Cost Benefit Analysis of Shale Gas

Development

Energy and Energy Policy

Report

Salman Ali, Rakhee Jain, Rutvik Joglekar & James Sweeney

Group 13

12/4/2015

ABSTRACT

Since the 1990s, innovations in hydraulic fracturing (“fracking”) have completely changed

the landscape of the energy market. With improved fracking technology and horizontal

drilling, the extraction of natural gas from shale has become profitable. This has had a

large impact on the U.S. energy market. There have been positive and negative externalities

to both the environment and the general economy. In this study, we will conduct a cost-

benefit analysis of shale gas development beginning with a literary review of outstanding

economic work in the field, and then conduct our own original research in housing values

as a product of fracking operations, thus furthering the understanding of producer surplus

as a result of fracking. We will spend the majority of this research in Pennsylvania, as this

area provides an interesting and localized case study for the impacts of fracking on housing

values. We will break the study first into cost-benefit analysis, and then economic and

environmental impacts, ultimately weighing all factors against one another.

WHAT IS FRACKING?

Technology Explained

Hydraulic fracturing, known simply as fracking, is a relatively new process for extracting

reserves of natural gas and petroleum. These energy reserves exist in the shale rock beds far

underground, some 7,000 feet deep (Kershner 2015). Shale and other similar rocks can hold

reservoirs of gases and oil in their pores, and fracking breaks them from the pores of the rocks to

production wells.

As a brief overview of the process, drilling companies drill a vertical well straight down to the

shale bedrock, and then drill laterally through the shale layer. While drilling laterally, they pump

air, water, and corrosives into the well to pressurize the chamber and fracture the shale rock. One

the shale has been fractured, natural gas is released which can then be harvested and refined for

use as fuel (Kershner 2015).

A deep well is drilled in order to begin the fracking process. The wells are on average 7,700 feet

deep (nearly six Empire State buildings). Once a certain depth is reached, the well turns and from

that point on drills laterally. According to the EPA, the horizontal tunnel may range from 1,000

to 6,000 feet in length.

A steel casing is put into the hole, lining the entire cavity. The casing is to protect groundwater

and the surrounding land from any fracking related leakage. The casing is perforated throughout,

allowing for tiny particles or water to escape. Fracking fluid and corrosives are pumped through

these small perforations to pressurize the chamber and crack the shale bed (K

ershner 2015).

The fluid is highly pressurized and is composed of water, sand, and other additives, which cause

the fissures to remain open. Gas or other resources flow from the open fissures back to surface

level in the water that is pumped back up. Fracturing in this way typically takes a period of three

to ten days to complete. The figure below is a visual representation of the fracking process,

outlined above.

(Nature, Volume 477)

Growth Overview

Natural gas is a valuable alternative to traditional energy sources like oil or coal, but has

always been difficult to extract. However, with the advent of fracking, previously inaccessible oil

reservoirs can now be harvested and the energy captured and refined. The hydraulic fracturing

process is unlike any previous type of oil drilling; and as such has completely changed the

energy landscape in the United States by dramatically increasing the supply of known energy

reserves in the country.

Until recently, natural gas was not a very significant fraction of energy consumed

because it was difficult and inefficient to extract. However, given the expansion of hydraulic

fracturing operations, the US fuel supply has boomed. In less than 10 years, domestic natural gas

production has increased by 25%. This supply increase amounts to an additional 5.5 trillion cubic

feet per year of natural gas, according to Hausman and Kellog (2015). The natural gas supply is

only expected to grow as our ability to harness this resource expands further. Given the current

rate of growth, Hausman and Kellog (2015) estimate that 80% of natural gas production will

come from shale and tight sands by 2035. This research team argues that eventually, up to 2/3 of

US oil production could come from natural gas, significantly altering the energy landscape and

demand schedule. This increase in supply and the resulting decline in gas prices are pictured in

the figures below.

(Hausman and Kellog 2015)

(Burnett 2015)

ECONOMIC IMPACT

Hydraulic fracturing has been largely positive force in many communities throughout the

country. Through this economic study, we will explore on consumer surplus nationally, as well

as producer surplus regionally, focusing on Pennsylvania so that we may better understand

impacts of fracking on a specific locality. Certainly, when exploring the impacts of hydraulic

fracturing, we must consider everything from economics to the environment, and weigh not

easily measured positive and negative forces against one another. Over the next several sections

of this paper, we will consider consumer surplus in broad strokes on the national scale. Then, we

will explore producer surplus, where we aim to spend the bulk of our interest and where we have

conducted our own independent research.

Consumer Surplus

In this portion of the project, we will consider consumer surplus effects of increased

hydraulic fracturing in the United States. Though fracking tends to be thought of in a very

localized way, the benefits could positively impact the entire country. First, let us turn to

Hausman and Kellogg (2015), who consider consumer surplus through counterfactual study of

hydraulic fracturing’s impact on the price of fuel. In order to calculate consumer surplus,

Hausman and Kellogg (2015) first estimate the short run and long run elasticities of natural gas

demand through a linear regression that takes into account retail gas price, observed weather,

seasonality based on state and a few other variables. First, they found that heating follows a

seasonal trend for both residential and commercial patrons. From here, they determined that on

the industrial end, demand increases in winter but shows far less seasonality in general. They

found that household consumers seem to have far more seasonal variation. After carrying their

study to ascertain the likely price elasticities for individuals and industrial consumers, they

discovered that both residential and commercial sectors have elastic demands in the short and

long runs. They determined that sectors like energy and industrials have the most elastic price

elasticities in the short run (-.16 and -.15) but become slightly less elastic in the long run (-.57

and -.47). Residential customers are slightly less price elastic in general, as residential customers

seem to have a short run elasticity of (-.11) and a long run elasticity of (-.20). From here, they

were able to determine counterfactual energy consumption when oil prices remain as they did

without the increased supply of natural gas due to fracking, pictured below.

