Energy pumps $215 million into local region

This region’s energy industry quietly goes about its business, but it has a major impact, to the tune of $215 million annually.

That includes the energy-related natural-resource extraction and transportation industries: natural-gas and crude petroleum extraction, natural-gas liquids and pipeline transportation.

A small amount of coal mining exists in Weld County, but that industry has mostly disappeared locally.

Larimer County now contains a diamond mine, but the sector is new enough that the models we use do not yet contain sector purchases, sales, employment or income data.

Oil and gas extraction and distribution constitute significant sectors in Northern Colorado, especially in Weld County. Crude petroleum and natural-gas extraction are both approximately $90 million sectors, and coal mining is a $5 million sector. There is a $5 million petroleum pipeline industry and a $25 million gas pipeline industry.

These commodities are extracted from wells and shipped to refineries in Cheyenne and Denver, i.e., outside the local economy. Almost 100 percent of the output of the natural-gas/crude petroleum extraction sector is exported, while about 75 percent of the output of the natural-gas liquids sector is exported.

The value added in refining the crude products is earned in the Denver and Cheyenne economies. The refined products are returned for use in our economy, but that is not the focus of this column.

More than 3,300 jobs are directly and indirectly created by these energy-related natural-resource extraction and transportation sectors. There are 14 times as many jobs created in the natural-gas and petroleum extraction industry as in the natural-gas liquids industry. This is because natural-gas liquids extraction can be more highly automated than can petroleum extraction.

Investment is greater, but labor costs are lower, i.e., it is possible to substitute capital for labor in the natural-gas liquids sector.

We can define just how capital-intensive these sectors are by examining the following ratios. Employee compensation in the petroleum/natural-gas extraction sector is about $23,000 per employee. However, each employee adds more than $89,000 to value added and more than $138,000 to total industry output. Average employee compensation in the natural-gas liquids sector is just more than $21,000, but each employee adds more than $750,000 to value added and more than $1 million to total industry output.

About $7.5 million from the sectors goes to local proprietors, the owners of the firms. The largest share of this income, $6 million, is in the petroleum sector, suggesting more local ownership of the resource, i.e., local companies that collect the crude petroleum and transport it to refineries outside the region.

Almost $70 million of income is generated in the form of rents and royalties.

Some of this income is paid to local land owners on whose land the pumping activities occur. A portion of this income is also paid to stockholders in local companies. These stockholders may or may not reside in Northern Colorado.

Personal income and employment multipliers are very high in the natural-gas liquids sector. This is also because the sector is so capital intensive.

Wage and salary payments are made to only a few employees in the natural-gas liquids industry, so the direct salary and employment effects are small.

Thus, any indirect or induced salary or employment effects create large multipliers – 19.7 for the personal income multiplier and 24.5 for the employment multiplier.

The personal-income multiplier in the petroleum/natural-gas-extraction sector is 2.3, and the employment multiplier is 2.8. The petroleum pipeline employment multiplier is 3.3, and the gas pipeline multiplier is 2.7. Income multipliers are 2.2 and 1.7 for these sectors respectively.

John Green is a professor of economics at the University of Northern Colorado in Greeley. Eric Siverts is president of Siverts & Associates of Fort Collins.