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The Economic Benefits and Costs of Frac-Sand Mining

The Economic Benefits and Costs of Frac-Sand Mining in West Central Wisconsin: Phase One of Study – General Economic & Community Overview By Thomas Michael Power, Ph.D. and Donovan S. Power, MS. Published in May 2013.

Executive summary

A new technology to extract oil and natural gas from geological formations that lack the porosity to allow the oil and natural gas to flow into drilled wells has dramatically increased oil and natural gas production in the United States. Horizontal drilling combined with hydraulic fracturing (“fracking”) of the rock requires that material be injected into the fractured rock to “prop” it open. Sand of the right size, shape, and strength is one of the “proppants” used in oil and gas fracking. Wisconsin has substantial deposits of such “frac-sand.” The boom in the fracking activity of oil and gas companies has created a boom in the demand for frac-sand, including Wisconsin’s.

Frac-sand production, like almost all surface mining and ore processing, involves significant land disturbance and the potential to cause air and water pollution among other environmental problems. That has confronted citizens and local elected officials in west central Wisconsin with a familiar but difficult choice: mining, processing, and transporting the sand promises economic benefits for some parts of the population while imposing business, environmental, and social costs, on other parts of the population. Citizens and elected officials have to evaluate the mix of benefits and costs and their distribution over the short term and long term to make an informed decision as to what is best for their community.
The commercial businesses promoting frac-sand production typically commission economic impact analyses that purport to layout the “economics” of frac-sand production. These types of impact studies, however, almost always quantify only what are labeled benefits: additional jobs, payrolls, and tax revenues to governments. Costs associated with frac-sand production are rarely discussed in these studies. Since economic analysis, in general, involves the analysis of choices and tradeoffs where benefits and cost have to be weighed, the study of only benefits is difficult to label an economic analysis. As economists are fond of saying: “There is no such thing as a free lunch,” meaning costs are almost always present and have to be considered in any rational decision.

This report seeks to look at both the benefits and the costs associated with frac-sand mining. The objective of the report is to lay the basis for more informed public discussions and improved decisions about how to manage the natural landscape in Wisconsin’s frac-sand country. Based on our research on the impacts of mining activity across the nation and around the world, we will raise many questions about the benefits and costs associated with frac-sand mining. Some of those questions we will answer, some we will not. The intent is to lay out as clearly as possible the questions that each community needs to ask and answer, as best they can, before authorizing additional frac-sand production.

This study came to the following conclusions that are documented in the full report:

■■The promise of mining is that it will remove from the earth minerals of substantial value. That value created by miners typically supports levels of pay that are far above the average pay level in the rest of the economy. That high pay and the creation of wealth are expected to have “ripple” effects that boost the economic vitality and wellbeing of the entire community.

■■The promise that mining can lay the basis for prosperous, vital economies has not usually been fulfilled. Wisconsin has had a long history of mining that tells the same historical story found in other mining districts across the United States and around the world. Mining has rarely laid the basis for sustained prosperity. Often, as in Appalachia or the Ozarks or the Upper Peninsula of Michigan or the Iron Range of Minnesota, mining has been synonymous with economic depression, high rates of unemployment and poverty, or simply “ghost towns.”

■■This “economic anomaly of mining,” the apparent contradiction between wealth creation and high wages not leading to community prosperity or often, even, community survival, needs to be recognized and understood if communities are going to manage their landscapes so as to sustain and increase local economic wellbeing.

■■We discuss seven reasons for the frequent failure of mining to produce sustained prosperity:
● ●Mining tends to be volatile, swinging through booms into busts. These fluctuations can be quite frequent and quite deep. This creates uncertainty about mining jobs and payroll that disrupts communities and depresses local economies.
● ●Labor-saving technological change is constantly reducing the number of jobs associated with any given level of mine production. This causes an ongoing loss of jobs even when production is steady or rising.
● ●Miners recognize this uncertainty about employment and choose to live away from mines, commuting long distances to work or leaving their families “at home” while they temporarily re-locate to work. This leads to substantialleakage of the mining payroll out of the local community.
● ●Mines tend to have limited connections with the local economy, especially if the mine in located in a rural area. With limited commercial infrastructure, the local economy cannot provide the mine with either the equipment or supplies it needs and often cannot even provision the mining households. As a result, the income generated rapidly leaks out of the community.
● ●Mining is very landscape intensive and has often been associated with significant air and water pollution. That environmental degradation makes mining districts unattractive locations for both homes and non-mining businesses.
● ●Mining in a variety of ways can discourage or displace other economic activities. In that sense, the economic stimulus provided by the mine is offset by the economic losses also associated with the mine.

■■Analysis of frac-sand production indicates that it is likely to have many of these same characteristics and economic problems that limit or offset the economic benefits associated with it.