Hausman and Kellogg (2015)

Hausman and Kellogg (2015) observe that the prices for gas were $6.81 per thousand

cubic feet (mcf) from 2000 to 2010. This price has now dropped to $3.65, a more than 50%

decrease in price. Their research team concluded that from 2007-2013, the direct decrease in gas

prices caused by the increasing gas supply was $3.45 per mcf. Accounting for the consistent

increases in natural gas supply, the counterfactual price decrease as a result of fracking could

actually be anywhere from $2.19 to $4.16. By this research, natural gas fracking operations

directly increased the supply of oil and thereby decreased the price of fuel considerably.

Also of interest was the per person, per year consumer surplus breakdown specifically by

region. The researchers determined that the West South Central region of the United States

(comprised of Arkansas, Oklahoma, Texas, and Louisiana) saw the largest increase in consumer

surplus (around $432 per person) followed by the East North Central region ($259 per person)

and East South Central ($239 per person). These regions align closely with areas of increased

fracking operations. These increases were mostly through significant savings from the electric

power sector and the industrial sector, an average of $78 and $70 per person respectively.

However, the positive impact of fracking on consumer surplus, regardless of region, is apparent.

The average surplus among regions was $237 per person per year. Clearly, the proximity to

fracking operations significantly impacts the direct consumer savings associated with drilling, as

we see a notable margin in the West South Central region. Nonetheless, fracking operations

appear to have generated positive consumer surplus nation wide by saving residential and

commercial customers a great deal.

When considering prices of energy sources, we might look to Europe and Asia as a proxy

for the United States. Gas prices in Europe and Asia are three to five times more expensive today

than before fracking operations began growing. This statistic is a fair indicator of what US gas

prices could have looked like without the advent of fracking. We could very well have seen a

dramatic increase in the price of fuel domestically had there not been for such a significant

expansion of fracking operations. Specifically, the domestic price of natural gas has dropped to

1/3 of its price in 2008. Therefore, it is very compelling that the proliferation of fracking has had

positive impacts on pricing for both natural gas as well as other energy sources. In the United

States’ ability to substitute towards fracking as an energy source, this nation has dramatically

increased their energy supply and decreased the price of fuel. Hausman and Kellogg’s (2015)

data suggest that hydraulic fracturing has given the consumer more buying power and improved

their quality of life.

(Burnett 2015)

In sum, increased fracking operations over the last decade have certainly improved the

consumer surplus. Consumers have seen billions of dollars saved in energy bills, fuel prices, and

indeed in industries that use energy as an intensive input such as transportation or production. On

the national scale, hydraulic fracturing appears to have tremendously boosted consumer surplus.

Producer Surplus

In this portion of our study, we will consider the economic impacts of drilling, in the

form of hydraulic fracturing, on a small region. We will first examine the impacts of a single

well, and gradually grow from there to countywide operations, and then to multiple county

regions of a state. In this way, we will attempt to map out the impacts of these operations to

understand how they benefit or harm the individuals, businesses, and governments of these areas.

We will consider the Marcellus Shale Bed for our case study throughout this paper. The

Marcellus Shale Bed, located under Pennsylvania, New York, West Virginia, and Ohio,

represents the largest unconventional gas reserve in the U.S. and one of the largest worldwide

(Brundage et al. 2011; U.S. Energy Information Administration 2012). This reservoir provides an

interesting area for study because we are able to survey counties and cities not previously

exposed to drilling operations, but who have seen hydraulic fracturing operations skyrocket in

recent years.

SINGLE WELL

First, let’s consider the direct impact of a single well in the Marcellus shale oil region.

Hefley and Seydor (2011) carry out extensive research to understand the average costs and

benefits of constructing a well in the Marcellus Shale Bed. In order to carry out their analysis,

the team creates an input-output model based on similar research conducted by Miller and Blair

(2009), Barth (2010), and lastly taking into account concerns about input-output models posed

by Crompton (1995). Below, Hefley and Saydor (2011) map the lifecycle of a single well,

beginning with leasing and mineral rights and continuing through drilling and fracturing, and

concluding with the plugging and reclamation of a well.

Hefley and Seydor (2011)

Hefley and Seydor’s research indicates that the construction of a single well can cost well

over $7 million. First, a prospective drill operation begins with leasing rights, whereby the

company gains the right to prospect and drill for oil. These leasing rights require that they pay

the landowners a signing bonus, which averages $2,700/acre. In order to construct a hydraulic

fracturing well, the team must amass a square mile of land or 640 acres. Thus the average cost

associate with leasing bonuses per well comes out to $1,728,000. Next, the land must be

appropriately permitted and titled, which Hefley and Seydor conclude usually costs $500,000.

Once all leasing and permitted is settled, construction of the wellhead can begin. The site must

be leveled and the wellhead built, which averages a cost of nearly $400,000. Now that surface

level operations are settled, the team must drill the well, which the researchers argue costs

$1,878,125 on average and takes 25 days or more. After drilling, the well must be fractured to

gain access to the shale gas, which will additionally cost and average of $2,500,000. Finally, the

well must be completed, which involves: laying pipes, expanding the infrastructure surrounding

the well, creating a water reclamation and treatment system, and constructing the surrounding

buildings necessary to operate a well. This final stage can add an additional $500,000 to the total

startup costs of a single fracking operation. Therefore, before the well operator can begin to drill

for oil, they must invest a minimum of $7,651,825 on average per well in the Marcellus oil

region of southwestern Pennsylvania. This money is spent on everything from supplies for the

well, to fuel, to large machinery, to labor costs, and permitting. Later, we will discuss notions of

leakage to understand how much of this money stays local, but for now we can certainly claim

that a great deal of these costs are regional and will positively impact the community seeing

construction of a new well.

