The economic benefits of fracking

The new NBER paper by Erik Gilje, Robert Ready, and Nikolai Roussanov shows some truly impressive economic benefits:

We quantify the effect of a significant technological innovation, shale oil development, on asset prices. Using stock returns on major news announcement days allows us to link aggregate stock price fluctuations to shale technology innovations. We exploit cross-sectional variation in industry portfolio returns on days of major shale oil-related news announcements to construct a shale mimicking portfolio. This portfolio can explain a significant amount of variation in aggregate stock market returns, but only during the time period of shale oil development, which begins in 2012. Our estimates imply that $3.5 trillion of the increase in aggregate U.S. equity market capitalization since 2012 can be explained by this mimicking portfolio. Similar portfolios based on major monetary policy announcements do not explain the positive market returns over this period. We also show that exposure to shale oil technology has significant explanatory power for the cross-section of employment growth rates of U.S. industries over this period.

Do note that $3.5 trillion figure is not a measure of social value.  It does not count the losses to coal companies for instance, nor does it measure the consumer surplus or the “greener energy” benefits from fracking, among other factors.


This appears confined to the study of oil wells and so there is also a substantial value in addition associated with the fracking of gas wells. The revolution in gas fracking probably has more positive social impact as well due to its lower greenhouse gas emissions compared to coal.

Plus shale oil development started before 2012. North Dakota first broke above 100 land rigs in 2010, and when I visited in May 2011 it was booming. As early as March 2010 most US rigs were doing horizontal drilling.

2nd Opinion:

You are aware that fracking of gas wells releases hundreds -> thousands of tons of methane into the atmosphere, a greenhouse gas which is 30X more powerful than CO2, correct?

When a gas well is being hydraulically fractured, the slurry goes down the well pipe.
It's fully under control.

If any gas escapes, it's by accident. The gas only enters the atmosphere
when it's being used.

Well operators use gas flares to at least turn any excess methane into CO2 and water. You
can't just turn a well off and on.

Does it considers the sharpe decline of energy costs that led to increased output of energy thirsty industries in US?

Energy costs have not declined. Profits on gas fell as surpluses forced spot prices down, but long term contracts are the same. The surge in supply has eliminated the expectation of higher costs from LNG imports.

Oil production increased due to high profits, but current prices are below costs, thus falling US oil production.

Saudi costs have increased, but their costs were $3 so $10 is a huge increase in cost but far below price. But Saudi profit needs to be $40 for it to survive.

Nor does it measure the cost of contaminated drinking water caused by fracking, the cost of earthquakes caused by fracking, or the cost of other health risks directly associated with fracking (including the release of toxic gas). I appreciate that this report wasn't intended to measure the net benefit of fracking, but only the positive benefit. In the age of Trump, we can expect many more such reports. And we can expect a complacent and cooperative community of economists. I would point out that the same community of economists rarely, if ever, overlook the theoretical cost of regulations when assessing their impact on the economy. Unfortunately, the adversarial approach to economics has become the dominant approach of a certain community of economists. What they don't seem to realize is that it undermines their own credibility.

Shorter rayward: Morning in AmeriKKKa again! James G. Watt is back, powering the USA USA USA!

It's an Inconvenient Truth however that a cheap and easy way to raise GDP without dingdonging (spell check's suggestion!) with productivity is to lower the cost of energy, which is something like 10-15% of GDP directly and more so indirectly. No need to fiddling with patent laws and making people invent more, just lower the price of gas, done.

Bonus trivia: they say that rare DC earthquake a few years ago was due to ExxonMobile experimental fracking...or that's a rumor I heard.

This just came out. I'm sure the EPA won't be permitted to reach such conclusions in the future.

By the way, I'm not opposed to fracking, but we need to understand these risks through thorough study in order to properly manage them.

Fracking often happens where water is not all that easy to get in the first place. Much of the area is over the Ogallala Aquifer. None of the water or environmental impact is much priced into the cost of operations or the price change of the result.

The happy version of the story is that *done properly* fracking most likely does not pose any viable long-term threat to groundwater.

"Done properly?"

Energy companies are not noted for the care they take to do things "properly."

Sorry, but you might know some things that are not true. Oil companies are good neighbors. They clean up their messes, leave roads, etc. in better condition than they found them and always have their check books on them. My family farms in a boom area. Every contact they have with oil/gas companies is positive.

