Do Primary Energy Resources Influence Industry Location?

By Martinek, Jason P.; Orlando, Michael J. | Economic Review - Federal Reserve Bank of Kansas City, Third Quarter 2002 | Go to article overview

Do Primary Energy Resources Influence Industry Location?


Martinek, Jason P., Orlando, Michael J., Economic Review - Federal Reserve Bank of Kansas City


By choosing to locate in a particular place, firms create employment opportunities for workers living there. And the wages they pay increase demand for local goods and services, creating additional job opportunities and further increasing the tax base. Consequently, state and local governments go to great lengths to encourage firms to locate within their boundaries.

States compete for industrial activity in a variety of ways. Publicity campaigns raise awareness of local endowments of natural resources, climate, and other indigenous advantages. A favorable business tax climate and indirect payments in the form of relief from income and property taxes also lure prospective employers. Finally, public investments in education, roads, and other municipal services valued by commercial interests may make one state more attractive than another.

In recent years, volatility in energy markets due to deregulation and events in the Middle East has increased the role that energy resource endowments may play in firm location. Thus, economic development agencies in energy producing states have highlighted their natural advantages as a way to attract and retain businesses. Yet there is scant evidence that firms base location decisions on the availability of primary energy resources, such as coal, oil, and natural gas.

This article explores the role of primary energy resources in industry location. It examines the relationship between state energy supplies and employment in energy-intensive industries and suggests there is a limited relationship between the production of primary energy resources and industry location. State energy supplies are associated with the location of only the most energy-intensive industries. In other energy-intensive industries, firm location decisions appear largely unresponsive to state energy conditions.

Section 1 summarizes a range of theories that attempt to explain the location of economic activity and the role that primary energy resources may play in the firm location decision. Section II identifies the energy intensity of regions and industries and then analyzes the relationship between the location of employment in energy-intensive industries and the location of primary energy resources. Section III discusses the potential implications of state primary energy resource conditions for economic development policy.

I. ENERGY AND THE LOCATION OF ECONOMIC ACTIVITY

As firms choose where to locate, they must balance a number of energy and non-energy related features of regions, technologies, markets, and local governments. The cost and availability of primary energy resources are likely to be especially important for firms that are intensive users of energy in producing or distributing their products.

Factors that guide the location of industry

In general, the factors that lead economic activity to locate in a particular place include natural advantages, scale economies, and government policy. These factors determine the cost and benefits of alternative locations for business activity.

Natural advantages. Perhaps the most obvious reason for firms and individuals to locate in a particular place is to benefit from unique attributes of that place, otherwise known as natural advantages. A historical examination of many city locations suggests that some unique regional feature played an important role in their formation. For example, shipbuilding requires deep, calm waters with access to the ocean. These are features of coastal Maine that allowed Bath to become the ship-building capital of the New World (Snow).

As the economy has moved from a manufacturing to a service orientation, one may be tempted to conclude that natural amenities have become a less important factor in firm location. Improvements in transportation and other technologies would seem to allow firms to move to areas that lack natural advantages in production, perhaps to take advantage of a local supply of labor.

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