Eagle Ford Roads Impacted by Higher Traffic & Inadequate Funding – Tunstall

Current Tax Revenue Mechanisms Do Not Address Road Damage Caused by Development
I-37 Gravel Road Frontage in Live Oak County - TxDOT

I-37 Frontage in Live Oak County – TxDOT | Click to Enlarge

Roads in the Eagle Ford Shale are under intense pressure from the huge volumes of truck traffic that are regularly running up and down South Texas highways – literally hundreds of trips per day in many cases.

The traffic highlights a disconnect in the Texas political economy between how tax revenues are generated and how roads are then funded. With TxDOT’s recent announcement that approximately 83 miles of FM roads have been slated to be returned to gravel (66 miles of them in the Eagle Ford area), it’s worthwhile to examine road funding mechanisms in Texas.

How Is Road Construction Funded?

Let’s start with the state gas tax that we pay at the pump, which is a total of 38.4 cents. Immediately, 18.4 cents goes directly to the federal government, which leaves 20 cents for state use. However, 5 cents of that goes to public education. Only the remaining 15 cents is used to fund TXDOT projects directly. Texas motor vehicle fuel sales taxes are flat taxes that have not been raised since 1991 and are not adjusted for inflation.

The unprecedented activity on the roads in the Eagle Ford Shale area is having an impact that is overwhelming traditional highway funding sources. As an example, it takes nearly 1200 truck trips (equivalent to 8 million cars) to complete a single oil or gas well. Another 350 or so are estimated to be required for annual production.

So, what about other potential funding sources for roads?

Let’s look at sales taxes in Texas, which have a statutory maximum rate of 8.25%. Of that total, 6.25% goes to the state. Cities, counties, transportation authorities and economic development corporations can add up to an additional 2% to their sales tax rates. Some counties charge no sales tax, such as McMullen County, so the maximum rate there is 6.25%. Since city and county sales taxes in the Eagle Ford Shale area have increased significantly starting around 2010, it might seem to make sense for these entities to pick up the tab for increased road wear. In some cases, for example, county tax increases jumped between 300-500 percent in a single year. While this sounds like a lot of money, it pales in comparison to the cost of building roads.

In round numbers, county roads typically cost around $250,000 per mile to build. Farm-to-Market and Farm-to-Ranch (FM) roads cost twice that – about $500,000 per mile. State highway grade roads cost in excess of $1 million per mile. When county and FM roads are repaired to their current standard, the cost can be less – “only” $120,000 per mile – but heavy volumes of truck traffic can tear them back up in less than a year.

Karnes County Example

One of the most active counties in terms of Eagle Ford production is Karnes County. In 2010, county sales tax receipts were $837,038. By 2012 that number had risen to $7,961,495 – a huge increase by any measure. And yet, if every dollar of increased county sales tax revenue were applied to roads in the area, Karnes County would be able to build about 28 miles of county roads, 14 miles of FM-grade road, or only 7 miles of state highway-grade road. Clearly the orders of magnitude for the road impact as a result of oil and gas exploration and production activity is beyond the scope of county budgets.

One the most significant source of potential revenue for roads and perhaps the most applicable is the state’s severance taxes, which are imposed for the extraction of non-renewable natural resources, such as oil and gas. These taxes are on the rise because Texas is producing more oil than it has in over 30 years. In fiscal year 2013, Texas collected $4.5 billion in severance taxes. Overall, about $2.5 billion will go into the Rainy Day Fund (more formally known as the Economic Stabilization Fund) – most of that the result of increased severance tax receipts.

In fact, some of these severance taxes are being channeled to road projects. During the most recent legislative session, $1.2 billion per year was allocated from the Rainy Day Fund for roads across the state (pending approval by voters in November 2014). In addition, a one-time infusion of $225 million was allocated for road systems in South and West Texas areas affected by oil and gas production. And just this month, TxDOT announced that it had identified another $250 million from vehicle registration fees.

However, plans remain in place to convert the 83 miles of formerly paved FM roads to gravel in order to save money. TxDOT has held public hearings to address community concerns, but the larger issue has yet to be addressed. It is becoming clear that several aspects related to the costs of shale oil and gas production (roads in particular) will not necessarily be remedied by current tax revenue mechanisms. As such, any chance for a more permanent solution will be up to the Texas Legislature, which does not convene again until 2015.

Texas Ghost Towns & Implications for Eagle Ford Shale Counties

Graveyard

Click to Enlarge

It might surprise most of us to learn that there are over 250 ghost towns in Texas. In fact, many communities in South Texas that are now being impacted by the Eagle Ford Shale probably had some concerns about becoming the next ghost town. That is, until unconventional oil and gas exploration techniques changed the landscape entirely. However, as residents of Texas know probably better than anyone else, booms will sooner or later lead to slowdowns, if not outright busts.