Fracking is a risky business like operating a commercial airline or building skyscrapers. Things can go wrong, but things don't go systemically wrong. Airplanes will go down and cranes will crush construction workers but anyway we keep crossing oceans on planes and constructing buildings.

Deficient well construction may pollute groundwater and the injection of fracking wastewater into wells may cause earthquakes. What is needed is groundwater quality data before and after fracking. If groundwater quality is affected: pay a compensation. If fracking wastewater injection cause earthquakes: pay damages. The problem with frackers is that they don't like this kind of regulations. As long as they can they will sail with the flag of "fracking is 100% safe" to avoid paying for damages, even if pollution or earthquakes occurs in 0.001% of wells.

Today the discussion is trapped between two extremes. Frackers say it's 100% safe and tree-huggers say 100% of fracked wells pollute groundwater. None of them is right. What the EPA suggests is collecting data and doing environmental forensics. It's just like plane crashes, the only way to know what happened is forensics.

Yes, this is an example of adversarial economics. It's surprising to me how readily economists accepted the adversarial method. I'm an advocate by training and profession (I'm a lawyer) so I'm comfortable with the adversarial method for resolving disputes, but I was under the (false) impression that economists weren't advocates for a particular side other than the side of the truth. Trump says there are no truths, only opposing sides to an argument. I suppose there are many economists who will find a home in the Trump administration. [Cowen recently had a blog post supporting the side of truth. Good for him.]

That Darwin stuff? Nothing school vouchers can't fix.

In antitrust litigation, each side has economic experts. They seem to take to the adversarial method quite well.

Yes, there are 2 sides to every argument-- the crony capitalist welfare queen who has bought the government side-- including oil companies-- and the side you almost never hear about, until your ground water is poisoned or you get sick. One of these sides is well compensated for pushing its point home. The other is not.

Fracking could make a lot of money for health care companies by making people sick.

It's quite larger in scale than a plane or skyscraper. And the time delay is significant, it could manifest in birth defects years later. And how to determine if a building collapsed due to shoddy original construction vs effects of an earthquake?

The only winners here are the deplorables (lawyers).

If the ground water is not affected then there is no mechanism for birth defects to be caused. If you think for some reason that liability is impossible to determine in this case then it seems the obvious solution is to allow fracking to continue since the benefits are so large and obvious and the costs so small and uncertain.

Regulations easier to model than affects of pollution, and economists need to print something (I.e., low hanging fruit) to make money. Power of incentives etc

The health-related costs you mention are very small, *maybe* as high as a couple million dollars a year, and if you were to include the net environmental costs of natural gas fracking my guess is you'd end up with a negative number.

Also the earthquakes are usually exceedingly minor and release pressure that otherwise would result in larger earthquakes.

That's a theory, but hardly a consensus view. Geologists have known since the '60s that wastewater injection can cause earthquakes, but the huge upsurge in injection from the fracking boom is - quite literally - breaking new ground. States have already moved to restrict injection wells. If those restrictions aren't enough, drillers will have to use other treatment methods to deal with produced water, likely at significantly higher cost. It could really throw off the economics of shale oil production.

Yes, Cliff and celestus, these are the stories propagated by the fracking companies and their agents. The well spread stories. Harm to individuals is almost kept a secret.

'quantify the effect of a significant technological innovation, shale oil development, on asset prices'

Well, thankfully we don't need to use any other but asset prices.

'It does not count the losses to coal companies for instance'

For whom everyone's hearts should undoubtedly be bleeding, except for those blinded by mood affiliation.

'or the “greener energy” benefits from fracking'

Compared to mountaintop removal, sure. Compared to wind power, not even close.

Why would we even want to look at the economic benefits of something that most probably destroys our planet? Who cares if we could save 12 dollars a months by ruining our soil and water?

Liberal, you are harming the planet. Please kill yourself.

-- signed: everyone that has to listen to your constant drivel.

Ha ha, so true. He should totally kill himself. Filthy liberal.

Do you believe that high energy costs don't lead to higher death rates among the poor?

Cheap and abundant energy powers the modern world. To demand expensive energy is to condemn to death millions of people you neither see or think about while posturing on the internet (also powered by the energy you dislike)..

I love cheap energy. And telling liberals to kill themselves.

I'm old enough to remember when liberals were concerned about little old ladies freezing to death in their homes because they couldn't afford heating fuel.

