The Local Economic and Welfare Consequences of Hydraulic Fracturing

Summary:

• The application of hydraulic fracturing to develop oil and natural gas found in shale deposits has led to a sharp increase in U.S. energy production and generated enormous benefits, including abruptly lower energy prices, a reduced trade deficit, stronger energy security and even lower carbon dioxide emissions in the power sector. Moreover, given the relative prominence of shale resources globally, it is plausible that substantial additional resources could be produced. While the least carbon intensive fossil fuel, unlocking the large reserves of natural gas that exist could also potentially have negative climate implications.
• As drilling activity has increased in recent years, however, a robust debate has begun within communities where development is occurring—and those where it prospectively may occur—regarding the potential pros and cons of development. Advocates point to increased economic activity, including tax revenue and jobs. Opponents, on the other hand, point to potential disadvantages such as increased levels of crime, a higher burden on public infrastructure, and possible health risks.
• This study examined the benefits and costs of shale development at the community level across nine different U.S. basins, the most comprehensive assessment to date. The data suggests that the economic benefits are significant, with the average household benefitting by roughly $1,300 to $1,900 per year. Such benefits include a 7 percent increase in average income, driven by rises in wages and royalty payments, a 10 percent increase in employment, and a 6 percent increase in housing prices. Local government revenues also increased at a faster pace than expenditures.
• There were also costs. Combining the effects on housing prices and earnings with an economic model, the authors estimate that fracking reduces the typical household’s quality of life by about $1,000 to $1,600 annually. These factors included an increase in truck traffic, more noise and air pollution from drilling activity, beliefs regarding negative health effects, and higher rates of crime despite a 20 percent increase in public safety expenditures.
• This data indicates that the average local benefits from hydraulic fracturing outweigh the costs, though this may change as more information about the environmental and health impacts of hydraulic fracturing is revealed. There is a fair amount of heterogeneity across the nine shale basins. North Dakota’s Bakken shale and Pennsylvania’s Marcellus shale saw the largest benefits, with house price increases of 23 percent and 9 percent, respectively. Average benefits likely also mask considerable variation in the cost and benefits that accrue to individuals within each community.