Volume 14, Issue 3

March 2012
EDITOR
Dr. Greg Delemeester
Professor of Economics
Marietta College

Developing the Utica Shale

By: Alex Cavanagh

Dr. Bob Chase, chair of Marietta Colleges Department of Petroleum

Engineering and Geology, spoke to the Economic Roundtable at the Parkersburg Country Club on Wednesday, February 1, 2012. The topic of his presASSISTANT EDITOR
entation was Developing the Utica Shale: Economic and Environmental ImAlex Cavanagh, C15
pact.
Dr. Chase began his presentation with a brief explanation of various
CONTRIBUTORS
technical aspects of the shale drilling boom that is just getting underway in
Qi Li , C12
Jen Rohrig, C14
eastern Ohio. The
Yuan Tao, C12
shale of the Utica
and Point Pleasant
Special thanks to
formations are in
Dr. Jacqueline Khorassani &
Tom Perry
the perfect spot for
natural gas and oil
On the web @
production. The
economicroundtable.org
shale has a rich
organic content,
correct depth and
temperature for
Inside
production, and
This
has a brittle nature
Issue
for ease of extracPhoto by Jen Rohrig
tion. This Perfect
Storm of conditions has contributed to the explosion of interest in the eastern Ohio region.
Utica Shale
In addition to the perfect storm of conditions, a relatively new technological advancement is also prevalent in the shale gas and oil industry.
Chinas Economic Horizontal drilling has been used in offshore operations for over 40 years.
Growth Puzzle
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 Determinants of
ued horizontally for an additional 5-7 thousand feet. Hydraulic fracturing, or
College Tuition
fracking, has been used for the last 60 years. Hydraulic fracturing is the
process of injecting pressurized fracking fluid into the shale formation in
Upcoming
order to create small fissures to increase the proSpeaker
Please turn to Chase, page 2
duction of the natural gas and oil present in the

Chase, continued from page 1

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 abundance 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 region. 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 exponential.
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 uninformed. 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 couldnt 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 nonhazardous. 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 active 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 Pennsylvania and West Virginia. The typical value per acre leased is a $1,000 to $5,800 signing bonus, combined 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, rubber, and polymer industry in Ohio are also great. The availability of a local feed stock for these industries 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 development 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 possibilities, and be prepared for when the boom reaches your town.

Undergraduate Research

page 3

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 completing 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.

Chinas 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 Chinas recent
economic growth, concentrating on differential growth rates experienced by the eastern and western portions of China. Much of Chinas 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 techniques, and a cross-sectional data set covering 122 prefecturelevel cities in eastern and western China, Tao estimated a model
explaining Chinas economic growth as measured by the percentage change in per capita real GDP. Typical long-run economic growth models include various measures of labor and
capital resources, along with technological change, as key factors determining growth. Taos model, however, was focused on
a shorter time spanthe 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 education expenditures, percentage change in foreign direct investment, change in the share of primary industries (agriculture, fishYuan Tao, Senior Economics
ing, stockbreeding, etc.) to local output, change in saving rate,
and Math major
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 Taos estimation results, four factors have significantly affected Chinas economic
growth over the 2002-07 time span. Specifically, Tao found that the higher the citys initial GDP, the
lower its growth rate over the five year period. Second, a citys economic growth was inversely related
to the change in its saving ratethat 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 Taos findings, whether the city was located in east or west China did
not significantly affect its rate of economic growth.

page 4

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 suggests that this result is likely due to higher demand for colleges that graduate their students on time.
Second, Lis 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 colleges ranking
(Barrons Profile of American Colleges) and city size are
positively correlated with tuition. Other factors that are
Qi Li, Senior Economics
positively correlated with tuition are the age of the college
and International Business major
and its size. That is, the older the college is, perhaps reflecting its reputation, the higher the tuition it charges. And, the larger its size as measured by acreage, the
higher its tuition. Lis results also show that the student-faculty ratio is negatively correlated with tuition: the lower the student-faculty ratio, the higher the colleges tuitionperhaps 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 average 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 levels), 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.
Note: The opinions expressed in MACRO & micro do not necessarily represent the opinions of the ERT or the B&E Department at Marietta College.