Hefley and Seydor (2011)

Hardy and Kelsey (2015)

Certainly many of the costs associated with constructing a single well will stay in the

community and produce a positive economic benefit, but perhaps the most easily visible benefit

to residents comes in the form of royalty payments on the mineral rights of the oil. According to

Green (2010), Pennsylvania law stipulates that the minimum royalty payable to the landowner is

12.5%. Still, Green carried out his own primary research and determined that the average royalty

payment is significantly higher, at 15% of production value. Given the price of gasoline at the

time of this research, Green demonstrates that, on average, oil companies will pay about

$300,000 annually in royalties per well in this region.

Hefley and Seydor (2011)

Given the research above, it is easily plausible that a single well can a have a tremendous

positive impact on the community. At least $300,000 will be pumped directly to the community

through wealth transfers in the form of royalty payments. Many dozens of workers will be

needed to construct and operate the well. Lastly, local industry stands to benefit from increased

consumer demands and a larger labor force residing in the community. We will discuss specific

community economic impacts later in this paper, when we consider larger impacts from drilling

on towns and counties. For now, we see there are clear benefits to landowners, and very likely

strong benefits to the community from the construction of just one well. After we conclude our

discussion of the economic impacts, we will begin weighing other, more intangible impacts to

the community.

COUNTY WIDE

Now that we have examined Hefley and Seydor to understand the costs and economic

benefits associated with a single well, let us consider how hydraulic fracturing in a town may

impact the community at the county level. Wang and Stares (2015) argue that there may be

significant positive economic impacts derived from oil drilling. To conduct their research, the

team constructed and input-output model to understand the impact drilling and production has on

a community. They center their research on Washington County, in the southwest of

Pennsylvania. The team aims to ultimately understand whether drilling has a positive economic

impact on the community, and additionally to understand the localization and sustainability of

these economic benefits.

Between 2001 and 2015, 1,346 natural gas wells were drilled in Washington County

(Pennsylvania Department of Environmental Protection, Oil and Gas Reports). The greatest

period of expansion was from 2009 – 2014. This rapid expansion of well drilling in recent years

has had an extraordinary impact on the communities of these counties. Looking to Washington

County, we see large benefits in the forms of land value, incomes, job opportunities, and taxes.

First, Wang and Stares (2015) use the Impact Analysis and Planning (IMPLAN) methodology to

create an input-output model that accurately describes the potential benefits and harms to the

community. Here, gross input comes from the costs associated with well construction as well as

county wide economic data preceding any drilling or construction. Output will be defined as the

value of the industry production as well as any inventory changes observed. Once again, we must

consider questions of leakage to understand how much of the economic benefits actually stay

within the county lines. Wang and Stares (2015) observe that a large portion of workers’ wages

and company revenues tend to leave the county. We therefore must weigh each category to

understand how input leads to local output.

First, Weng and Stares (2015) argue that employment and income have risen

dramatically, contributing to higher economic output in communities with drilling operations.

First, to weigh economic benefit the team had to choose a reasonable measure of localization vs.

leakage. In other words, the team had to establish a reasonable metric for the amount of money

staying within a community, against the amount leaving county or state lines. After carrying out

significant primary research, the team established that there is very likely a 50/50 localization

rate, which indicates that 50% of royalties are spent locally, and 50% of drilling costs go to local

parties in the form of labor wages or rental rates. Using this metric, the team establishes that up

to 9.01% of the total economic output from drilling operations will go directly to the local

economy. Even with a far more conservative localization rate of 25/25, they still conclude that

Washington County would expect as much as a 6.64% of the total economic output. Of this,

Wang and Stares (2015) observe a local employment benefit of 4.89% to 5.25% of total

employment in Washington County. Therefore, they conclude that labor and income will

certainly be positively impacted by increased drilling operations.

Wang and Stares (2015)

Wang and Stares (2015) find that accommodation seems to be among the most directly

and positively impacted sectors with shale gas drilling. First, they note that the majority of rents

tend to stay within the county, as landowners tend to be localized. Additionally, accommodation

needs naturally prefer localized industries. For example, this team finds that the hotel industry

saw a 200% increase in revenue between 2004 and 2012. We therefore see that certain localized

measures of economic benefit, such as residence, seem to grow rapidly and correspond very

closely with shale gas well drilling and production.

Weng and Stares (2015) argue that regional governments also appear to benefit

tremendously from increased drilling operations. The team observes that tax revenue increased

dramatically in the years since 2009 when drilling operations ramped up significantly. The team

found that Washington County received approximately $4.7 million in 2012 alone due to impact

fees (or taxes charged for the right to carry out hydraulic fracturing) and municipalities within

the county received an additional $7.9 million; this was the only year for which the researchers

could easily access and draw conclusions about impact fees at the time of their writing.

Secondly, as noted above, they observe dramatic increase to real estate taxes collected by county

and municipality governments. Lastly, they found a roughly 30% increase to sales tax collected

within county lines, indicating a large amount of the wealth created in fracking operations was

likely spent within county boundaries as well.

Weng and Stares (2015)

REGIONAL

Now that we have considered the impacts of one well and the impacts of countywide

drilling operations, we may begin to consider the impacts of drilling on a region of counties to

understand how fracking impacts an entire area. Hardy and Kelsey (2014) consider a group of six

counties in the northeast of Pennsylvania, referred to as the Northern Tier. They argue that these

counties provide an interesting case study in the regional impacts of unconventional shale gas

exploration, as these counties had relatively low to no conventional gas exposition prior to

hydraulic fracturing. Due to the fact that there has been very little oil or coal mining, many of the

landowners had never sold their mineral rights and thus properties are not divorced from the

mineral rights underneath. Importantly, over the period of 2005 to 2011 these counties saw the

construction of 2,694 unconventional gas wells. Additionally, our team has discovered that

between 2004 and 2015 4,125 wells were constructed in these counties (Penn State Marcellus

Center for Outreach and Research). The dramatic increase in oil drilling over a fairly short period

of time provides a clear example of the impacts of drilling on a community.

