The Economics of Shale Gas Development

Abstract

In the past decade, innovations in hydraulic fracturing and horizontal drilling have fueled a boom in the production of natural gas (as well as oil) from geological formationsprimarily deep shales -in which hydrocarbon production was previously unprofitable. Impacts on U.S. fossil fuel production and the U.S. economy more broadly have been transformative, even in the first decade. The boom has been accompanied by concerns about negative externalities, including impacts to air, water, and quality of life in producing regions. We describe the economic benefits of the shale gas boom, including direct market impacts and positive externalities, providing back-of-the-envelope estimates of their magnitude. The paper also summarizes the current science and economics literatures on negative externalities. We conclude that the likely scope of economic benefits is extraordinarily large, and that continued research on the magnitude of negative externalities is necessary to inform risk-mitigating policies.3 INTRODUCTIONIn the latter part of the 20 th century, a small group of determined entrepreneurs (supported by decades of federal and private research and development investments) chased a dream -that they would be able to extract meaningful, economically valuable amounts of natural gas from shale deposits (Zuckerman 2013). These individuals were broadly ridiculed at the start, but when their determination paid off and large amounts of gas began to flow from the wells they had drilled, critics in the industry changed their tune. The methods used to unlock these enormous deposits include hydraulic fracturing, or "fracking"-the injection of water under high pressure to fracture lowpermeability shale -along with horizontal drilling. Both techniques had been used in the past; fracking was used commercially as early as 1950, and horizontal wells were common by the late 1970s (King 2012). But innovations in their joint use proved the key to unlocking massive stores of natural gas, which have transformed important parts of the U.S. economy.The substantial increase in economically recoverable reserves, mostly thus far in North America, has led to lower prices for residential and commercial consumers, increased reliance on natural gas to generate electricity, and increased reliance on natural gas as an input to industrial production (U.S. Energy Information Administration 2011, 2014a). As abundant shale gas displaces coal in electricity generation and other industrial uses, the shale boom could also have positive implications for local air pollution and the greenhouse gas emissions that are changing the global climate. At the same time, concerns have been raised about the potential for fracking's water intensity to place pressure on agricultural and municipal use of fresh water, as well as aquatic ecosystems. The chemicals added to the water before fracking, as well as significant wastewater produced, have prompted worries about the contamination of aquifers, rivers, and streams. Air quality impacts from the practice have a...

Welfare and Distributional Implications of Shale Gas

“…25 For ease of comparison across divisions, we divide by the population in 2013. It is important to note that these calculations do not account 24 This range is qualitatively similar to the calculation done by Mason, Muehlenbachs and Olmstead (2014). Under an assumed elasticity of -0.5 for overall demand, they calculate a change in consumer surplus of $65 billion per year.…”

“…technological changes and their impact on the cost of extraction. Mason, Muehlenbachs and Olmstead (2014) provides a summary of the literature on shale gas in economics, as well as a broad first pass at calculating the scope of economic costs and benefits. Krupnick et al (2014) summarizes policy questions that remain unanswered relating to economic impacts, environmental impacts, and preferred regulatory approaches.…”

Who Wins in an Energy Boom? Evidence From Wage Rates and Housing

“…Hydraulic fracturing, or "fracking," in which water, sand, and chemicals are injected into shale reserves to allow for extraction of natural gas and oil, has led to a large increase in U.S. production of gas and oil. In addition to having trillions of dollars in direct value, shale gas and oil withdrawals may reduce domestic energy prices thereby leading to increases in consumer surplus and enhanced growth in other sectors of the economy (Hausman and Kellogg 2015;Mason, Muehlenbachs, and Olmstead 2015).…”

Shale Gas Development and Drinking Water Quality

“…The extent of environmental externalities associated with shale gas development (SGD)is important for welfare considerations and, to date, remains uncertain (Mason, Muehlenbachs, and Olmstead 2015; Hausman and Kellogg 2015). This paper takes a first step to address this gap in the literature.…”