Why 'drill, baby, drill' was always bound to fail
Much of the traditional Republican jobs agenda simply does not work. Deregulation, tax cuts for the rich, eyewatering cuts to government — these policies have been enacted by Republican lawmakers in several conservative states. These states are now flailing in economic crisis.
The only part of the Republican jobs agenda that makes even a scintilla of sense was memorably summarized by Sarah Palin: "Drill, baby, drill!" And okay, it's true, drilling for oil and gas does create jobs. At its recent peak at the end of 2014, the oil and gas extraction industry employed more than 200,000 people. That's not so many jobs in a country of 320 million people, but it's not nothing either. The work even pays well, though it's also pretty dangerous.
But in an extremely familiar and predictable pattern, the boom has turned to bust as the price of oil has fallen sharply over the last year. It turns out "drill, baby, drill!" is a terrible long-term economic development strategy. The money comes in quick and easy, but the bust is long and hard — and often comes at the expense of alternative strategies.
First, let's look at some numbers. The price of oil has fallen by over two-thirds since late 2014, and the number of active U.S. rotary drill rigs has fallen by 54 percent in the last year. Though overall U.S. production has not crashed that hard, it's still down by 7 percent. Jobs in the sector have fallen by over a tenth overall, and are headed straight downwards:
— ryan cooper (@ryanlcooper) April 28, 2016
In Pennsylvania, active rigs have plummeted from 115 to a mere 16. Local businesses in drilling country report crashing sales and mass layoffs.
Vernal, Utah — long a hub of oil and gas — makes for a particularly interesting case study. Over two years ago, I reported a long story for the Washington Monthly about the development of a recreation economy in the American West, comparing Vernal to nearby Moab, Utah. The latter is a small town that has made a decent living catering to tourists visiting the nearby national parks and monuments. The immediate money isn't nearly as good as oil and gas, and it takes quite a long time to build up a worldwide reputation that will bring lots of visitors, but it's also a much more stable business model over the long term.
So while Vernal was overflowing with cash in late 2013, I predicted that a bust "is coming at some point." Lo and behold, the bust has arrived. The unemployment rate in Uintah County (of which Vernal is the county seat) has nearly tripled to 11.2 percent since December 2014 — a full percentage point higher than it ever got during the Great Recession. Sales tax revenue is down by a quarter. It's particularly striking because the rest of the state is doing extremely well. Here's the Deseret News:
Here then is the story of two states: Utah with a flourishing business climate driven by Wasatch Front success, a jobless rate lower than the national average, and an economic climate ranked sixth in the nation by Forbes Magazine. The other story, the one that does not generate state-issued press releases, is of government job placement offices that fill up weekly with the stricken-faced, newly unemployed, the one with local governments cutting services and businesses that are folding one by one. [Deseret News]
Commodity prices fluctuate. Vernal was in for it sooner or later.
And that demonstrates what may be an even more toxic effect of oil and gas development — the political economy it creates. One could imagine that a community might parlay a lucky but obviously temporary resource strike to pay for investments in a more diverse economic base — particularly in places that have been burned before by an oil bust — but in practice this usually doesn't happen. Instead, they go all in on drilling, again and again.
During the boom, drilling jobs are plentiful and well-paid. Particularly in small communities, the ensuing tax revenue can quickly account for a huge fraction of the tax base — enabling easy new spending or popular tax cuts. Wealthy oil executives (who are, of course, going home with most of the money here) step up with political donations to ensure a friendly regulatory environment. Local politicians become pliant and cooperative.
In short, the whole society becomes oriented around continued oil and gas extraction. And for awhile, it seems to work great. Everyone is rolling in money, and they get to stick it to smug liberals worried about endangered cacti or whatever.
But it can't last. Either the price of oil falls, or the community's finite supply of oil runs out. There is no other outcome.
Perhaps it's too much to hope that Vernal and its colleagues across the nation will come to grips with the economic limitations of oil and gas. But if they can't, climate policy will do it for them.