New study says economic benefit from frac sand will be minimal

By LeAnn R. Ralph

TOWN OF AUBURN — For those who had hoped frac sand mining would bring economic prosperity to everyone in West Central Wisconsin, the conclusions from a new study will be disappointing.

An economic analysis completed by Dr. Thomas Michael Power, a University of Montana economist who has studied the mining industry for 45 years, concludes that the economic benefit of frac sand mining will be minimal — if any benefit at all — to the local economy.

The study was released at a news conference May 15 at the Auburn Town Hall, north of Colfax on state Highway 64, across the road from the Superior Silica Sand (Glaser) Mine.

The Wisconsin Farmers Union, the Wisconsin Towns Association, and the Institute for Agriculture and Trade Policy commissioned the economic analysis.

Two years ago, the Wisconsin Farmers Union and the Wisconsin Towns Association received numerous requests for information about frac sand mining, said Tom Quinn of Downing, executive director of the Wisconsin Farmers Union.

In late 2011 and early 2012, the two organizations held two conferences on frac sand mining that were attended by 700 people, he said.

The conference materials were posted on the Internet and have been accessed by many people over the past two years, Quinn said.

A better economic impact analysis was one piece of information still missing from the materials available about frac sand mining, he said.

Most of the information so far has come from the frac sand industry and focuses solely on the positive but includes nothing about any of the negative aspects, Quinn said.

The study completed by Dr. Power is intended to foster better discussion in communities that are considering frac sand mines, he said.

Who benefits?

A typical economic analysis of mining focuses only on the benefits, Dr. Power said.

But “a benefits-only analysis is not an economic analysis,” he said, adding that economists call a benefits-only analysis “free lunch economics.”

Good public policy decisions will need to weigh both the costs and the benefits, Dr. Power said.

Questions that local government officials should ask themselves when considering a frac sand mine include who will benefit the most, what will be the impact on the local area, what services will local governments have to supply and how much will it cost? he said.

The promise

The “promise” of mining is that wealth will circulate through the local economy, creating unusually wealthy and prosperous communities, Dr. Power said.

As it turns out, an analysis of mining areas around the United States shows the opposite to be true: mining areas contain high amounts of poverty and unemployment, he said.

“Mining communities are not stable communities in spite of the wealth and high wages,” Dr. Power said.

Examples of areas where mining did not produce prosperity include Appalachia (coal), the Ozarks (lead), the Four Corners (coal) and the Upper Peninsula of Michigan (copper and iron).

Boom or bust

One of the reasons that mining communities are not prosperous, in spite of the high wages paid to miners, is that mining goes in “boom or bust” cycles, Dr. Power said.

The anomaly of mining — wealth for a few landowners and high wages for a few workers along with poverty-stricken communities — relates directly to the volatility of the mining industry, he said.

The people who work in the mines are paid wages considered good compared to other jobs, but when the mine slows down or closes, those people are out of work and no longer receive a paycheck, Dr. Power said.

People who were employed at the mine often wait around to see if the mine is going to open again instead of moving on to find other employment, he said.

Because mines tend to over-produce or under-produce, the huge fluctuations in production are distressing for communities, Dr. Power said.

Many of the frac sand mines say they have enough sand for 30 or 50 or 100 years, he noted.

“I don’t know of any mining operation that has run smoothly for 30 years. This is just not going to happen,” Dr. Power said.

Commuting

Because our society is so mobile, people employed by mining operations often do not live in the community where they work.

Dr. Power gestured toward the large sand mine near the Auburn Town Hall.

“Do you think the people who work at that mine are going to build their houses (in the field) next to it? Of course not,” he said.

When people drive many miles to work, they tend to spend their paycheck where they live and not where they work, Dr. Power noted, adding that paychecks generated by the sand mines are likely to “leak out” of the area and provide very little benefit to the local economy.

Dr. Power also noted that people who live in the rural areas of West Central Wisconsin where the frac sand mines are being developed are unlikely to have the skills necessary to operate the large and expensive equipment used to mine the sand.

The fact that local people will not have the skills needed increases the likelihood that those employed at the mines will not live in the area, he said.

The mining equipment also will not be built in the local area but will instead be purchased elsewhere and shipped in; supplying mining equipment will not provide jobs for local workers, Dr. Power said.

Sand rush

Frac sand mining in West Central Wisconsin currently is in the “rush” phase.