@Cooper: conservatives aren't concerned about old ladies freezing to death?

The new form of argument. People used to try to use facts or rationality to back up their arguments. Now simply telling liberals to kill themselves, or saying that liberals are filthy, is the fashion in discussion here.

At least we liberals know we are in the right, when the arguments for Right Wing positions keep being ad hominem.

Somehow this doesn't stop the likes of Bernie Sanders from opposing fracking.

The number of jobs created or carbon emissions reduced just doesn't matter I guess.

Carbon emissions reduced??? If the price of hydrocarbons becomes cheaper, the use of them increases.

Im sure this is correct, but i dont think its a 1 for 1 correlation. Does the decrease of power by 50% cause a 50% increase in power usage? I doubt it.

Most of the carbon emissions reduction in the US has been due to gas from fracking replacing coal.

I know this is over your head, but the natural gas availability due to fracking has made shutting coal plants possible.

Yes, carbon emissions have reduced in the US. The recession played a role in the 2008/2009 drop, but the economy has recovered from that and we are still many years of growth from returning to the high set in 2007.

And yet the non-fracking, stagnant EU economy sees it's emissions continue to rise - another 0.7% last year.

There's an irony here - delicious or bitter depending on your ideology - but those dumb Americans are lowering their CO2 output while benefitting from fracking (on state and private land anyway), while the sophisticated EU elite accomplishes neither.

+2. Fracking is not perfect but it's a huge net positive. Energy companies do need to be informed of and bear the cost of negative externalities, however.

Fat chance of that, msgkings. Especially now, with Trump nominating an anti-EPA guy to head the EPA.

Look at long-term trends and then re-view that 0.7% in a context of oil dropping in price by half.

Nothing ironic at all, at least not in the sense you suggest.

In (what was I believe an op-ed) on some years back was a piece claiming that there was zero coupon bond money roughly proportional to the $3.5T from the mentioned NBER report.

It could be that they're measuring nothing more than the single-impulse effect of that as a perturbation. Looks like a bubble to me.

There are also substantial consumer surplus / benefits that have occurred. Just one example ( among several ) is the reduction in national energy costs that have occurred solely in the electrical power market due to input cost reductions. The price of energy is set by the most expensive production source on a hourly basis and all other cheaper sources ( hydro, solar, wind, nuclear, and other gas plants ) will receive this higher price that has been set in the hourly auction for all of their output. Natural gas is the marginal unit. Order of magnitude...

annual electrical consumption per capita ( MWh per capita ... ~ 15) * USA population ( ~ 330 million ) * price reduction in natural gas ( high of $14 per mmbtu pre-fracking to $3 per mmbtu post .. let's use $7 to be conservative ) * natural gas input use by typical margin unit setting prices in ISO auctions ( 7 to 10 mmbtu per MWh ... let's use 7.5 )

15 * 330,000,000 *7 * 7.5 = ~ $260 billion USD per year in savings to consumers

And for environmentally consciousness people... be aware that ~80% of the Obama administration's CO2 reduction plans from 2005 CO2 levels as envisioned in the Clean Power Plan have already been acheived without a single administrative action yet in 2022. This reduction is due to natural gas displacement of coal... impact of wind and solar has not been significant.

Cheap natural gas means cheaper inputs for many industries. We had a twenty year period in which no new fertilizer plants opened up in the United States. Now we have a bunch of new plants. Billions of dollars in capital investment and thousands of new jobs that would have gone overseas instead.

Those new plants are driving down the cost of producing fertilizer which means higher profit margins for farmers and lower food prices. The positive supply shock of cheap natural gas has lifted a lot of boats.

The US chemicals industry is growing, the European chemicals industry is stagnate.

There is no great stagnation... anymore?

Maybe you need to show some 2016 data?

'U.S. production of tight oil and shale gas has increased significantly from 2010 to 2015, driven by technological improvements that have reduced drilling costs and improved drilling efficiency in major shale plays, such as the Bakken, Marcellus, and Eagle Ford.

Production from tight oil in 2015 was 4.89 million barrels per day, or 52% of total U.S. crude oil production. From 2015 to 2017, tight oil production is projected to decrease by 700,000 barrels per day in the Reference case, mainly attributed to low oil prices and the resulting cuts in investment. However, production declines will continue to be mitigated by reductions in cost and improvements in drilling techniques. The use of more efficient hydraulic fracturing techniques and the application of multiwell-pad drilling, as well as changes in well completion designs, will allow producers to recover greater volumes from a single well.'

