The oil boom that transformed Lima and its region more than a century ago is mirrored today in Ohio communities less than 200 miles to the east. New technologies for finding and extracting natural gas and crude oil from deep shale deposits have made much of eastern Ohio ground zero for the largest national energy boom in decades. As a result, the world’s largest energy corporations are rushing in to drill Ohio’s energy wealth and pipeline it to global markets. While much of Ohio and the nation will experience short-run benefits from this energy “gold rush,” we should also prepare for some unintended consequences.
One drawback of energy-led development is the curious long-term pattern noted by economists: that natural-resource-intensive economies tend to underperform compared with similar economies without resources. Think of it as a sort of natural-resources curse, through which a short economic boom is followed by a much longer bust. A nearby example is central Appalachia, where despite the region’s tremendous coal wealth, its economy is forever struggling.
Governor John Kasich’s severance-tax proposal – one part of his comprehensive tax reform package – is a step to ensure that every Ohioan shares in the long-term benefits of energy development. Economists argue that when nonrenewable oil and natural gas resources are extracted from beneath our soil, those assets are lost to the region’s economy. In return, we should insist that offsetting investments in business capital, innovation, education and infrastructure are made in our state. A reasonable severance tax is one part of that that picture.
By any comparison, Ohio’s present oil and gas severance taxes are incredibly low given the costs of energy development on affected communities in terms of added infrastructure, public services, etc. For example, Ohio assesses just 20 cents per 42-gallon barrel of oil and 3 cents per thousand cubic feet of natural gas extracted. That’s simply too low to ensure that Ohio and its citizens benefit from our state’s energy resources.
While some argue that higher severance taxes will make Ohio uncompetitive for energy development, those fears make no sense, given what is happening elsewhere. Energy development is determined primarily by energy prices set on global markets, not by local taxes. For example, Texas, Oklahoma and North Dakota are all seeing some of the greatest growth in energy production, despite the fact that each of those states has much higher severance taxes than anything proposed in the Kasich plan.
Michigan charges 6.6 percent of the value of crude oil and 5 percent of natural gas. The Texas rate is 4.6 percent for crude oil and 7.5 percent for natural gas, and West Virginia charges 5 percent on both crude oil and natural gas. The Kasich proposal would set Ohio’s severance tax at 4 percent of market value for high-volume crude-oil producers and 1 percent for natural gas. The plan presents high-volume oil and gas extractors with realistic, modern-day tax rates that are still lower than they pay in competing states.
The Kasich severance-tax proposal is a good step toward ensuring that the vast majority of Ohioans benefit from the current energy boom while pulling us away from the negative boom-bust cycle that plagues other natural-resource economies. The added economic growth it promotes will support broader-based development long after the energy boom ends.
Mark Partridge is a Professor of Agriculture, Environmental and Development Economics at The Ohio State University.