Hardy and Kelsey (2014) observe that Northern Tier counties gained several noticeable

economic benefits from hydraulic fracking operations. First, Northern Tier counties received an

average increase of 24.7% in sales tax revenue, which agrees with Wang and Stares (2015)

above. In other words, the influx of people and industry augmented sales tax collection as both

the quantity and price of goods increased. Moreover, Hardy and Kelsey find that all counties saw

an increase in income tax revenue, with an average increase of 41.1% increase from business tax.

Specifically, Bradford County observed an increase of 71.9% corporate tax revenue (Hardy and

Kelsey 2015). Moreover, they observe that not just business, but entire industries within these

counties have improved. Industries such as transportation, hotel accommodation, construction,

and others that are apparently tied to drilling increased about 25%. Lastly, personal income taxes

also appear to have risen significantly in the Northern Tier, which saw an average of 11.8%

personal income increase from 2007-2014, despite a statewide average decrease of (-) 7.6%. All

in all, Hardy and Kelsey find that the Northern Tier certainly observed economic benefits, as

incomes, business profits, and total tax revenue all increased.

However, the team found that while incomes and profits tended to increase, competition

rose as well, which challenged local individuals and business. Hardy and Kelsey (2015) carried

out significant primary research to understand qualitatively what appeared to be happening in

these counties. They found that while business profits increased, the increased revenue

disproportionately favored larger chains. Small, local stores found the increased competition

overwhelming and many closed their doors for good. We see these anecdotes verified when

looking to tax reports, which illustrate that despite greater taxable profit, fewer business were

actually filing tax returns (the most extreme being 4.8% fewer in Bradford county). Conversely,

the researchers do not observe this same phenomenon when considering individuals. They find a

significant increase in income paired with a mild, but positive, 1.3% increase in the number of

tax returns filed throughout the Northern Tier. Using their input-output model, Hardy and Kelsey

conclude that there was a very positive economic effect, citing the creation of 23,000 jobs over

this time period, where each worker made more through higher wages and longer hours, and

contributing to a total economic gain of $3.2 billion in the Northern Tier.

Finally, in this discussion of a regional case study to understand impacts of hydraulic

fracturing, we ought to consider what happens to the individuals not involved or benefiting from

drilling. Shafft (2014) argues that the negative impacts of a fracking operation may actually

outweigh the positives. Shafft argues that the rapid increase in drilling operations, and rapid

inflow of workers, businesses, industry, and capital, creates a boomtown effect in these small

communities. Small towns in regions that previously had very little exposure to oil and gas, or

previously had fairly low median incomes and fairly low levels of employment are suddenly

becoming enormous centers of industry and drilling. While this is positive, as discussed above,

Shafft asserts that we should be cautious of the boomtown environment. He claims that with

rapid growth, communities also witness increased crime, drug and alcohol abuse, domestic

violence and divorce, and negative effects on local solidarity that come from a fairly transient

population.

Moreover, Shafft observes that the drilling industry contributed to income inequalities

that further harmed the low income of these communities throughout the Marcellus region. As

McGraw (2011) argues, much in the way of rents and local incomes went directly to landowners

who received royalties for their land. Furthermore, oil companies tend to preference working

with landowners who own larger parcels because this simplifies the leasing process. Therefore,

larger landowners disproportionately benefitted from leasing bonuses and oil royalties. Small

landowners gained very little as their parcels were rarely selected when avoidable.

Shafft observes still more negative effects to renters and lower income individuals, in the

form of higher rent and higher cost of goods. Renters watched as the price of small houses

skyrocketed from “$800 per month to $2,500 or $3,000 per month” (interview from Shafft

2014). Others watched as their landlords sold their home to benefit from the short-term demand

increase, evicting families and sending them to the streets. Additionally, home prices were not

the only thing to increase rapidly over this time frame, but basic goods skyrocketed as well.

Families living on food stamps and welfare were suddenly going hungry because the value of the

food stamps had not kept pace with the price of goods. Therefore, we should continue our

exploration of the economic benefits of drilling with caution, as the harms may be less visible

than the benefits, but can be drastic to the individuals they do impact.

ORIGINAL RESEARCH

Empirical Design

While numerous studies have been conducted on the economic effects of hydraulic

fracturing on consumers, vis-à-vis the reduction in fuel prices through increases in supply, we

aim to determine the economic effects of constructing fracking wells within the producer's

locality itself. Opponents have argued that any positive effects of shale gas drilling, including

increases in employment and availability in fuel, are outweighed by the negative environmental

impacts. As such, some localities have chosen not to opt into fracking despite having access to

shale bed while others have chosen to take advantage of their geology..

To estimate the net economic impact of the presence of fracking wells, we utilize cross-

sectional data across Pennsylvania counties located on the Marcellus Formation, a shale bed

located in the western portion of the state. The counties contain a differing number of fracking

wells, which we believe to be an adequate source of exogenous variation. We then compare each

county's concentration of fracking wells to the county's real estate index, a measure which we

believe truly captures both economic gains and short-term environmental damage for the

locality. In fact, a superficial analysis of the data seems to indicate that there exists a positive

relationship between Pennsylvania home prices and the number of fracking wells:

(Figure 1)

We specifically choose not to use individual home prices, however, to account for the

impact that distance to fracking well may have on property values (noise pollution, etc.) and

assume that any such biases are eliminated at an aggregate-level index. To substantiate our

claims, we regress the county's real estate index on well density:

Ri = αFi + βOi + Xi’γ + εi

where R is the real estate index in county i, F is well density1, O is oil well density, X is a vector

of covariates acting as a control, and ε is a random error term. Because real estate prices are

influenced by a variety of factors, we control for median per capita income, population density,

education, and unemployment; although the cost of building construction is also a major

determinant in home value, we do not include this variable assuming it to be relatively constant

across all counties given the limited geographic scope (Capozza et al., 2002). Additionally, we

1 Well Density = Number of Wells in County / County Area

control for oil wells, similar in nature to fracking wells and a major, competing industry in the

region.

