Economic Impacts of Shale Energy
The dramatic increase in economically recoverable shale energy reserves in North America has led to lower energy prices for consumers, increased use of natural gas for power generation, increased utilization of natural gas and natural gas liquids as key feedstock inputs to industrial production, and both direct and indirect employment opportunities. Lower natural gas prices result in energy savings for consumers and decreasing costs for manufacturing, which generates far-reaching economic benefits. In addition to benefiting consumers, the widespread development of shale energy has generated gains to energy companies. One way to evaluate these gains is through the value of proven reserves, which increases the value of publically traded companies and thus their shareholders.
The localized impacts of shale gas and tight oil development are often framed in terms of income, increased wages, employment, economic development, and tax or state fee revenues. These impacts may take various forms: royalty payments to mineral rights owners, the potential for increased direct and indirect job opportunities, increased sales for local businesses, and possible growth in wages for both extraction-related sectors and others due to an increase in the demand for labor. All of these benefits then have indirect and induced benefits to other sectors and the regional economy. Landowners with active leases earn royalties, but their neighbors and other landowners who do not own their mineral rights may receive no compensation, experience negative externalities, and even see property values drop. Workers see new opportunities but, at least initially, much of the workforce comes in from outside the community, particularly in areas that do not have prior experience with oil and gas development. Likewise, local businesses that support oil and gas operations see increased demands and income growth, but residents may see higher prices for goods and housing. The overall economic changes to a local area are therefore not necessarily clear-cut, though the literature generally finds an overall increase in employment and income.
Using Marcellus shale as an example, from 2012-2017 slightly over 20 trillion cubic feet of gas has been produced in Pennsylvania. Assuming an average price of $3 per MCF of gas and 15% royalties paid to oil and gas rights owners, this equates to approximately $9 billion dollars of royalties paid out to oil and gas rights owners in Pennsylvania. In addition, the state collects fees (rather than a tax) from the industry for each producing well that totals $1.4 billion dollars from 2012-2018. Much of this money is then re-invested into Pennsylvania's infrastructure, such as new or upgrades to roads, water, and wastewater treatment systems, parks, land conservation, and other environmental-type projects. These economic metrics are substantial and don't even include business revenues, wages, taxes, and other revenues the private and public sector can generate.
Shale energy development occurs in a relatively short period of time when compared to where the United States has historically developed oil and gas through on-shore conventional and offshore development and as a result, the economic impacts are also different. This video by Dr. Seth Blumsack, Penn State Associate Professor of Energy Policy and Economics, discusses the difference in economic impacts from shale energy development as compared to conventional and offshore development.
Seth Blumsack: Differences in Shale Gas Economics (1:28)
David Yoxtheimer: How is unconventional offshore oil and gas development different, from an economic perspective, than offshore or conventional sources of hydrocarbons?
Seth Blumsack: There are two big differences between unconventional oil and gas production and conventional onshore oil and gas production and offshore oil and gas production. The first is that offshore oil and gas production requires really long lead times. You've got to get the rig out to sea, you have to drill, and it may be months before you get any production whatsoever. On the other hand, with onshore production, whether it's conventional or unconventional, the process of drilling completion to production can be much quicker -- within a month. The second difference between unconventional oil and gas production and conventional oil and gas production onshore is that, in a typical, unconventional oil or gas well, a lot of the production happens within the first few years of the well's life. So a lot of the revenue that comes in comes in much more quickly or over a shorter timescale than a conventional well. And this tends to improve return on investment and the overall economics of the well for an unconventional well as compared to a conventional well.
Economic impacts are one of the more well-studied subjects in terms of the various local impacts of unconventional oil and gas development. While the results of the fracking boom on natural gas and electricity prices are easy to see at the national or regional level, it is more difficult to sort out the economic effects locally, which can be positive or negative both in the short and long runs. The literature is fairly consistent in showing that short-run benefits to wages, jobs, and economic development are significant during a boom, though statistically-based employment studies may overestimate actual employment impacts. The literature generally shows the economic benefits of unconventional oil and gas development to be more positive than negative. The reading assignment provides an overview of some of the economic impacts and considerations for shale energy development.