According to Dr. Power’s economic analysis, in 2010, sand brought $40 to $45 per ton, and the cost of production was $20 to $30 per ton.

In early 2012, the price of sand rose to over $100 per ton, but then declined to $80 per ton at the end of 2012.

“Those prices and costs meant very high profits for those who could get mines and processing plants permitted, built, and operating. The ‘rush’ was on,” the report states.

The report also notes, however, that there is no shortage of frac sand in Wisconsin and Minnesota, which means that “large additional supplies of frac-sand can be brought onto the market relatively quickly, creating competition for sales and pushing the price for the sand back down toward the cost of producing it. Wisconsin sand production may already be moving into that oversupply phase,” the report says.

Warning

In August of 2012, an investment advising firm called Seeking Alpha published a warning to investors, “The Coming Tsunami of Frac Sand Supply.”

Based on surveys of county permitting officials, the production capacity of frac sand facilities under construction and those that are proposed, production would increase by 90 percent.

As a result, more and more frac sand mines will come on line, “pushing the price down until marginal, high cost operations are squeezed out and the price is closer to the cost of production. Seeking Alpha projected that (the price of sand would end up at) $35 to $40 per ton,” according to the economic report.

Natural Gas

Sand prices also will be affected by the price of natural gas, since sand is used to force natural gas out of the rock where the gas is located.

According to the report, natural gas prices have been “highly volatile” for the last 20 years. In April of 2012, natural gas wellhead prices fell to less than $2 per thousand cubic feet; four years earlier, the price had been at almost $11, the report states.

“These types of price cycles are typical of many mineral markets,” the report says.

When the price of natural gas is extremely low, pursuing the more difficult sources of supply that were profitable when the price was higher is no longer feasible.

“The result has been a decrease in investment in natural gas exploration and development, including the higher cost shale gas developments that purchase frac sand,” the report states.

Stability

The Midwest in general, and Wisconsin in particular, have always been relatively stable in terms of population and economics, Dr. Power said.

When areas in the rest of the country experience steep declines because of an economic recession, Wisconsin remains more stable, he said.

One reason people live in this area is because they like living here, and when the population is stable and does not fluctuate much, service industries and other areas of economic activity, such as manufacturing, tend to develop, Dr. Power noted.

In relation to the frac sand mines, local residents should consider the attractiveness of the region to new residents and businesses.

“All economic activities cannot take place in the same place at the same time … you have to ask yourselves, ‘what economic activity will frac sand mining displace’?” Dr. Power said.

“To the extent that re-industrialization of the region around frac-sand production damages the region’s attractiveness as a place to live, work, raise a family, visit and do business, it may undermine future economic vitality rather than stimulate it,” the report states.

Visitors

The 2011 Wisconsin county “Visitor Spending and Impacts” analysis indicated that in the Eau Claire-Chippewa metro area, 5,175 jobs were associated with serving visitors. In Dunn County, there were 819 visitor-related jobs.

“Other counties where there is significant frac-sand production potential also had significant contributions to local economic vitality from visitors: 3,813 (jobs) in LaCrosse County; 2,115 in Wood County; and 1,198 in Monroe County. Clearly the visitor economy and the attractiveness of these areas to visitors is an important component of the local economic vitality,” the economic report states.

According to a chart in the report, from 2001 to 2011, out of the 10,519 jobs gained in Eau Claire, Chippewa and Dunn Counties, only 132 jobs (1.3 percent) were created by mining, even though there were already frac sand mines operating.

The real gains in jobs were in health and educational services, finance, real estate, professional services, visitor services and government.

If the future growth of jobs in Wisconsin occurs at only half of its historical rate, “frac sand mining will never become more than a tiny sliver in overall state employment … this relatively small number of jobs is unlikely to have any impact on the overall trajectory of the Wisconsin economy,” the report states.

Even in West Central Wisconsin counties where frac sand is being mined, the jobs represent only seven-tenths of one percent (.007) of total jobs, according to the report.

Full info

Dr. Power stressed that he is not “anti-mining” and did not intend “The Economic Benefits and Costs of Frac Sand Mining in West Central Wisconsin” to be an anti-mining document.

“People need to make an attempt to be fully informed so they can make rational choices,” Dr. Power said.

A complete copy of the 67-page report can be downloaded from www.iatp.org/frac-report.

The report includes a list of questions that local residents and government officials can ask when they are considering a proposed frac sand mine.