Thinking about the Economics of Petrochemicals

By John McFerrin

            One of the clichés of our public policy has long been that we have to “balance” the environmental and social costs of coal, oil, and gas extraction with the benefits to our economy.  For pretty much forever, our public policy has assumed that coal is so important to our economy that we should put up with a great deal of environmental and social cost in order to assure that the industry prospers.

As coal begins to fade away, we are applying the same analysis to gas production and use.  Sure, drilling for gas has an environmental cost.  So does using it as the basis for a petrochemical manufacturing industry.  At the same time, the reasoning goes, it is of such enormous economic benefit that we are obliged to put up with the substantial environmental cost.  The only job of policy makers is to decide how to balance the economic benefit with the environmental cost.

But what if the assumptions are not true?  What if there is really no economic benefit?  What if we look at the economic side of the balance and find nothing?  What if pursuing and trying to develop a petrochemical industry is waste of time?

This is the question that a group[i] of economists and academics have raised in a joint letter to the Governors of West Virginia, Ohio, and Pennsylvania.  Is the development of a petrochemical manufacturing industry an economic benefit to those states?

The letters writers have concluded that that petrochemical manufacturing is not a viable business that will revitalize Western Pennsylvania, West Virginia, and Southeast Ohio.  They point to the cancellation of the ASCENT cracker plant in Wood County, West Virginia, the inability of the proposed Appalachian Storage Hub to attract investors, the failure by China to follow through on an announced investment of $84 billion in regional petrochemical projects, and the recent indefinite postponement of a final investment decision on an ethane cracker plant proposed for Belmont County, Ohio.

In addition, the writers of the letter raise questions about the competition that products from petrochemical manufacturing facilities in Pennsylvania would face.  Production of petrochemicals elsewhere in the United States and in China is increasing and is expected to increase even more.  This would tend to make production from Pennsylvania facilities less competitive.

The writers suggest that, instead of pursuing petrochemical plants, the states devote their efforts to industries such as the clean energy economy – electric vehicles, energy storage, wind power, solar power, and energy efficiency — which already employs more than 175,000 workers in Ohio, Pennsylvania, and West Virginia, three quarters of them in manufacturing and construction.

[i] Wilfrid Csaplar, Jr. PhD, Professor of Economics at Bethany College; Nicholas Muller, PhD, Associate Professor of Economics, Engineering, and Public Policy at Carnegie Mellon University; Mark Partridge, PhD, Professor, Swank Chair in Rural-Urban Policy at the Ohio State University; and John B. Russo, EdD, Founder and former Director of the Center for Working-Class Studies at Youngstown State University;  James Van Nostrand, Professor and Director of the Center for Energy and Sustainable Development at the West Virginia University College of Law; Amanda Weinstein, Associate Professor of Economics at the University of Akron;  John Hanger, former Pennsylvania Secretary of Environmental Protection; and Ted Boettner, Executive Director of the West Virginia Center on Budget and Policy.