Editor’s note: The North Carolina Chamber is hosting an energy conference on Wednesday during which Gov. Pat McCrory, various industry executives and N.C. State economist Dr. Michael Walden will be speaking. Walden will present a study he published earlier this year that points out energy development poses benefits as well as risks to the state. WRALTechWire is publishing portions of Walden’s report ahead of that meeting.
Dr. Walden is William Neal Reynolds Distinguished Professor, Department of Agricultural and Resource Economics at North Carolina State University. The following is the Executive Summary of his report “The Economic Potential from Developing North Carolina’s On-Shore and Off-Shore Energy Resources” followed by “Conclusions.”
Walden decided to write the report as a research project that would take an objective look at the benefits and costs of developing the state’s energy resources. Walden notes that “no outside group funded the study.”
RALEIGH, N.C. – Developing North Carolina’s energy resources has the potential to create income, employment, and public revenues for the state. Using average (mean) estimates for economically recoverable supply and prices of energy resources, it is calculated that constructing the facilities to access North Carolina’s off-shore energy resources could create $181 million (2012$) of annual income, 1,122 jobs, and $11 million of annual public revenues during the seven-year build-up period. Then during the estimated 30-year period of energy recovery, $1.9 billion of annual income, 16,910 jobs, and $116 million of annual public revenues would be generated. All economic impacts include the direct impacts of the energy acitivities, the impacts from in-state suppliers and enhanced consumer spending, and account for losses of economic activity when benefits flow to input owners outside the state.
There would also be economic impacts from development of the state’s on-shore energy resources. Again using average estimates for supply and prices, during the construction of the needed infrastructure and facilities, $80 million of new annual income, 496 jobs, and $4.9 million of annual public revenues would be generated. Then during a projected 20-year energy production period, $158 million of new annual income, 1406 jobs, and $9.6 million of new annual public revenue would be generated. Again, all impacts include direct effects of energy activities, impacts for in-state suppliers and greater consumer spending, and losses from benefits to out-of-state input owners.
These economic impacts were derived using average (mean) values for available energy resource quantities from government agencies and best-estimate energy price forecasts from government and international sources. However, changing these quantity and price projections were found to have significant effects on the size of the quantitative impacts – sometimes by a factor of more than 100.
There are also potential costs to North Carolina from development of energy resources. Unfortunately, these costs are difficult to estimate and are sometimes given only with a large range. Coastal damage from spillage of recovered energy resources is the greatest threat from off-shore development. The potential average annual cost – using actual spillage rates for the past 40 years – is $83 million, primarily to coastal counties. The potential annual average on-shore costs from possible environmental damage could reduce property values in the affected counties by between $636 million and $4.7 billion.
Accessing and producing North Carolina’s off-shore and on-shore energy reservoirs holds both the potential of economic benefits but also the possibility of economic costs. The largest benefits appear to be from off-shore development. Using average (mean) values for energy supply and future energy prices, during the seven year construction period of facilities for off-shore energy recovery, annual economic activity in North Carolina would increase by approximately $181 million (2012 $), and 1122 jobs would be created in the state. This enhanced economic activity would be associated with new annual public revenue of $11 (2012 $) million. The economic impacts would be even larger during the estimated 30 year period of energy recovery. Using recognized forecasts of energy prices and economically viable quantity, annual economic activity in the state would increase by $1.9 billion (2012 $) and would be associated with 16,910 jobs. Annual public revenues would increase by $116 million. All of these estimates account for economic returns flowing outside the state from to non-North Carolina input owners as well as the “re-circulating” of economic returns remaining in the state.
The economic benefits from on-shore development are estimated to be more modest. Also using average quantity and price values, during the seven year build-up of facilities to access the energy reservoirs, $80 million of new annual economic activity would be created in the state, along with 496 jobs and $4.9 million in annual public revenues. During each year of a 20 year production period, the annual increase in statewide economic activity would be $158 million, and this spending would generate 1406 jobs and $9.6 million in annual public revenues.
These average (baseline) economic impact results were generally smaller than those found in other studies focusing on energy development in North Carolina. However, it was not apparent those studies were careful to consider the interaction between the level of forecasted energy prices and the economically recoverable quantity of energy. This interaction was a key component of the current study.
Also, these results were obtained by using the average (mean) estimates of available energy resource quantities and the best single estimates of future energy prices. However, sensitivity analysis using ranges of both energy quantity and energy price forecasts showed significant variability in the results, in some cases by a factor of more than 100.
Hence, the estimated impacts are subject to specific forecasts for energy prices and available viable energy quantities. However, if the forecasts are changed, the methodology outlined in this report can be easily modified to generate new estimates.
But along with the potential economic benefits to North Carolina from energy recovery must be considered possible costs. Off-shore energy resource recovery faces the threat of spillage from natural disasters or man-made errors. Spillage could threaten North Carolina’s coastal counties and especially the tourism and fishing industries in those counties. Using average spillage rates for the last forty years of off-shore oil production in the U.S. and estimates of spillage costs, it is calculated that off-shore energy recovery could impose average annual costs of $83 million for North Carolina coastal counties.
There are also potential economic costs related to on-shore energy development. Previous studies have measured these as reductions in property values in counties where the on-shore energy development occurs. Using these studies as a guide, the North Carolina counties where on-shore energy development happens could see a reduction in residential property values of between $636 million and $4.7 billion, with an associated annual loss of spending of between $32 million and $235 million and job reductions ranging from 320 and 2350.
The result is that there are both potential “upsides” and potential “downsides” to energy resource development in North Carolina, and neither the “ups” nor the “downs” should be ignored. Benefit estimates should be continually refined as updated price and quantity information becomes available. Potential cost information should also be reviewed with the goal of narrowing the range of estimates. Plans, procedures, and contingencies for both reducing potential costs as well as addressing costs when they occur should be developed and debated.
(Note: The full report is available online.)