A high cost energy future will profoundly impact the cost of doing business and create new opportunities, but not necessarily in the way most people expect.
By Joel Kotkin and Michael Shires
The New York Times, the Atlantic Monthly and the rest of the establishment press have their answer: big cities like New York, Chicago, and San Francisco will win out. Our assessment is: not so fast. There’s a lot about the unfolding energy economy that is more complex than commonly believed, and could have consequences that are somewhat unanticipated.
On the plus side there are some undoubted winners -- those areas that produce energy and those with energy expertise. What’s working for Moscow, St. Petersburg, Calgary, Edmonton, and Dubai is also working for the U.S. energy regions as well. Not surprisingly, many are located deep in the heart of Texas. This includes not only big cities like energy mega-capital Houston but a host of smaller ones, like high-flyers Midland, Odessa and Longview.
But it’s not just Texas cities that are winning. A host of other places have strong ties to energy production and exploration -- Salt Lake City, Denver, and the North Dakota cities of Bismarck, Fargo, and Grand Forks. And it’s not just oil: The U.S. Great Plains have also been described as “the Saudi Arabia of wind.” If the right incentives are put in place, a wind-belt from west Texas to the Canadian border could be produce new jobs, both in building mills and also for the industries -- manufacturers, computer-related companies -- that will harness the relatively cheap energy.
Alternative renewal energy producers in biofuels, thermal, and hydro-electric will also become big business. The Sierra Nevada cities like Reno could benefit from thermal; the Pacific Northwest’s hydro-power gives places like Portland, Seattle, and a host of smaller communities -- Wenatchee, Bend, Olympia -- a great competitive advantage in terms of dependable, low cost and low carbon energy.
How about the big cities and metros that consume less energy? It seems logical that San Francisco, D.C., Los Angeles, Boston, Chicago, and New York should have an advantage over other cities and their suburban hinterlands; these cities, especially New York, have higher than average transit use. San Francisco and Los Angeles enjoy milder climates requiring less air conditioning and heating.
But these advantages are somewhat mitigated by the fact that these same cities often pay far more for energy than their rivals. Electricity in New York, notes an upcoming study by the New York-based Center for an Urban Future, costs twice the national average. California cities also suffer much higher prices -- almost 50 percent higher than their counterparts in the Midwest. So even if you use considerably less energy, you might end up paying more. Being a big, dense city clearly has advantages, but they too often are squandered by aging infrastructure, lack of new plants and high business costs.
One other problem for big Northern cities: colder regions will feel the ripple in local economies as the impact of high heating bills is felt next winter. A cold winter will push northeastern city-dwellers to join the chorus of complaints now voiced by drivers in auto-heavy Sunbelt states like Florida and California.
Nor is it certain suburban areas will do so much worse in tough energy times. Studies of commuting patterns in Chicago and Los Angeles show that many suburbs thirty miles or more from their downtowns -- places like Naperville, Illinois and Thousand Oaks or Irvine, California -- have shorter commutes than most inner-ring urbanites. This is a result of the movement of jobs to “nodes” on the periphery over the past 30 years.
Another kind of area that will do well are those that have well-developed telecommuter economies. In Los Angeles, notes California State University at Los Angeles geographer Ali Modarres, telecommuters are concentrated not only in places like Santa Monica, but also in sections of the San Fernando Valley (which has most of the region’s entertainment workers) as well as further out inu highly educated communities like Thousand Oaks and Irvine. In the long run, the best and most energy efficient commute is none at all.
So who are the losers? Certainly some of the distant outer suburbs, like the high desert communities far east of Los Angeles, which lack jobs for their residents, and suffer longer than average commutes. Also hurt will be poorer inner city areas where workers have to commute, by transit or car, over great distances. Sadly, it’s many of the communities that have already suffered the most. The changeover to lower mileage vehicles will be particularly tough on those communities that produce SUVs and trucks -- places like Flint, Michigan; Ft. Wayne Indiana; and Janesville, Wisconsin.
But there are also some auto centers that are likely to do better. Just follow where low-mileage vehicles, particularly those built by Toyota, Honda, Nissan, and the Korean makers, are either being built or planned. This is mostly a southern play -- Tupelo, Mississippi; Nashville, Tennessee; and Georgetown, Kentucky, site of the largest Toyota plant outside Japan.
Economic change has always impacted America’s communities. But with the current energy price surge, we may find that “creative destruction” may be sweeping through many communities even faster than we anticipated.
Cities and Oil Prices: The Winners and The Losers
For most places, it’s hard to tell what the long-term effect of the high cost of energy might be. But there are some fairly safe bets.
