Oil and natural gas are two of Ohio’s most valuable resources. Currently, there are over 3,000 fracking sites operating in the state. The extraction and transportation of these resources and their by-products pose significant risks to the environment, public health, and public safety. Groundwater contamination, accidents, fires and explosions, and greenhouse gas emissions are all examples of threats and risks that are caused and exacerbated by the industry. Concerns surrounding energy production in Ohio are growing. This paper will begin with an overview of what severance taxes are before moving into a discussion of why Ohio’s severance tax policy is flawed.
WHAT ARE SEVERANCE TAXES
Severance tax policy can be best understood as a tax system that generates revenue and funds the oversight and regulation of the energy-producing industry. Just over $60 million was generated from severance tax revenue last year (p.91). This number may seem modest, but the state lags in comparison to competitors. Ohio has been taxing energy companies at the same flat rates of 10 cents per barrel of oil and 2.5 cents per Mcf (1,000 cubic ft) of natural gas produced since 1983 (p. 92). Other states, such as West Virginia, Michigan, and Texas, have all implemented variable tax rates; they change with the market, and taxes are collected based on the value of the resource when it is sold rather than extracted (p. 89). For example, West Virginia collects a 5% severance tax on all sales of oil and natural gas. Last year, their severance revenue was well over $300 million. Ohio, a predominant energy force, produces roughly 80% of the natural gas that West Virginia does yet generates less than 1/5 of the revenue. States with policies similar to West Virginia’s benefit by generating significantly more revenue and ensuring that taxpayers get a fair cut of the actual value of the resources.
Furthermore, the $60 million that is generated annually from Ohio’s policy is not used to serve the needs of the people or adequately protect the environment. Each year, the revenue is funneled entirely into the Ohio Department of Natural Resources (ODNR), specifically, into the Division of Oil and Gas (p. 90). The division’s main duty is to report all drilling exploration and extraction in the state. An ODNR official must inspect and authorize each new dig before a well can be used. The division is also responsible for assessing and reporting all geological hazards associated with the energy industry, as well as tracking and plugging inactive oil and natural gas wells (zoom in after clicking this link). These are heavy, diverse, burdens to put on a single organization.
ORPHANED WELLS
One of the top concerns surrounding the energy industry in Ohio is the number of idle wells that need to be capped. “Idle” or “orphaned” wells are wells that are no longer producing energy but have not been properly capped to prevent methane leakage. Reports as to the total number of wells that need to be capped in Ohio are upwards of 35,000(, p.55) This number will only continue to grow as more and more active wells come to the end of their useful lives.
Sean O’Leary and Ted Auch are two researchers who I spoke with about this issue. When asked about the economic impact of capping such wells, Auch said, “The numbers that we see are anywhere from $50,000 to $140,000 to maybe even $170,000 to properly cap a well in Ohio. I mean, if you look at the inventory wells that need that, that would blow a hole in the budget,” (pg. 9). According to ODNR, 497 wells were plugged last year and fewer than 200 were plugged the year before that. The annual revenue generated by the severance tax in its current form is insufficient to provide proper oversight and the adequate cleanup of the oil and gas industry in Ohio.
EXPLOITATIVE EFFECTS
In speaking with O’Leary, I learned how this industry squeezes people from their communities. He spoke about things that are affecting the quality of life of individuals living in places such as Harrison, Jefferson, and Noble counties, where energy production is the highest. Constantly increasing amounts of noise and air pollution, trucking, and the unreliability of having clean drinking water have led to things like decreased employment, population migration and increased healthcare costs. Referencing data from the U.S. Bureau of Labor Statistics, O’Leary also explained that, of any major U.S. economic sector, mining and natural gas extraction rank last in terms of the percentage of labor share among employees (p.24). Meaning, energy companies invest most of their money in capital; things like machinery, fuel, and other materials such as sand, water, and chemicals that are required for the process. Simply put, the industry has gotten efficient enough to employ significantly fewer people. These combining factors create economic inhibitors and a disincentive for other businesses to invest in the region, allowing the problem to take on a snowball effect.
WHAT CAN BE DONE