If I understand the gist, energy powers the economy?

I guess that is what peak oilers said, but they got the slope wrong.

Isn't that the stance of literally everyone? And yes, even our Sun eventually burn out. There's even peak solar... it just will take a few billion years.

The difference between energy costs being important and energy costs being everything?

I am not sure everyone agrees on the latter. Some hope/wish that you can run a modern economy on expensive energy sources.

One interesting aspect of the fracking phenomenon is it's effect on the Indiana Amish. Fracking operations in the Williston Basin of North Dakota get the sand necessary for the process from land owners in southwestern Wisconsin and neighboring areas of Minnesota. Some of these land owners are devotees of the sport of draft horse pulls. Usually teams of huge Belgian horses pull stone boats loaded with concrete weights in contests with the team that pulls the most weight a specified distance. Sales of fracking sand have given some of these horse pullers more money to spend on better horses. The producers of the most powerful horses are the Indiana Amish, who use them as a normal part of farming. As horse pullers try to build up better teams they financially compete for horses and the Amish are the winners.

Fracking saved the world. In 2008 we were paying 145 dollars for a barrel of oil, and prices were going parabolic. The impact on economy, and on human misery, was profound. Had the recession not happened, it is likely that there would have been massive global uprising as the price continued to climb. The recession gave the world time to finish the solution that entrepreneurs in the US had been working on for decades : fracking. This allowed humanity to leave the misery of the recession with greater energy supplies, the resultant economic growth, and the global prosperity that followed. The total energy expenditure of humanity has steadily grown since the Great Recession, and hundreds of millions have been raised out of poverty. This is, almost entirely, due to fracking.

Thank our lucky stars that the energy act of 2005 allowed the future that we have today, instead of some dark, dystopian, continual war that the left would have preferred.

I'm not sure how I feel about fracking. I guess my concern is that the existence and extent of negative externalities, including the timeline over which they will be suffered, is in dispute. I am not confident that those who end up suffering any negative externalities will be compensated. So we may end up with an instance where benefits are privatized while costs are socialized, and those they are socialized onto will tend to be the ones with minimal political power to do anything about it.

I want lower energy prices but I would probably oppose a fracking operation near my home. I have groundwater, probably already poisoned by agricultural activities. If people want to frack a few hundred miles away though, more power to them.

"I want lower energy prices but I would probably oppose a fracking operation near my home. If people want to frack a few hundred miles away though, more power to them."...

If 1 out of every 1000 Americans says the same thing, development is impossible due to basic population density. You can replace the " I like the results of x, but don't like x near my home" with many concepts...Walmart, Airbnb renters, medium and high rise residential construction, bars, railroads, low income housings, homeless shelters, energy production.... you can't have your cake and eat it to. you complain about corporations enjoying the positive benefits without shouldering their fair share of the costs. and then you say in the very next paragraph, that you're happy to enjoy the benefits of lower energy prices but would rather someone else pay the possible/hypothetical negatives several hundred miles away. somewhat hypocritical....

People don't want strangers parking on the street in front of their house but happily park their own cars in front of houses in other parts of town.

Come back when corporations start agreeing to pay those costs, instead of denying, stalling, lobbying, and doing everything else in their power to avoid paying.

Byomtov, I guess they'll have to come back when hell freezes over then.

Just stating a realistic view, which I suspect is shared by most people when not wearing their social planner cap. If my second paragraph describes the feelings of most Americans, then we probably shouldn't be allowing fracking until we tinker with the allocation of externalities such that people don't oppose, or even want, fracking operations near them.

Externality cost concerns me, as does overall regulation. Pipelines are governed by patch-work and there does not seem to be any uniform standards. I think DAPL was required to post some ridiculously low escrow amount, like $50,000, against possible oil spill damages.

That Michigan oil spill struck me as ridiculous. They had a massive hole in the pipe and started up the pipeline anyways, because they thought their readings were faulty. If you don't trust the readings, what the hell is the point of even having the sensors?

No need for an oil or gas company to be careful in the current political environment. As you can see from most comments here today, most people, and certainly the PEOTUS, are fine with those companies trashing everything 24/7/365.

