8/22/2005

KUFM / KGPR

T. M. Power

Mineral Development and Economic Development

Coal development in Montana is back on the political agenda, as it has been, off and on since the 1960s. This time it is not Republicans and coal moguls who are pushing coal development as Montana’s economic salvation. It is Democratic Governor Brian Schweitzer. That has led to a testy exchange between Schweitzer and some environmental leaders about whether Schweitzer is simply pursuing Judy Martz’s industrial lapdog strategy.

The perennial attraction of mineral development to political leaders of all stripes, decade after decade, as a way to “jump start” the Montana economy demands some explanation given that their political enthusiasms have rarely borne fruit.

The simplest explanation, the one offered by political and industrial leaders, is that Montana has huge quantities of coal and, in Eastern Montana, not much else. So developing that resource is one of the few sources of economic development for the region.

The problem with this explanation is that mineral development has become an incredibly capital and land intensive activity that generates relatively few jobs and many of those jobs do not go to existing Montana residents, but to in-migrating specialized workers. As a result mineral developments establish few links with the rest of the economy and very little actual economic development takes place around it.

In addition, mineral developments tend to be quite cyclical, prone to boom and bust patterns. There also tend to create relatively serious environmental problems that damage land and water, and because of that, future economic development possibilities.

This is not idle, pessimistic, speculation. Montana has been through these booms and busts for most of its European settlement history. It has also been through coal, natural gas, and metal mining booms and busts over the last quarter century. In addition, various regions of the West are currently going through mini-booms associated with the rush to develop natural gas resources. The result has not been economic development but a roving mass of migrant workers, many, increasingly, foreign nationals. Montana political leaders look longingly at Wyoming’s current mineral boom, ignoring the long bust that led to stagnation and decline in Wyoming for much of the 1980s and 1990s.

Across the nation and around the world, it is rare to find evidence that mineral development sustains ongoing economic development.

So what is the fascination that political leaders have with mineral development? Actually, it is very simple. State and local governments are effectively partners with the mineral developers, sharing in the profits that are generated through royalties and taxes. Mineral development may not provide very many jobs or sustainable economic development, but it does provide a flow of funds to state and local governments. That is particularly the case when the proposed development involves state-owned mineral deposits such as the Otter Creek coal that Governor Schweitzer has his eye on.

Indirectly, the state government’s financial interests in mineral developments may have positive economic development impacts because the higher flow of revenues into state and local government coffers allows a high level of spending on government services such as schools and highways. That higher level of spending on public services funded without tax increases could make a region or state a more attractive location for people and businesses.

Before counting our coal chickens, however, we ought to ask why we expect coal developers to be flocking to invest in Montana. The common answer is that Montana has an unusually large quantity of coal. But that has been know for a very long time and has led to only limited coal development here. Although some would have us believe that it has only been pesky environmentalists and burdensome Montana taxes and regulations that have blocked that coal development, the fact is that pro-business Republicans have been in charge of state government for almost two decades. The real barrier has been that Montana coal is at an economic disadvantage because Wyoming’s coal is hundreds of miles closer to rapidly growing Sunbelt states.

In addition, many other states have substantial coal deposits too and are as interested as Montanans in developing those resources by converting the coal to electricity, synthetic gas, or other synthetic fuels. Montana competes with most other Western states as well as the Great Lakes region and Appalachia as potential sources of coal. Having lots of coal is not sufficient. Your coal has to have a cost advantage relative to that of other states. Thus far that has not been true for Montana except for a narrow range of markets across the northern tier of states.

So, for your own health, don’t hold your breath for coal development to bring an economic renaissance to Montana. Such development will provide few jobs to Montanans. We face stiff competition from better located alternative sources of coal. In addition, the current very high natural gas and petroleum prices that make coal look so attractive do not appear to be justified by economic fundamentals. We have often assumed in the past that high energy prices were here to stay only to be surprised as energy prices tumbled downward. And, finally, expanded coal development and use comes at significant environmental costs that the coal enthusiasts are trying hard to ignore. We may primarily be witnessing one of our regular bouts of public wishful and magical thinking. Let’s hope we limit the public cost associated with this particular attack of political irrational exuberance.