We obtain our data from a variety of sources: median per capita income, population

density, education (percent of bachelor's degrees), unemployment (percent of population

unemployed) use Federal Reserve Economic Data (FRED); county median real estate prices are

from Trulia; fracking wells per county from NPR; and oil wells per county from the Energy

Information Administration (EIA). We then normalize all of our variables to adjust for county

area. For example, FRED provides percentages for bachelor's degrees and unemployment: we

use these figures along with the counties' population and area to compute the density of

bachelor's degrees and density of unemployment. All figures used are as of December 2014.

(Penn State University, Marcellus Center for Outreach and Research)

(http://stateimpact.npr.org/pennsylvania/drilling/)

As visible in Figure 2 above, fracking wells (blue) are concentrated in the northeast and

southwest but scarce in between; both oil wells (red) and the land itself, on the other hand, are

uniformly distributed. Accordingly, our regression rests on two premises:

1. The land across the Marcellus Formation is relatively homogenous; this allows us to

effectively compare the counties at a side-by-side level without having to control for

geographic features.

2. Fracking is regulated by the State of Pennsylvania and not influenced at the county-level;

thus, the question of legal structures and frameworks are held constant in our analysis

with minimal interference from counties.

In the event that the mere presence of a well has an influence on Ri and cannot be

generalized, we then subset the counties into two clusters based on whether fracking wells

are present or not.2 Then, using a dummy variable regression:

Ri = α{Dfracking} + βOi + Xi’γ + εi

where {Dfracking} =1 if the numbers of fracking wells in a county exceeds 100, we test whether our

assumption holds true.

Regression Results:

There is some evidence, as our first regression in the table below shows, that there is

some producer surplus generated by fracking as measured through a real estate index. Quite

surprisingly, however, the presence of oil wells within a county has minimal effects on housing

prices. The education levels of the county’s population also appear to have a statistically

significant impact.

2 Namely, that Ri is not continent on the well density and more so the result of the presence of a well.

VariableCoefficient Estimate

Standard Error t values Pr(>|t|)

Oil Well Density -17.291 28.406 -0.609 0.548

Fracking Well Density 52.391 13.187 3.973 0.00048***

Population Density -2810.5 1919.483 -1.464 0.155

Per Capita Income 0.3419 1.369 0.25 0.805

Unemployment Density 8707.616 21477.044 0.405 0.688

Bachelor's Degree Density 10392.074 3206.617 3.241 0.003**

Constant 87924.653 48226.682 1.823 0.079

R-squared 0.671

Adjusted R-squared 0.598

p-value .000016***

 ***p<0.01, **p<0.05,

*p<0.1

We then, as a validity measure, repeat the procedure but convert fracking wells into a dummy

variable. We obtain the following results:

VariableCoefficient Estimate

Standard Error t values Pr(>|t|)

Oil Well Density -15.746 29.661 -0.531 0.6

Fracking Well Density 35963.938 9977.661 3.604 0.001***

Population Density -1663.5 1982.91 -0.839 0.41

Per Capita Income 0.306 1.437 0.213 0.833

Unemployment Density -5349.683 22145.035 -0.242 0.811

Bachelor's Degree Density 9182.069 3249.573 2.826 0.003**

Constant 88783.583 50239.122 1.767 0.089*

R-squared 0.647

Adjusted R-squared 0.571

p-value  0.00038***

 ***p<0.01, **p<0.05,

*p<0.1

We believe that the increase in the real estate index manifests through the exogenous

wealth created by tapping into the Marcellus Bed. Most notably, counties that have access to the

bed but choose not to extract shale oil witness lesser increases in housing prices; in other words,

home values are tied to the extraction process and not to the features of the land itself.

The implicit assumption is that the real estate index can capture both economic gains and

short-term environmental damage. While the former is certainly evident given that the regression

coefficient is positive, the latter may not hold and may only amplify the result of the regression

coefficient. This may occur for two reasons:

1. The type of short-term damage that does occur may not be a factor in home

values.

2. Homes are simply not affected and distanced from fracking wells.

However, the statistical significance and direction of the regression coefficient does indicate

some sort of net positive producer surplus is created.

EMPLOYMENT

Border counties along the New York – Pennsylvania state line are an excellent case study

to measure the labor market differences caused by fracking, since New York imposed a

moratorium on fracking operations in the Marcellus Shale while they continued on in

Pennsylvania. Hasting et al. (2015) found that the New York moratorium adversely affected the

labor market in the state. There was a statistically significant increase in unemployment in New

York caused by the moratorium. There were approximately 403 jobs lost per county per year in

the state. On the other side of the border, Pennsylvania benefited with a 2.7% increase in labor

force participation rate and 4.4% increase in the employment-population ratio. Not only did

Pennsylvania observe an increase in employment numbers, but this state also saw a median

income increase as well. As discussed above, Hardy and Kelsey (2014) saw the median income

for fracking dense regions of Pennsylvania actually rise by 11.8%. Their study supported the

commonly cited benefit of fracking: lower unemployment and higher labor force participation

and employment-population ratio.

At a national scale we see the same trend extended, that hydraulic fracturing appears to

lead to increased employment and higher salaries, even in communities that are fairly removed

from the fracking well itself. Hausman and Kellog (2015) assert that jobs created from fracking

have increased in fields from energy intensive manufacturing to transportation and more. The

researchers argue that employment in gas-intensive industries, which they define to mean metals

manufacturing, large-scale production, and similar energy intensive fields, increased

approximately 3.4% to 9.1%, accounting for 24,000 – 65,000 jobs. Even in non-gas-intensive

industries, employment has skyrocketed due to the lower cost of fuel and higher producer

surplus. Hausman and Kellog (2015) believe that up to 280,000 jobs may have been created as a

direct result of increased fracking operations and cheaper fuel.