This sort of begs the question: Why do communities become ghost towns in the first place? To gain some insight into the issue, UTSA’s Institute for Economic Development examined the cases of Texas communities over the past two centuries that have fallen victim to significant population declines. Interestingly, there is no single factor as to why communities end up as ghost towns. In some instances – clearly applicable to the Eagle Ford Shale – natural resource abundance is the culprit. Typically, the supply of oil, gas, coal or other mining product runs out. In other cases, the commodity being mined falls victim to a steep and extended price decline. The Permian Basin area in West Texas, for example, has seen ups and downs related to the price of crude oil for decades. In other communities, the transition of locomotives from steam to diesel resulted in a drop in demand for coal mined in Texas.

But the effects of the resource curse are not uniform and clearly vary by country or community – many do in fact end up better off.

But a fall-off in natural resource mining/extraction is not the only reason that communities become ghost towns. The mechanization of agriculture during the 20th century resulted in a decrease in rural populations, which in turn caused many small towns to systematically wither away. New railroads or highways that bypassed existing cities often served as a death knell.  In other cases, relocation of the county seat served as a catalyst for population migration away from established city centers. Sometimes the need for military bases ceased to exist, and the local communities followed suit. Drought and flood have been factors from time to time.

In the academic economic development literature, there has been a fair amount of research performed on the Resource Curse or Dutch Disease, which has demonstrated that in many situations, communities with an abundance of natural resources actually end up worse off after the discovery. This might be because competing industries are “crowded out” by the emphasis on natural resource production. In other instances, the temporary windfalls are squandered by local governments and citizens.

But the effects of the resource curse are not uniform and clearly vary by country or community – many do in fact end up better off. A key differentiating factor between those that are successful and those that are not appears to be governance. Several programs at UTSA’s Institute for Economic Development such as the Rural Business Program and the Eagle Ford Shale Community Development Program – in coordination with the College of Public Policy, and the Center for Urban and Regional Planning – have been working to promote just that. Good governance is the key to the long term prosperity of the Eagle Ford Shale communities.

UTSA Is Working To Assist Communities In South Texas

Along those lines, UTSA, with a grant from Royal Dutch Shell has developed a municipal capacity building program aimed at assisting community leaders address the many issues they currently face. In addition, the Institute for Economic Development continues to stress the need for diversification in communities across South Texas. Houston in the late 1970s, for example, was nearly 90% dependent on the energy industry for economic activity, but has since made significant efforts to diversify into other areas such as medical, finance and technology so that it is less dependent on a single economic sector.

For the rural communities in South Texas, the options are more limited. The relatively short list of industries with potential for growth include olives and olive oil processing, spinach and other agricultural products, geothermal energy, tourism, hunting, outdoor recreation, water recycling/desalination, and wine/beer making. In addition, if a robust broadband infrastructure can be put in place, there are prospects for telemedicine, distance learning, and attracting knowledge workers who prefer the lifestyle associated with smaller communities.

Municipal Capacity Building Workshop - Carrizo Springs 2013 | Click to Enlarge

Municipal Capacity Building Workshop – Carrizo Springs 2013 | Click to Enlarge

But these potential opportunities cannot be actively pursued yet – they can only be planned at this point. UTSA’s Eagle Ford Shale Community Development Program refers to this approach as “strategically sequenced” economic development. Clearly local mayors, city managers, economic development directors, county judges and commissioners, and other community leaders have their hands full with the pressing needs of infrastructure development right now. That list is long and includes roads, water, wastewater treatment, solid waste treatment, medical facilities, first responders (police, fire, medical emergency), electricity generation, K-12 education, and housing – as well as broadband, improved public amenities and aesthetics that will be needed to improve quality of life. And yet, if the infrastructure in South Texas is incrementally and steadily improved, it can serve as the foundation for attracting other types of industry in future years.

“It is important to stress that long term community sustainability is not guaranteed.”

The Eagle Ford Shale discovery represents a significant opportunity for South Texas. But it is important to stress that long term community sustainability is not guaranteed. The extensive roster of old Texas ghost towns is proof enough of that. So it will be important for community leaders to engage in longer term strategy planning, undertake regional approaches to economic development, establish a skilled local workforce, recruit or nurture strong institutional management, and exercise fiscal discipline. If we can put these pieces together, we will have gone a long way toward ensuring that economic development – which includes job growth, quality of life, and environmental stewardship – will be sustainable for communities across South Texas well into the 21st century and beyond.

Natural Gas Exports & Global Gas Prices

Japan and Asia LNG Supply

Japan & Asia LNG Supply Source | Click to Enlarge

Shale exploration technologies have initiated a renaissance for domestic applications for natural gas that include power generation, manufacturing and vehicle fuel, but also the growing prospect for export. Yet the possibility of exporting natural gas remains controversial. For example, several chemical companies have formed an advocacy group known as America’s Energy Advantage that is attempting to exert political pressure to limit exports. [Read more…]

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