Update: Jennifer Bradley (Brookings) describes the good that government spending could do for innovation.
Over the past week or so, I've taken issue with public comments from Pennsylvania Lieutenant Governor Jim Cawley (here and here). Cawley is trying to beat back proponents of a greater tax for drilling in the Marcellus Shale. He makes a lousy case, demonstrating a poor grasp of economic development issues. Via Pipeline, the Council on Foreign Relations (CFR) offers a similar critique:
That argument would be undermined if a severance tax threatened to crush the industry. Indeed that is what Cawley has claimed: his op-ed suggests that gas drillers would flee the state if a severance tax were imposed. But the economics of don’t add up. The Marcellus shale is relatively cheap to produce: the recent MIT Future of Gas study, for example, shows breakeven gas prices that are much lower than for any other shale play. A modest severance tax would still leave the Marcellus as the place to be. To be fair, if natural gas prices crashed, it’s plausible that an excessive severance tax could deter production at the margin. But, assuming that gas can’t stay super-cheap forever, that’s not necessarily bad: rational resource management says that you should produce more when prices are high and less when they’re low.
The CFR analyst is describing a unique attribute of the Marcellus: Relatively low cost of production. That means that Pennsylvania could levy a higher tax than other states with significant shale gas plays and still be economically attractive for drilling. I won't mince words. Cawley is lying in an attempt to keep taxes as low as possible. He is defending corporate interests instead of Pennsylvania's.
Cawley is ideologically opposed to tax increases. Yet he is incapable of rationally supporting his position. The debate shouldn't be about how little to tax drilling. My concern is how the increase in revenue will be used. Ideally, Pennsylvania invests in more economic development. In any state, energy jobs are a small piece of the overall picture. Job creation in other sectors would be most welcome during a time of stubbornly high unemployment.
I have in mind research and development. Could Pennsylvania become an innovation leader for safer and more environmentally friendly hydrofracking? Universities could attract state, federal, and industry funding. Talent emerging from such a program would be in demand worldwide.
There is already a model to explore:
To feed its energy demands, the United States is looking for energy in increasingly far-flung environments such as: Ultra-deep offshore oil wells, the Arctic, shale rock formations 20,000 feet underground. The risks involved are often greater, but the industry lacks a set of “best practices” for these new frontiers of energy exploration.That's a need that researchers at the University of Texas and the Massachusetts Institute of Technology hope to fill. Scientists at both colleges are teaming up to create some guidelines for industry. Their focus would range from guiding principles to government policies to the engineering needs required to reduce environmental impact.
Pennsylvania should be a partner in this. Unfortunately, Cawley has neither the vision nor the leadership skills to get his state in the game. He'd rather bang the anti-tax drum and draw lines in the sand. Thanks to his ridiculous antics, PA residents are so much the poorer.