Article in New Economic Perspectives. Google for this title, to get to it.

After Meeting with Gore/DiCaprio Then Choosing “Fossil Fool” Cabinet, Trump is saying “I’m Evil”

Fossil Fool Cabinet. I like it.

Another good one today from New Economic Perspectives. Google for this title, to get to it

White Collar Crime Will Have a Field Day Under Trump

Some notes on the paper itself, and some notes that might clarify info for some of the commenters

First, I'm gated from the paper itself, so my comments are based only on what's in the abstract. Tyler is quite correct that there are a lot of ways this would be a massive undercount of social value
- The authors seem to be specific about specifying oil shale, both in their verbiage and in the time-frame they select as relevant (2012+). Most "shale oil" companies produce both oil and natural gas (most "oil" or "gas" wells produce some of both. The nomenclature is a simplification describing which hydrocarbons are the most important in that particular well). The oil side of the shale revolution is only half (or even less than half) of the story. The energy content of natural gas produced in the US exceed that of oil production by a factor of about 30%, so if the authors were attempting to capture just the oil component of shale they would be drastically under-counting the overall fracking benefit.
- Only about 2/3 of US natural gas production is accounted by production that is equity of public corporations (i.e. reported as corporate production on their financial statements), and that includes many corporations whose primary listing is overseas (BP, Shell, BHP Billton, Statoil, a number of Canadian companies). I don't have the statstic for oil production handy but it is likely a little higher but comparable. Depending on how the study looked at these companies and the 1/3 privately-held production, the $3.5T in public corporate equity could substantially count the overall corporate equity created.
- The overwhelming majority of shale production to date has been on privately-held land. Depending on the terms of the leases, the owner of the mineral rights (by default the landowner, but many/most states allow landowner/mineral rights severability) will capture 20-35% of the value of a well (a typical lease involves an upfront cash payment and then 20% of the revenue from the well's production, with the size of the cash payment primarily being a function of how proven or speculative the prospect of finding oil is). It is comparatively rare for public oil&gas companies to be outright owners of mineral rights (at least in meaningful amounts), so that additional value from the well would be almost entirely additive in social value on top of the corporate equity.
- The consumer surplus almost certainly greatly exceeds the increase in corporate equity. The marginal cost of producing (and wholesale price of) natural gas has dropped by (depending on how you estimate it) 60-70% in real terms due to shale-drilling/fracking technology. Corporate equity by definition does not capture the value from the industry-wide marginal cost drop. On the oil side, the cost drop due to shale has been about 40% (oil shale lagged gas by ~3 years), with accounting for the consumer surplus very tough because quantifying the impact of fracking/shale oil on the world oil price is not even remotely close to straightforward. Furthermore, the equity of a company is by definition net of costs (labor & equipment), which is going to be only a fraction (1/3 by rule of thumb for most companies) of the revenue.

Second, various points to previous commenters:
- The recently released EPA study is essentially pure politics. There was no new information added in between the draft and the final, and the interim period was simply a matter of political muscle between environmental activists, industry, and the admin (the O admin didn't advertise it but for various reasons is very much pro-shale), which the activists won. That the conclusion changed without any new evidence should tell you that neither the preliminary (no contamination) nor the final (some contamination) conclusion had anything to do with the evidence and everything to do with politics. The conclusions and executive summary should be essentially ignored and your own individual conclusion drawn from the meat of the report. If you don't have the commitment to read and digest it, know that neither do any of the journalists covering it, so you won't be informed by reading 'about it' from any non-specialist news source.
- The USGS has extensively studied the earthquakes in OK and north TX and concluded that a) the cause is not fracking per se but the disposal wells for the wastewater and b) it is a problem limited to the geology of that particular area (i.e. it's not a problem in PA, ND, CO, West TX, or South TX). It is more than a little bit mind-boggling that alternative wastewater disposal hasn't been mandated, but that is/will be the solution to that particular problem

environmentalists would quote this as a subject of ridicule..

One commenter on the radio this morning pointed out that if the US resumed investment in fracking it could tip the oil market towards competition rather than cartel/oligopoly, i.e. increased US output could shatter OPEC's recent tentative moves to reduce production and the price would go back down.

Continued low prices would hurt the welfare of various Mideast oil states, ISIS, Venezuela, and Russia among others.

But is that an outcome that the Trump administration would want?

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