The Economic Benefits of Hydraulic Fracturing

A new economic study attempts to determine if the benefits of hydraulic fracturing of shale gas formations outweigh the costs.

A group of Yale economics graduates, led by Yale Professor Emeritus Paul W. MacAvoy, were curious about whether they could quantify the economic benefit that shale gas has on the United States economy. They recently set out to perform a cost-benefit analysis, valuing and balancing the pros against the cons. They’ve released their findings in a paper called “The Arithmetic of Shale Gas.”

In 2008, before the shale boom really took off, the nominal price of natural gas (that is, the price at the Henry Hub in Louisiana) averaged $7.97 per mcf. In 2011, the price averaged $3.95 per mcf. Multiply that price drop of $4.02 per mcf by the 25.6 trillion cubic feet the country consumed in 2008 and you find that, thanks to the shale boom, America is paying $103 billion a year less for natural gas. Natural gas prices are falling even further since 2011, increasing the potential benefits.

Had drillers not cracked the code on shale gas with horizontal drilling combined with hydraulic fracturing, the United States would instead have been forced to do what the experts expected five years ago: import massive quantities of gas, in the form of LNG from countries like Qatar, Australia, even Russia. Import-dependent nations like Japan and Korea pay upwards of $14 per mcf for LNG. If the U.S. had to supplement domestic supplies with imports, the extra costs could have easily added $50 billion a year to the national natural gas bill.

In the eastern U.S., utilities are concluding that burning natural gas to generate electricity is cheaper (and cleaner) than coal for the first time in history. Inexpensive supplies of fuel and feed-stocks benefits U.S. industry, especially manufacturers and chemicals makers which have been reinvesting in the U.S. Homeowners benefit from reduced heating and cooling and electricity in most of the country. Low natural gas prices in California have offset many of the costs to utilities of bringing more renewable energy online as required by the State, thereby reducing the costs California consumers would have felt. Drilling for gas has created hundreds of thousands of jobs during this economic malaise and it has generated billions of dollars of lease payments and royalties to landowners.

As the report’s authors write: “It is startling to acknowledge that consumer benefits from the technology of shale gas drilling and new gas production can be expected to exceed $100 billion per year, year in and year out, as long as present production rates are maintained.”

The Yale group also looked at the costs associated with increased natural gas production. The authors collected as many reports as they could find describing “accidents, misuse of technology and poor well design and installation.” A 2011 report for the Secretary of Energy counted 19 times that water from hydraulic fracturing operations has been released, out of thousands of wells drilled. None of these instances included groundwater contamination. The Oklahoma Corporations Commission, which regulates the 100,000 oil and gas wells that have been hydraulically fractured in Oklahoma, had zero documented instances of groundwater contamination.

Despite no documented evidence showing hydraulic fracturing caused environmental damage, the authors decided to calculate the costs for a scenario that assumes 100 spills a year out of 10,000 new wells drilled each year. They figure that if 5,000 gallons of polluted hydraulic fracturing fluid were to spill into a field, the cost to scrape up a hypothetical 5,000 cubic yards of contaminated soil and dispose of it at an offsite landfill would be on the order of $2.5 million. Furthermore, if potable water wells were polluted by hydraulic fracturing, the cost to haul in a potable water supply and drill new water wells would be about $5,000 per well. Given 100 incidents in a year, the clean-up costs associated with hydraulic fracturing accidents would be roughly $250 million.

Comparing $250 million a year in phantom damages against the $100 billion in savings and economic benefits, it is reasonable to conclude that benefits exceed costs to by 400-to-1.

The Yale study group also looked at the potential benefit to consumers of replacing oil consumption with natural gas by converting fleets from gasoline and diesel to compressed gas or LNG. The math works like this - It takes 6 mcf of gas to get the energy equivalent of one barrel of oil. The authors assume an average natural gas price of $5 per mcf (nearly double today’s price) and an average oil price of $100 per barrel (about $20 more than today). Thus, you need $30 worth of natural gas to replace $100 of oil, a savings of $70 per barrel. Replacing just 1 million barrels per day of oil demand with natural gas would save $70 million a day, or nearly $26 billion a year.

The Yale study group conclusion: not even inflated costs associated with unrealistically high incidences of pollution can come close to balancing the societal benefits of the shale gas boom.

For a copy of the study, please click here.