EXTERNALITIES

When weighing the costs and benefits of fracking, we must consider all externalities to

have a complete understanding of the impact, as both positive and negative externalities result

from hydraulic fracturing. In this portion of the study, the environmental, health, and

infrastructural externalities will be considered. As discussed above, fracking is a complicated,

multi-step activity and can result in externalities along many of the steps. We will consider

externalities that are a product of fracking as an activity, as well as externalities specific to one

step.

ENVIRONMENT & PUBLIC HEALTH

The environmental & public health externalities can be nicely summarized in the following chart

Krupnick and Gordon (2015)

Water

As described in the technology overview section, hydraulic fracturing consumes large

amounts of surface and below ground water and this could subsequently have a great impact on

the water resources, both directly and indirectly. Various above and below ground mechanisms

affecting drinking water resources have been identified; water withdrawal, spills, below ground

migration, and wastewater treatment. In this portion of the study, the relative impact of these

mechanisms will be assessed, particularly in context of the recent Environmental Protection

Agency (EPA) report on the effect of hydraulic fracturing on drinking water resources.

Water Consumption

In 2011 and 2012, approximately 44 billion gal of water were consumed for fracturing activities,

with an estimated 4 million gallons per well. Given the increase in fracturing and that water is

about 90% of the injected fluid, this number is no surprise (Jackson et al. 2014). While this is a

large number, it is still only 1% of annual water use. Hence in the grand scheme, this is not a

great increase in water consumption (EPA 2015). However, it is often argued that the water

withdrawals can have very local effects. A potential mechanism could be that the over extraction

of water for fracking could induce water shortages and compete with local water uses (Jackson et

al. 2014). Yet, even in a state like Texas, fracturing only amounts to 1% of statewide water

consumption (Mason 2015). In fact, hydraulic fracturing is actually less intensive than most

other forms of energy extraction (Jackson et al. 2014). Hence, while no economic literature was

found quantifying the economic value of risks associated with water scarcity (Mason 2015), on

both surface and groundwater supplies, given the relatively small share of water usage by

fracking, it appears that water consumption is not a major economic risk.

Water Pollution

The surface water resources, such as rivers, streams, and lakes, can be contaminated

through fracking related incidents, such as spills, leaks, and inadequate treatment and disposal of

wastewater. The EPA estimates that in the state of Pennsylvania, there are between 0.4 - 12.2

spills per 100 wells (EPA 2015). These spills often occur during chemical mixing and range from

volumes of 5 gal to 19,000 gal, with a median of 420 gal. In the study of 151 cases, 9% reached

surface water, 64% reached soil, and none reached groundwater (EPA 2015). While these

percentages are low, these chemicals can ultimately end up in both surface and ground water.

Chemicals that leach through the soil and end up in groundwater after years, move laterally

through surface soil and end up in nearby streams, or wash off the soil through rainwater. To

better assess the risk, studies spanning a long time frame will need to be conducted.

Another source of contamination is flowback and produced water, whereby much of the

fluid injected into the shale formation, along with the gas, oil, and other impurities, comes back

up to the surface. Of the 225 cases EPA considered, they observed about twice as much spilled

producer water as chemical water, citing about 990 gallons of spills on average per well. The

chemicals from these spills are toxic as they contain salts, heavy metals, and radioactive

materials, and can enter both surface and groundwater. Beyond spills, the wastewater can pollute

the natural potable water if it is not disposed of properly. The wastewater is either transported to

industrial treatment plants or deep injection wells. Often times, the wastewater is not sufficiently

treated and adverse water quality impacts have been shown for chlorides, bromides, and

radionuclides (Mason 2015). The water pollution is avoided from deep well injection; however,

there are risks with deep injection such as, induced earthquakes, which will be addressed later.

While there are not exact economic numbers quantifying the risk of pollution, the mean

willingness to pay to avert pollution can indicate the economic value. A study conducted

estimated that in the state Pennsylvania, the mean willingness to pay was $10.46 per month ($9.3

mil aggregate per year) to eliminate all risks to waterways (Mason 2015).

There are two main subsurface mechanisms for water pollution. The first is an unintended

movement of liquid or gases from the production well to drinking water resources due to

inadequacy of well casing. Chemicals, either from the fluid mixing or from the flowback water,

can escape the well casing and flow into the groundwater. Similarly, harmful gases, in particular

methane, can escape the well casing and leak into the groundwater reservoirs. In addition,

contamination of groundwater can occur from wastewater pit leaks. The estimated incident rate

of wastewater pit or well integrity failure is about 0.1% (Jackson et al. 2014).

The second mechanism is a subsurface migration of liquids and gases from the

production zone via pathways other than the production wells. These liquids and gases can travel

through natural faults in the ground and seep into the groundwater. However, the probability of

fracking fluid making its way up to water aquifers through natural or induced fractures is very

low (Vengosh et al. 2014). Similar to surface water, while there is currently no research

quantifying the economic risk of groundwater pollution, its value can be estimated from the

mean willingness to pay. A study conducted in Pennsylvania and Texas estimated that household

would be willing to pay $33 per year to reduce the number of groundwater wells with potential

problems by 1000.

The EPA concluded “we did not find evidence that these mechanisms have led to

widespread, systematic impacts of drinking water resources in the U.S. Similar to the EPA,

Olmstead et al. 2013 concluded no systematic pollution caused by fracking. While there have

been specific instances of water contamination via the above mentioned mechanisms, there is

little systematic risk associated to water supplies from fracking.

Air

Negative Externalities

Hydraulic fracturing poses often-cited environmental harms to the air, in the form of

harmful gases and particulate matter that can be released along several different steps of the

fracking process. Harmful species include Methane, Volatile Organic Compounds (VOCs),

Nitrous Oxides (NOx), CO2, particulate matter (PM), and SO2, and these species can affect both

local, regional, and global air quality. Moore et al. (2014) conducted a study and summarized the

potential for harmful species released along different steps of the fracking process. The results

are summarized in the figure below.

