored by Dartmouth College Professor Elizabeth Cascio and researcher Ayushi Narayan, found that when the shale industry showed up, it increased the rate at which young men dropped out of high school. This impact was seen regionally in areas where the shale boom was occurring, and was found to be statistically valid when the authors controlled for other factors. They found that the high school graduation gap between males and females would have been 11 percent smaller between the years of 2000 and 2013 if the shale boom had not occurred. Instead, the gap remained unchanged.

For a lot of 18-year olds, dropping out of school to work in an industry that was offering six figures for low-skill work may have been the smart choice. But now that oil prices have collapsed, many positions are being eliminated by oil and gas drillers. Even as the U.S. adds more than 200,000 new jobs each month, employment in the oil and gas sector is shrinking. The U.S. oil and gas industry has lost about eight percent of its jobs since December 2014.

This presents a particular challenge to those who decided against finishing high-school to work in the oil fields. These individuals are arguably left with fewer avenues of future employment, having missed out on an education (the job market is also difficult for those with higher education, such as petroleum engineers).

The resource curse

In a small way, this impact is consistent with a theory that economists call the “resource curse,” in which economies that lean heavily on resource extraction suffer from currency volatility, high poverty rates, corruption, violence, reduced competitiveness in other industries, and weaker economic growth. Extreme examples include countries like Angola or Equatorial Guinea, which have corrupt governments that siphon off much of the oil wealth for the personal enrichment of elites while the rest of the country remains mired in poverty. High costs of living (stemming from an overvalued currency) keep people poor and make economic diversification difficult.

Of course, these countries represent the resource curse in its most severe manifestations. The shale oil and gas boom has had undeniable positive impacts across the country, but it’s not to say these benefits have come without costs of any kind. And in the United States, local economies are not immune from the inherent boom-busts in oil prices. For example, a 2013 study by Headwaters Economics found that counties in western U.S. states that participated in the early 1980s oil boom suffered from lower per capita income between 1980 and 2011, and also had higher crime rates and lower levels of educational attainment. These outcomes were magnified in the counties that had a higher degree of specialization in oil and gas development for a longer period of time. This suggests that oil and gas crowded out other industries, and when there was a bust, there were few alternatives to pick up the pieces.

Despite abundant coal reserves, a century of coal mining has not transformed West Virginia into a rich state.

Places like West Virginia also exhibit symptoms of the resource curse. Despite abundant coal reserves, a century of coal mining has not transformed West Virginia into a rich state. Booms are followed by busts, which has time and again inflicted economic and social pain on a state so dependent on resource extraction, “leaving communities vulnerable, underdeveloped, and less economically secure,” according to a 2011 study by the West Virginia Center on Budget and Policy. Disconcertingly, these are not just short-term effects following downturns—dependence on resource extraction can lead to persistent economic weakness that spans generations. In West Virginia, “counties with high concentrations of mining employment tend to underperform economically in the long run compared to counties that have a more diverse economy,” the WVCBP study concludes.

Costs will remain to be seen

Not all areas that experienced the shale boom are equal. For example, the Dallas-Fort Worth region is much more economically diversified than North Dakota or parts of rural Pennsylvania. Nimble economies with greater transparency will have a better chance at avoiding the negative effects of resource extraction.

Of course, different regions will cope with the effects of drilling differently. Regions with relatively low levels of population density and wide open areas (North Dakota) may suffer from fewer negatives side effects than places where other industries—tourism, agriculture, hunting, fishing—are vibrant (such as upstate New York, had fracking not been banned there). Tourism and outdoor recreation, to take one example, is not easily compatible with the degree of industrialization that takes place in a shale boom town, so the jobs gained in drilling need to be weighed against the potential job losses (or, at least, slower job growth) elsewhere.

With the shale revolution only recently slowing down, it is too early to say that shale has produced a new resource curse. Studies to date have found little evidence of negative economic impacts, but much of the data is based on the boom times. It’s important for communities to be cognizant of potential long-term costs in order to help temper their impacts.

To the extent that young men opted against obtaining a high-school education because they flocked to drilling jobs, there are negative impacts on their long-term career prospects, but it could also leave the towns and regions in which they live less able to adapt to life after the boom.

The jury may still be out, but the Dartmouth study mentioned above offers kernels of evidence that even in the United States, we are not immune to “resource curse” impacts. It studies just one aspect of the recent shale boom—high school completion. To the extent that young men opted against obtaining a high-school education because they flocked to drilling jobs, there are negative impacts on their long-term career prospects, but it could also leave the towns and regions in which they live less able to adapt to life after the boom. If their workforces are less educated and less equipped to transition into other industries, the surge in drilling left these regions with a temporary influx in cash, but no more prosperous over the long-term. Indeed, they could potentially even be worse off.

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