■■The economic impact of frac-sand production in west central Wisconsin is likely to be quite small. The jobs associated with it will make up only a fraction of one percent of total employment. Over the last twenty years, the Wisconsin economy has created about the same number of jobs every single month on average. Within the frac-sand region that number of jobs has been created about every two months. That level of job creation will have little impact region-wide.

■■Using four quite different counties that are already significantly involved in frac-sand production, Trempealeau, Dunn, Eau Claire, and Chippewa, we explore the sources of their economic vitality over the last several decades. We document that land-based export activities such as mining, agriculture, forest products and other manufacturing have not been a source of economic vitality. The primary sources of job growth have been in the service sectors such as medical and other professional services.

■■Those frac-sand counties, however, have shown considerable economic vitality over the last decade or so despite the fact that the national economy has stumbledthrough two recessions including the last “Great Recession.” These counties should not think of themselves as so economically desperate that they cannot afford to make good long-run decisions for their communities.

■■For at least the last two decades, despite the recessions and their lingering effects, west central Wisconsin, has shown impressive economic vitality as its economies have evolved away from land-based economic activities towards a more diverse professional services economy combined with manufacturing that is not land-based. The high quality of life of the region, buttressed by attractive natural and human-made landscapes, inviting small towns and cities as well as rural areas, diverse cultural opportunities, and outdoor recreation potential has been central to this ongoing economic vitality. The high quality of life allows the region to hold and attract residents and visitors and well as relatively “footloose” new business ventures. The potential impact of frac-sand mining on these existing positive economic trends needs to be carefully examined.

Questions to be asked and answered before approving expansions of frac-sand productions

  1. What will the pay levels associated with the projected new jobs be?
    1. Direct mining and processing jobs may or may not be quite high.
    2. Transportation jobs may or may not be quite high.
    3. “Induced” jobs tied to workers spending their paychecks are likely to be low.
    4. Exactly what will be the mix of high and low paid jobs.
  2. Who will get each type of job?
    1. National studies do not show faster job growth in more mining reliant communities.
    2. Can unemployed and under-employed existing residents fill the jobs or will in-commuters and in-migrants take the jobs?
  3. Will frac-sand production be relatively stable?
    1. As natural gas and oil prices fluctuate, will the demand for frac-sand fluctuate?
    2. Is the recent frac-sand retrenchment and production declines a sign of the fluctuations the industry will have going forward?
    3. As more firms seek to enter the Wisconsin frac-sand market and large national firms seek to “integrate” frac-sand production with oil and gas developing companies and transportation companies, what will be the impact on small local operations?
    4. As frac-sand production gets consolidated into the hands of a smaller number of large national firms, how will that impact local employment and businesses? E.g. will there be a shift to national trucking firms, railroads displacing trucking, deployment of more capital-intensive, labor-displacing technologies, the flow of profits and wages out of the community, etc.?
    5. Will the damage and disruption in the downturn or “bust” be greater than the benefits of the initial growth or “boom” in sand production?
  4. How big will the frac-sand production “footprint” ultimately be?
    1. The area of operating and abandoned mines?
    2. Intensity of haul truck traffic on local roads?
    3. The number and location of processing plants?
    4. Unit train loading facilities, rail spur extensions, rail heads, storage piles?
  5. What will be the environmental impacts of these activities?
    1. Fine silica particulate from sand mining, handling, trucking, processing, and railroad hauling? Diesel and other emissions from all of these?
    2. The likelihood of more extensive chemical treatment and/or coating of the sand and resulting pollution associated with those chemicals?
    3. Likelihood of abandoned pits, storage piles, rail spurs and rail heads, etc.?
    4. What level of bonding will be required to assure complete reclamation? Are frac-mine operations willing to put up such guaranteed bonds?
  6. What will be the costs to other economic activities?
    1. Impact on the visitor economy from pollution, congestion, and industrialization of small towns and rural areas?
    2. Impact on holding and attracting new residents and businesses including retirees and other amenity in-migrants.
    3. Impact on agricultural productivity of the land?
    4. Will frac-sand producers bid workers away from local businesses and/or drive the cost of labor to local businesses upward?
  7. How important will the economic impact of frac-sand production be to the local economy?
    1. What will be the growth in percentage terms of the jobs, total income, and population?
    2. How does the frac-sand production impact compare, for instance, to the on-going growth in the other sectors of the economy?
    3. How short- or long-term will the impact be?
    4. Will there be a sustained, long-term, positive impact on the local economy from frac-sand mining?
  8. How desperate is the current and near term economic situation in potential frac-sand counties?
    1. Is it unbearable, calling for significant sacrifices of other community objectives and attractive characteristics right now?
    2. Is the longer term trajectory of the community relatively attractive despite the short term disruptions associated with the national Great Recession?
    3. How could frac-sand production actually contribute to the pursuit of the community’s primary long-term objectives?

 

Download the complete report in PDF format. Click here.

 

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