Moore et al. (2014)

The global and regional air quality might be adversely affected due to the methane

venting. Methane, a greenhouse gas 22 times more potent than CO2, is vented during drilling,

fracturing, and completion (Krupnick and Gordon 2015). In fact, in a study done in

Pennsylvania, it was found that the natural gas compressors were the largest source of emissions

for oil and gas operations in NY (Jackson et al. 2014). In addition, the local air quality might be

affected indirectly. There is an increase in diesel use during drilling and transportation (Mason et

al. 2015).

Litovitz (2013) estimates regional air quality damages from Marcellus Shale in

Pennsylvania between $7.2 million and $32 million for 2011. Development emissions are

between $2.5 and $5.5 million, however the vast majority of damages will come from ongoing

operations. Since most emissions come from ongoing activities such as gas production and

compression, that should be the focus of regulatory practice.

Positive Externalities

Conversely, many researchers argue that due the reduced price of gas, we could

potentially see CO2 reductions. Mason et al. (2015) consider the economics of shale gas

development and conclude that the climate benefits depend on four factors. 1) the degree to

which people substitute natural gas for more carbon intensive fuels like coal; 2) the net GHG

(greenhouse gas) lifecycle effect of substituting natural gas for other fuels, with an emphasis on

methane, which is a much more potent GHG than CO2; 3) increase in energy demand as a result

of lower natural gas prices; 4) which climate policy the U.S. government ends up assuming.

While the first factor is clearly a positive externality, factors 2 and 3 clearly reduce those benefits

and might even outweigh them. There is evidence that lower natural gas prices are already

causing a retirement of coal electricity plants as we substitute gas for coal. Mason et al. (2015)

note that this coal could easily be transported to another market; hence global climate emissions

could remain the same. In addition, since fracking also gives access to oil, the increase domestic

supply of oil and a refusal for OPEC countries to curb production has caused the price of oil to

decrease, which may increase demand in transportation and other sectors. The main factor for the

climate benefits of fracking is methane leakage. Methane is about 22 times more potent of a

GHG than Carbon Dioxide. Depending on the sample collection method, different estimates of

Methane emissions are attained and the benefit of fracking natural gas hinge on the methane

emission. Another benefit is to the local air quality surrounding coal plants. As natural gas is

substituted for coal, the coal consumption will be reduced and many plants even retired. Since

coal plants emit extensively more pollutants that increase morbidity and mortality (toxic

particulate matter, mercury, sulfur dioxide), there will likely be an improvement in the air quality

surrounding coal plants.

Seismic

While the study of seismic effects is still in its infant stage, most current evidence suggests that

there is no significant threat. Turcotte et al. (2014) discuss the seismic effects of fracking. They

note that the fracking-induced earthquakes are too small in magnitude to do surface damage. The

largest fracking induced earthquake thus far has had magnitude of just 3.6. The majority of the

fracking earthquakes are in the -3 to -2 range, meaning they are 100 to 1000 times smaller than a

magnitude 1 earthquake, too small to be even felt on the surface. They estimate that the

probability of a magnitude 4 earthquake occurring from fracking operations is in the magnitude

of 10-15 to 10-9, so very small indeed. In Oklahoma in 2011, a magnitude 5.7 quake was attributed

to wastewater injection, not to the practice of hydraulic fracturing itself. The diagram below

illustrates some mechanisms of induced earthquakes.

(Ellsworth 2013)

Ellsworth (2013) studied the injection-induced earthquakes and noted that in

Pennsylvania, a region characterized with low levels of seismic activity, where thousands of

fracking operations have been conducted, there have been only 6 earthquakes with magnitude

greater than 2. Often, these earthquakes occur in areas near fault lines, as they discovered in the

Homs River basin of British Columbia.

While there is a clear link between fracking and seismicity, the vast majority of the

earthquakes are not even felt above ground and no earthquakes capable of causing surface

damage have occurred that are directly induced by fracking. The major earthquakes have been

caused by deep wastewater injection and this can be avoided. Hence, seismic activity does not

appear to be a major risk.

Ecological

Shale gas development using hydraulic fracturing could have significant ecological

impact. Burton et al (2014) conducted a study to evaluate the impact on the ecosystem given the

proximity to drilling operations. They considered the water withdrawals, construction and

transportation, industrial chemicals, flowback and produced water, and wildlife impact on the

ecosystem. While water consumption is significantly greater for agriculture than fracking, water

withdrawals can have significant detrimental effects in dry areas that already crave water. The

lower the quantity of water in a region, the greater impact the withdrawal of each additional unit

of water will have on the quality of water because pollutants become concentrated (Burton et al

2014). Another source of ecological concern is construction and transportation. Disturbance of

land increases soil erosion and several studies have linked well pads with an increase in erosion

on and off location. The sediment from the erosion runs off to ground water, decreasing

photosynthetic activity and harming the organism and their habitat. The hydraulic industrial

chemicals are also a source of concern as they can find their way into the ecosystems during

transportation accidents, spills, and leakage. While no direct research about fracking involved

accidents is present, the majority of these chemicals are toxic: they can have plausible health

effects not limited to the eye, skin, and respiratory, gastrointestinal, neurological, immune,

cardiovascular, renal, and endocrine systems. A major portion of the fracking process is the

management of flowback and produced water. Mismanagement of wastewater can lead to the

brine and radioactive materials contaminating soil and water (Burton et al. 2014). Lastly, they

address the impact of fracking operations on the wildlife. Construction related activities result in

habitat fragmentation. In addition, the noise and light pollution is detrimental to wildlife health.

However, quantifying this effect is difficult and we await further research to more clearly

understand these harms.

Health

Unlike environmental externalities, health externalities are more complicated to assess.

The significant damage would come from the air quality. Fracking can lead to volatile organic

compounds (VOCs) to be released into the atmosphere when fracking fluid evaporates. These

compounds could have seriously detrimental health effects and affect the quality of air.

