•••• Utica Shale

•••• China’s Economic

Growth Puzzle

•••• Determinants of

College Tuition

•••• Upcoming

Speaker

By: Alex Cavanagh

Dr. Bob Chase, chair of Marietta College’s Department of Petroleum Engineering and Geology, spoke to the Economic Roundtable at the Parkers-burg Country Club on Wednesday, February 1, 2012. The topic of his pres-entation was Developing the Utica Shale: Economic and Environmental Im-

pact. Dr. Chase began his presentation with a brief explanation of various

technical aspects of the shale drilling boom that is just getting underway in eastern Ohio. The shale of the Utica and Point Pleasant formations are in the perfect spot for natural gas and oil production. The shale has a rich organic content, correct depth and temperature for production, and has a brittle nature for ease of extrac-tion. This “Perfect Storm” of conditions has contributed to the explosion of interest in the east-ern Ohio region.

In addition to the perfect storm of conditions, a relatively new tech-nological advancement is also prevalent in the shale gas and oil industry. Horizontal drilling has been used in offshore operations for over 40 years. Horizontal, or directional drilling, is just as it sounds. The well is drilled down vertically to a depth of 6-8 thousand feet, and then the well is contin-ued horizontally for an additional 5-7 thousand feet. Hydraulic fracturing, or “fracking,” has been used for the last 60 years. Hydraulic fracturing is the process of injecting pressurized fracking fluid into the shale formation in order to create small fissures to increase the pro-duction of the natural gas and oil present in the

Developing the Utica Shale

Photo by Jen Rohrig

Please turn to Chase, page 2

Volume 14, Issue 3 March 2012

EDITOR

Dr. Greg Delemeester Professor of Economics

Marietta College

ASSISTANT EDITOR Alex Cavanagh, C’15

CONTRIBUTORS

Qi Li , C’12 Jen Rohrig, C’14 Yuan Tao, C’12

Special thanks to

Dr. Jacqueline Khorassani & Tom Perry

On the web @

economicroundtable.org

Ins ide

This

I ssue

page 2

shale. The recent advancement is the combination of horizontal drilling and hydraulic fracking on

land. Horizontal fracking has been used by the industry for the last 10 years to retrieve shale gas from the Barnett Shale formation in Texas. This recent advancement of technology combined with the abun-dance of shale gas in Ohio, Pennsylvania, and West Virginia, has made the extraction of Utica and Point Pleasant Shale gas and oil economically possible.

Many companies have flocked to eastern Ohio, Pennsylvania and West Virginia, in order to lease acreage from landowners for future drilling operations. By far, the largest in Ohio is Chesapeake Energy with 1.36 million acres, followed by Chevron with 623 thousand acres. Many other companies are competing for acreage though; a total 3.8 million acres have already been leased throughout the re-gion. Ohio has roughly 132 shale drilling wells in production or permitted to be drilled. Each horizontal drilling pad takes up about 5 acres and has the potential to produce 1280 acres worth of shale gas and oil. With nearly 4 million acres leased already, and only 132 wells, the potential for growth is exponen-tial.

With rapid progress comes reasonable concerns, but Dr. Chase reassured his audience of the many regulations and procedures that need to be followed in order to even consider beginning a new drilling site. The new method of horizontal fracking leaves a lot of room for criticism from the unin-formed. Environmental and worker safety is not an option, it is a corporate mandate. Dr. Chase stressed repeatedly that every modern well has at least 3 redundant layers of protection between the well and the local water table. The largest area of concern lies with the fracking fluid. Fracking fluid consists of 99.5% sand and water, and the other 0.5% is comprised of various chemicals. A large myth surrounding the fracking industry is that “the chemicals are top secret.” This couldn’t be further from the truth. Recent legislation has mandated fracking companies to submit the contents of their fracking fluid for public record. Dr. Chase also mentioned that the Environmental Protection Agency has fracking fluid listed as non-hazardous. For more information on fracking and the processes involved, Dr. Chase recommends FracFocus.org, because educating yourself is the easiest way to get past the many myths surrounding horizontal fracking.

The economic impact of the fracking industry in Ohio is already upon us; in 2011 there 132 ac-tive wells drilled and permits to drill. Dr. Chase expects that number to reach over 1500 per year by 2015. As much as $6 billion has been spent on leases in Ohio alone, with similar numbers for Pennsyl-vania and West Virginia. The typical value per acre leased is a $1,000 to $5,800 signing bonus, com-bined with a 12.5-23% royalty on everything produced. Many areas of Ohio have already felt the boom associated with such high lease bonuses. Carroll County, Ohio, has reported that over 90% of their land has been leased.

In addition to the hefty premium paid to lease holders, the physical drilling of the wells has an economic impact on the surrounding areas. Each additional well costs the drilling company $5-6 million to drill. It has been estimated that over 200 thousand jobs will be created over the next 5 years due to the development of the Utica Shale. The need for pipeline infrastructure, processing plants, and the sheer labor and supplies needed provides a huge opportunity for Ohio. The ramifications for the plastics, rub-ber, and polymer industry in Ohio are also great. The availability of a local feed stock for these indus-tries will create new jobs and lower costs, adding to the existing billion dollar industry. Combined with the direct influx of money and jobs from the fracking industry, the trickle-down effect comes into play. Suppliers, hotels, and restaurants are only some of the industries expected to benefit from the develop-ment of the Utica Shale.

