Nationwide study finds that, on average, economic pros outweigh the cons in hydraulic fracturing

A study published by the Energy Policy Institute at the University of Chicago (EPIC) this month found that, on average, the benefits experienced by communities from hydraulic fracturing outweigh the costs. Taking into account effects on housing prices, health and environmental costs, and the effects on local economies, the study found that shale development adds an average welfare gain of about $1,300 to $1,900 per household per year, or as much as $64 billion in all of the shale drilling areas in the study combined. The main findings of the study are listed below.

The study in its entirety can be found here.

EPIC’s findings from nationwide economic study of hydraulic fracturing

  • Shale development generates significant revenue in communities where drilling takes place. Counties with a high level of hydraulic fracturing activity produce an additional $400 million worth of oil and natural gas each year. To put this into context, the most productive counties saw a per capita increase in production of about $19,000.
  • Shale development improves the local economy. Counties with a high level of hydraulic fracturing experience marked increases in economic activity. Specifically, the study found up to a 7 percent increase in average income, driven by increases in wages and other factors such as royalty payments from the drilling to local land owners. Employment also increased about 10 percent, with a 40 percent increase alone in natural resources and mining jobs. The construction and transportation industries also saw an increase, while no industries experienced job losses. Additionally, local governments experienced a boost in revenue— though slight because of the need for additional expenses. For example, governments needed to pay more for public safety, infrastructure and utilities, and medical care.
Effects of shale development on income and employment in the US

Source: University of Chicago

  • Shale development did impose costs. While communities saw a boost to their local economy with the introduction of hydraulic fracturing, residents experienced decreases in local quality of life. The most directly measurable of these costs was the increase in crime. Despite local governments’ efforts to improve public safety—allocating 20 percent more funding—the crime rates still marginally increased.
  • Housing prices increased. The study found that housing prices increased on average by about 6 percent after shale development began, indicating the local benefits do outweigh the costs. To put this into context, studies have shown that: dramatic air quality improvements due to regulations have increased housing prices by just 2.5 percent; investments in school facilities have increased housing prices by about 4-8 percent; and the opening of an industrial plant leads to an 11 percent decline in housing prices.
  • Overall local benefits of shale development outweigh the costs on average. The authors combined the estimated effects on local housing prices and income with an economic model to compute two important measures of the local consequences of fracking. First, they computed the net impact of fracking on local well-being, which encompasses the gains from increased income and local activity, but also the costs from reduced quality of life because of truck traffic, criminal activity, noise and air pollution from drilling activity, and household beliefs regarding expected health impacts. Their analysis finds that shale development adds an average welfare gain of about $1,300 to $1,900 per household per year—that’s as much as $64 billion in all of the shale drilling areas studied combined. Second, the authors computed how much fracking had changed quality of life, ignoring the benefits from rising incomes. These estimates showed a reduction in the typical household’s quality of life by about $1,000 to $1,600 annually. While the results represent a step forward in our knowledge about the benefits and costs of fracking, the authors caution that these estimates are only as good as the information households have at their disposal about the benefits and costs of fracking. As more information becomes available on, for example, the health impacts, this new knowledge would influence real estate purchasing behavior and prices and general net welfare.
  • Each shale region fares differently, with the Bakken and Marcellus regions seeing the greatest benefits. These are averages. Not everyone fares equally as positively. Those who are not employed, i.e. students and the elderly, would not see benefits, nor would those who don’t own mineral rights for their property. Additionally, there was substantial heterogeneity in estimated effects across the nine shale regions studied. 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.

It is also worth noting that the data used in the EPIC study is from 2013, prior to the crash in oil prices. Since late 2014, U.S. shale operators have been forced to improve efficiencies to remain economical competitive. Greater rig efficiency means fewer rigs need to be operated, lowering the environmental impacts of drilling, and reducing strain on infrastructure in communities.

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