Tale of Shale: States' Growth Story in Moribund Economy

Gains in manufacturing, employment and energy independence — and stock returns

When the Commerce Department released its report on state GDP growth last week, economically minimal North Dakota had the mightiest results. It’s 7.1% growth rate in 2010 was far higher than the No. 2 state in GDP growth (New York, with a finance-fueled 5.1%) and orders of magnitude greater than the national average of 2.6%. Moreover, the largest component of North Dakota’s growth derived from natural resources extraction.

Now, recent data from the Department of Energy shows that natural gas production in March reached its highest point since DOE’s Energy Information Administration began keeping records in 1980. Indeed, there has been a lot of natural gas drilling in North Dakota since the discovery of the huge Bakken Shale deposit in the western part of the state (and in Montana and Saskatchewan) and a state tax break on producers has ensured that most of the action has taken place on North Dakota’s side of the border.

The EIA data shows six years of sustained growth leading up to March’s all-time high of 2.4 trillion cubic feet in gas production — from a low of 1.87 trillion cubic feet in February 2005. The vast expansion has been made possible by advances in hydraulic fracturing, or “fracking,” a means of extracting natural gas that is safer and environmentally less hazardous than conventional drilling.

The commercial viability of the technique in the past few years has not only boosted production of a cleaner fuel but has the potential to shift energy production away from Middle Eastern despots to the United States, with job gains as notable a benefit as energy independence. North Dakota today has the lowest unemployment rate (3.8%) in the nation.

Mark Perry, an economist at the American Enterprise Institute, writes on his blog that “more than 34,000 drilling-related jobs were added over the past year in Pennsylvania — that’s almost a hundred new jobs every day in just one state.” Those jobs have resulted from drilling on the Marcellus Shale, but only on the Pennsylvania side of the border, since New York maintains a ban on shale gas drilling.

U.S. stock investors also stand to benefit from the emerging boom in shale oil gas. Major players like Devon Energy Corp. (DVN), Chesapeake Energy Corp. (CHK) and Southwestern Energy Corp. (SWN) have been top stock performers for over the past 10 or more years, and smaller players such as Approach Resources (AREX), IDT Corp. (IDT) and Carrizo Oil & Gas (CRZO) have seen extraordinary and often surprising rises or recoveries; the latter three have more than doubled, doubled, or close to doubled in the past year.

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