From the first natural gas producing well that was hand dug in 1821 to a depth of 27 feet, to the

large scale operations of today, one thing is certain, there are valuable resources below our feet. We are

literally sitting on a gold mine of resources that could help reduce our dependence on foreign oil and

stimulate local economic development. The best thing to do is to educate yourself, embrace the possibili-

ties, and be prepared for when the boom reaches your town.

Chase, continued from page 1

China’s Economic Growth Puzzle: An Econometric Study

Yuan Tao, a native of Beijing, China, will be graduating in May 2012 with majors in Economics and Mathematics. For his senior capstone project, Tao examined the factors affecting China’s recent economic growth, concentrating on differential growth rates experienced by the eastern and western por-tions of China. Much of China’s economic growth has been concentrated in the eastern portion of China along the coastal areas where large special enterprise zones such as Shenzhen and Shanghai are located.

Meanwhile, the western portion of China has lagged behind the east. Using ordinary least squares (OLS) regression tech-niques, and a cross-sectional data set covering 122 prefecture-level cities in eastern and western China, Tao estimated a model explaining China’s economic growth as measured by the per-centage change in per capita real GDP. Typical long-run eco-nomic growth models include various measures of labor and capital resources, along with technological change, as key fac-tors determining growth. Tao’s model, however, was focused on a shorter time span—the five years from 2002 to 2007. Among the factors included in his model that were hypothesized to affect economic growth were: initial GDP, percentage change in educa-tion expenditures, percentage change in foreign direct invest-ment, change in the share of primary industries (agriculture, fish-

ing, stockbreeding, etc.) to local output, change in saving rate, percentage change in scientific expenditures, percentage change

in the number of internet users, and a dummy variable separating cities located in eastern China from those located in western China, among others. According to Tao’s estimation results, four factors have significantly affected China’s economic growth over the 2002-07 time span. Specifically, Tao found that the higher the city’s initial GDP, the lower its growth rate over the five year period. Second, a city’s economic growth was inversely related to the change in its saving rate—that is, the higher the change in its consumption rate, the higher its growth rate. Third, the growth rate in foreign direct investment was found to positively contribute to economic growth. Finally, the greater the change in the share of primary industries to local output, the lower the growth rate for the city. Surprisingly, according to Tao’s findings, whether the city was located in east or west China did not significantly affect its rate of economic growth.

page 3 Undergraduate Research

By: Greg Delemeester

This is part of a continuing series of reports on the undergraduate research projects of senior economics majors at Marietta College. Students must demonstrate their academic proficiency by com-pleting an empirical economics research project using the statistical methods of multiple regression analysis. Under the direction of Dr. Jacqueline Khorassani, students must write up their work and then make a presentation to an open forum.

Yuan Tao, Senior Economics and Math major

page 4

Note: The opinions expressed in MACRO & micro do not necessarily represent the opinions of the ERT or the B&E Depart-

ment at Marietta College.

The Determinants of College Tuition Qi Li has a double major in Economics and International Business. Li is from Beijing, China, and will be graduating in May, 2012. For his capstone project, Li investigated various factors affecting the tuition of private colleges in the United States. Using a sample of 120 randomly selected four-year private colleges during the 2010-11 academic year, Li used the Ordinary Least Squares (OLS) method to examine nineteen factors; of these factors, nine were found to have a statistically significant effect on tuition. First, Li found that the higher the 4-year graduation rate of a college, the higher the tuition it charged. Li sug-gests that this result is likely due to higher demand for col-leges that graduate their students on time. Second, Li’s results show that the state per capita income and minimum wage are positively correlated with college tuition. These results suggest that higher income leads to an increased demand for college and, therefore, higher tuition. A higher minimum wage, on the other hand, leads to an increase in operating cost, resulting in a lower supply and higher tuition. Li also provides evidence that a college’s ranking (Barron’s Profile of American Colleges) and city size are positively correlated with tuition. Other factors that are positively correlated with tuition are the age of the college and its size. That is, the older the college is, perhaps reflect-ing its reputation, the higher the tuition it charges. And, the larger its size as measured by acreage, the higher its tuition. Li’s results also show that the student-faculty ratio is negatively correlated with tui-tion: the lower the student-faculty ratio, the higher the college’s tuition—perhaps reflecting a premium that people are willing to pay for close attention. Among those factors that were not found to have any significant effect on tuition were the aver-age tuition at nearby public colleges, whether the college was religiously affiliated, the percentage of the faculty that held doctorates, the number of police officers per 100,000 population (a proxy for crime lev-els), and the number of graduate programs offered at the college, among others. Li summarizes his results by saying that “one could possibly lower his expected college tuition by choosing a small, new college that is located in a poor state, has a high student-faculty ratio, a low rank, and a low graduation rate.”

Upcoming Speaker

Sandra Pianalto, President of the Federal Reserve Bank of Cleveland. Date: Monday, April 2, 2012. Location: Lafayette Hotel, Marietta. Topic: The Fed and the Economy: Striving for Stability.

Qi Li, Senior Economics and International Business major