Two kinds of areas tend to perform best in a harsh energy environment. One is the energy-producing cities, whose place at the top of this list should come as no surprise. Another, though it may take a bit longer to emerge, may be those cities that are sites for production of fuel-efficient vehicles. These tend to be located in parts of the country -- Texas, the Southeast, and the Great Plains -- that have lower energy costs and more favorable business climates.
- Houston: This is one town where $150 a barrel gasoline is viewed more as an opportunity than an atrocity. Not that Houstonians don’t drive -- like other Texans, they tend toward the profligate in energy use. But prices are not terribly high by national standards and, more to the point, energy is producing lots of high wage jobs here for both blue- and white-collar workers. As headquarters to sixteen large energy firms -- far more than New York, Dallas, and Los Angeles combined -- Houston, which ranks No. 4 on our list of the best large cities to do business, provides an irresistible lure to hundreds of smaller firms specializing in everything from shipping and distribution of energy, to trading, exploration and geological modeling.
- Midland-Odessa, Texas: Houston is no longer the oil production center it once was, but the twin cities of Midland (No. 1 on our Best Cities list overall and among small cities) and Odessa (No. 4 on the list of small cities) certainly are. The two cities, only 20 miles apart in the energy rich Permian Basin, experienced hard times when energy prices dropped. Office buildings went empty, and people fled. But now the big problem is finding enough labor to keep the rigs going. Boomtimes are back -- and only a dramatic change in the energy markets will slow them down.
- Bismarck, North Dakota: No. 30 on our Best Cities list of small cities, Bismarck may be in the early stages of a big time expansion. It’s the closest “big” city to the rapidly developing Bakken range -- rich with oil and shale deposits -- and already enjoys the advantages of being the capitol of a state that boasts a $1 billion surplus. North Dakota’s biofuels, wind, and coal industries also make the city a natural focal point for Great Plains energy. As in Midland-Odessa, the biggest constraint may well prove to be the availability of labor.
- The Mid-south Autobelt: The shift to smaller cars may seem dismal in Detroit, but it’s pure joy to much of the mid-South. Foreign companies specializing in energy efficient vehicles -- Volkswagen, Kia, Honda, Nissan -- are concentrated in a belt running from Nashville (No. 18 on the large metro list) and Chattanooga (No. 59 on midsize list) in Tennessee to Huntsville, Alabama (No. 5 on the midsize list). Local universities in the area are also getting into the act, with several cooperating in an automotive research alliance.
Our list of losers is all too familiar. Basically, these are areas dominated by America’s weak automakers and are particularly wedded to the SUVs and trucks that are losing market share at an astonishing rate. Most fall in states that are strong union bastions, have relatively high energy prices, and get much of their energy from coal, a fuel that’s even less popular with environmentalists than oil is.
- Detroit: The center of the American auto industry ranks dead last, No. 66, on our big city list. The Motor City’s legacy as headquarters town for the former Big Three is now its biggest headache. It’s not just factory workers being hurt here; Detroit is where much of the technical, manufacturing, and design talent base of the U.S. auto industry resides. It’s also where ad agencies, law firms, and other high-end business service providers to the industry cluster. All have taken big hits over the last few years, which has led to increased out-migration, high rates of foreclosure and a deteriorating fiscal situation.
- Flint, Michigan: No. 171 on the small city list, just two from the bottom, Flint seems to make more and more of what Americans don’t want. In 2006, it made more than 170,000 pickup trucks; it’s doubtful it will see that level of production for a long time to come. And this is a place that was hurting even before gas prices went up. Over 40 percent of all manufacturing jobs disappeared between 2002 and 2007.
- Ft. Wayne, Indiana: Compared to Flint or Detroit, Ft. Wayne (No. 85 on the mid-sized list) is not doing too badly. Between 2002 and 2007 manufacturing employment dropped only 2.5 percent. The big problem is the future of the industrial sector. Ft. Wayne made 200,000 pickup trucks in 2006. It’s hard to see many of these jobs surviving if energy prices stay high.
- Janesville, Wisconsin: No. 92 on the small list, the Janesville plant manufactures GMC Yukon, the Yukon XL, the Chevy Tahoe, and the Suburban. Although more than 200,000 SUVs were produced at this plant in 2006, the plant will close by the end of 2010. The largest private employer in Janesville is Mercy Health Systems. Being in Wisconsin helps -- the state is in better shape than Midwest neighbors such as Michigan and Ohio.
Joel Kotkin is a presidential fellow at Chapman University and executive editor of Newgeography.com.
Michael Shires, Ph.D. is a professor at Pepperdine University School of Public Policy.