We've Only Scratched the Surface

by Kathy Deck  on Monday, Aug. 27, 2007 12:00 am  

In 2005, the Center for Business & Economic Research in the Sam M. Walton College of Business at the University of Arkansas at Fayetteville released a study that projected the economic impact of the introduction of the natural gas industry into central Arkansas.

The study was sponsored by Southwestern Energy Co. and based on a set of reasonably conservative assumptions about the Fayetteville Shale Play. The inputs to the economic impact model included estimated direct expenditures and employment by the operators in the Fayetteville Shale and by their primary suppliers.

The research did not attempt to project far into the future but estimated that between 2005 and 2008 there would be an aggregate economic impact of $5.5 billion, resulting in 9,683 full-time equivalent jobs by 2008 and $357.7 million in state and local tax revenue.

The realities of 2007 have proven that the assumptions underlying the 2005 study were indeed conservative. The major companies operating in central Arkansas have consistently increased their estimates for expenditures in the Fayetteville Shale Play. The 2005 study projected that in 2007, direct expenditures of just over $1 billion would result in a total economic impact of $1.6 billion. In fact, just between Southwestern Energy and Chesapeake Energy, outlays of $1.45 billion are expected in 2007. Using the multipliers from the initial study, the total generated economic output will be at least 35 percent greater than projected for this year.

Data from the U.S. Bureau of Labor Statistics show the substantial employment impacts that accompany such large dollar-figure expenditure. Examining statewide employment in the natural resources and mining sector shows an increase of 27.9 percent from January 2005 to June 2007. This increase translates into 1,900 jobs in that sector alone.

Every Job Sector Affected

But the employment impact from the development of the Fayetteville Shale Play is not limited to the natural resource and mining sector. Jobs have been created in every sector from construction to business services to manufacturing to transportation. Regional headquarter operations have been set up in Conway and Searcy. Note that total nonfarm employment in Arkansas increased 3.5 percent, or by 41,100 jobs, between January 2005 and June 2007. While it is difficult to tease out just how much of the new job creation was a direct or indirect result of the activity associated with the Fayetteville Shale, the statewide gains were realized despite a loss of 10,700 manufacturing jobs over that time. Clearly, the new industry has been supporting the state's economy in a very important way at a critical juncture.

Concurrently, the state realized a substantial tax revenue impact from the activities associated with the Fayetteville Shale Play. While natural gas production in the Fayetteville Shale ramped up, natural gas severance tax revenue increased from $529,416 in fiscal year 2005 to $619,418 in fiscal year 2007, according to the Arkansas Department of Finance & Administration's Revenue Division.

However, severance taxes are only a small part of the revenue that state and local governments receive as a result of the Fayetteville Shale Play. Sales and use taxes and income taxes increased as employment was generated and leasing bonuses were realized. These taxes will increase further as royalty payments are made. Property tax revenue also increased during the period as the economic vitality of central Arkansas improved due to the effects of the natural gas industry.

Measuring an industry's economic impact is a complex endeavor. Economic researchers have to look beyond the direct industry-specific impacts and explore the linkages between sectors. When expenditures are made by companies investing in the Fayetteville Shale Play, employment is generated. Increased employment opportunities lead to rising incomes and wealth in the state. Personal spending in Arkansas results from more disposable income and causes tax revenue to climb. Each of these effects factors into the overall economic impact calculation.

The quality of any economic impact study is directly tied to the quality of the data that are used as inputs to the model. In order to get the most reliable outcomes, an industrywide effort is necessary on the front end of a research project. To produce an updated economic impact study of the Fayetteville Shale Play requires extensive partnerships and information sharing. The Center for Business & Economic Research will continue investigating how the development of the Fayetteville Shale Play affects the economic well-being of Arkansans.

(Kathy Deck is director of the Center for Business & Economic Research at the Sam M. Walton College of Business at the University of Arkansas.)

 

 

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