Moreover, naturally occurring radioactive materials are also released into the air as a

consequence of fracking. Besides higher energy usage contributing to greenhouse gas emissions,

increased drilling activity and transport of natural gas also increase emissions. With higher

greenhouse gas emissions, higher retention of heat would only augment the problem of global

warming.

To evaluate the health impact, Shonkoff et al. (2014) conducted a review to study the

public health dimensions of shale gas development. They reviewed scientific literature to

evaluate the potential environmental health impacts by addressing matters of toxicity, exposure

pathways, air quality, and water quality. Their exposure pathway is summarized in the figure

below.

(Shonkoff et al. 2014)

Specifically, shale gas development uses fracking fluids that contain many chemicals

toxic to humans. These chemicals can find their way to humans through several environmental

pathways, including air and water. As discussed previously, fracking fluids can come into

contact with humans through leaks, poor well integrity, flowback water, and run-off during

storms, blowouts or flooding events (Rozell 2012). Because many of these chemicals are

proprietary, we do not have complete information about the known ones as established toxicity

standards are not in place. While there is a database FracFocus that includes voluntary chemical

disclose, there is a lack of complete information and uncertainty in the information itself. The

specific nature and quantity of chemicals remain confidential, we can conclude that hazardous

fracking chemicals, gases, and toxic waste from the shale deposits can find their way into surface

and ground water, and at toxic levels, are known for increased morbidity and mortality.

Kassotis et al. (2014) conducted a study measuring the effect of a subset of chemicals

used in fracking and also surface and groundwater samples in drilling intensive areas in Garfield

County, Colorado. They found that several of these chemicals are endocrine disrupting chemicals

(EDCs). The majority of their samples from heavy drilling operations showed increased

estrogenic, antiestrogenic, or antiandrogenic activities than their reference sites with limited

drilling. Their results suggest that fracking may result in higher endocrine-disrupting activity in

surface and ground water, which could directly impact the human body if given enough

exposure.

INFRASTRUCTURE USE

Road Degradation

Shale gas development operations often cause boomtowns. Since there is an influx of

migrants, there is great pressure placed on the local infrastructure. With the development of

fracking operations, there is an increase in volume of traffic for equipment and materials, which

can damage state and local roads are not designed to accommodate such heavy traffic. Abramzon

et al (2014) estimate that there is a degradation cost of about $13,000-$23,000 per well for all

state roadway types, or $5000-$10,000 per well if low-volume roads are not included. Similarly,

the Texas Department of Transportation has reported a preliminary damage to roads of $2 billion

while New York has reported $0.4 billion (Mehany et al. 2015).

Accidents

Beyond degradation, researchers also observe increased traffic accidents associated with

hydraulic fracturing. Graham et al. (2015) studied the impact of fracking in Pennsylvania and

found a significant increase in accidents in heavily drilled counties as compared to control. In

2010-2012, the heavily drilled counties had a 15-23% higher vehicle crash rate and 61-65%

increase in heavy truck crash rate in 2011-2012. While comparing drilling and non-drilling

months, they found an estimated increase in traffic accidents of 5-23%. In 2012, there was a 45-

47% increase in fatal and major crashes in heavily drilled counties, though there were no

statistically significant differences between drilling and non-drilling months in the same

counties.

EFFECT ON POLICY & RENEWABLES

Jacoby et al. (2012) study the impact of shale gas development on U.S. energy and

environmental policy. To analyze the impact, they consider two scenarios: one mandating

renewable generation, requiring 25% renewable share of electric generation by 2030 and coal

retirement; the other using price to achieve a 50% GHGs emissions reduction. In the first

scenario, they impose two conditions. A renewable energy standard mandating 25% renewable

energy share of electricity generation by 2030, and secondly, a 50% retirement of U.S. coal fired

plants. Then, they run the model with and without shale. With shale, total energy usage in the

U.S. in 2050 is 8% higher than otherwise. Similarly, gas prices and electricity prices are

significantly cheaper with the availability of shale gas. Hence, the first scenario shows that shale

will serve as a bridge and ease the transition to a low carbon future. It will enable greater

electricity and energy amounts, while reducing gas and electricity prices.

The second scenario aims to look at implications for stringent mitigation using prices. It

requires a 50% reduction in GHG emissions by 2050. Under this scenario, the GHG emission

would be internalized in the price, leading to an increase in both gas and electricity prices. In the

absence of no shale, there would be a reduction in demand for electricity because of higher gas

prices. Renewable generation would increase to 29% of total electric demand, above the

mandated 25%. With shale, coal is driven out of the system quicker. Under shale, the pace of

technology development will be affected. Without shale, there would be R&D in coal Carbon

Capture and Storage (CCS) technology, economically feasible by 2035. With shale, this

technology will likely be delayed for another 10-15 years. In addition, cheaper gas makes it

difficult for renewables to compete; hence they will not have as much market penetration under

the shale scenario.

Under both scenarios, shale gas is a boon to the U.S. economy. It allows greater

economic growth and eases the task of lower GHG emissions over the next decades. However,

shale gas does delay the development and deployment of low-emission technologies like CCS

and renewables.

CONCLUSION

In conclusion, it is very difficult to weigh the impacts of fracking operations in general.

Naturally, when considering whether or not this has been a positive force the country, individuals

will have to compare very different effects, such as weighing positive economic impacts against

potential environmental hazards. Our research team has worked diligently to provide a fair and

comprehensive view of the fracking landscape in the United States. In sum, we believe that

fracking has had an overwhelmingly positive economic effect, generating billions of dollars in

consumer and producer surplus. Through our own original research outlined above, we have

determined that increased fracking operations positively impact housing values in a county.

Additionally, though we are concerned about the environmental hazards fracking may bring, we

do not yet see sufficient evidence to argue that it should be stopped. Nonetheless, we leave the

final verdict to our readers as to whether or not fracking ought to be encouraged, such that they

may evaluate the economic gains and potential externalities according to their individual

preferences.

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