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Report Finds Shale Development Improves Local Economies

Researchers with the Energy Policy Institute at the University of Chicago (EPIC) report finding the economic benefits to local communities for allowing hydraulic fracturing (fracking), on average, outweigh any negative health and social impacts from the practice.

In a 119-page report, "The Local Economic and Welfare Consequences of Hydraulic Fracturing," released Thursday, four researchers for EPIC examined nine shale plays across the United States: the Bakken, Barnett, Fayetteville, Haynesville, Marcellus, Woodford-Anadarko and Woodford-Arkoma shales and the Permian Basin.

Through development of a "willingness-to-pay" (WTP) metric, the researchers found that shale development adds an average welfare gain of $1,300-1,900 per household per year, totaling approximately $64 billion for all of the aforementioned shale areas studied combined. The increase takes into account increased income and local activity.

While conceding "there is evidence of deterioration in the quality of life or total amenities" to local communities from fracking, the WTP metric shows the average household pays $1,000-1,600 per year for the practice. The declines take the form of quality of life issues such as increased truck traffic, criminal activity, noise and air pollution and the perceived negative health effects.

"Our estimates are based on the knowledge that communities currently have," said lead researcher Michael Greenstone, an economics professor at the University of Chicago and the director of EPIC. "So, for example, if new information emerges that indicates that there are larger negative, local health effects than is currently believed, this would likely lead to declines in housing prices and the overall welfare impacts.

"But based on what is currently known, the average community that has allowed fracking has enjoyed substantial net benefits."

The report found that counties with a high level of fracking activity saw a 4.4-6.9% increase in total income, driven primarily by increases in wages and other factors such as royalty payments to local land owners. Employment also increased 3.6-5.4% and salaries went up 7.6-13%. Additionally, local governments saw an average increase in revenues (15.5%) that more than offset an average increase in expenditures (12.9%).

EPIC also found that housing prices increased 5.7% and housing rental rates went up 2.7% in local communities after shale development began. The largest housing price gains were observed in the Bakken and Marcellus shales, where house prices increased 23% and 9%, respectively.

Conversely, the report found the largest detriment to local communities was an increase in crime, despite an average 20% increase in local government funding to public safety.

"There appears to be a good deal of heterogeneity in the estimates across the nine shale regions in our sample," said Alexander Bartik, economics professor at the Massachusetts Institute of Technology (MIT) and co-author of the report. "These differences reflect both variation in how large fracking activity is relative to the local economy, as well as differences in local housing markets. In future research, we're working on understanding this heterogeneity better."

Janet Currie, economics professor at Princeton University and another co-author, added that local communities that banned fracking may, on average, see fewer economic benefits.

"The heterogeneity in effects lends support to the idea that local communities should have a voice in decision making about fracking," Currie said. "It will also be important to think about whether it is possible to compensate individual people in local communities who experience the costs of fracking without participating in the benefits."

The report also found that counties with high fracking potential produce an additional $400 million worth of oil and natural gas each year three years after the discovery, compared to other counties in the same shale play. Placed into context, that means the most productive counties saw a per capita increase in production of about $19,000.

Christopher Knittel, another economics professor at MIT and the fourth co-author of the report, said the study "makes it clear that on net there are benefits to local economies, which we believe is useful information for leaders in the United States and abroad who are deciding whether to allow fracking in their communities."

Last month, a separate study commissioned by the Center for Rural Pennsylvania found that local communities in Pennsylvania devoted much of the impact revenue from Act 13, the state's omnibus Marcellus Shale law, to public safety and infrastructure.

ISSN © 2577-9877 | ISSN © 2158-8023

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