Academic journal article Independent Review

More Boon Than Bane: How the U.S. Reaped the Rewards and Avoided the Costs of the Shale Boom

Academic journal article Independent Review

More Boon Than Bane: How the U.S. Reaped the Rewards and Avoided the Costs of the Shale Boom

Article excerpt

The United States has vast quantities of shale gas, but for decades it was not economically profitable. The economics of shale gas changed in the late 1990s, when drillers working the Barnett Shale in Texas figured out how profitably to extract natural gas from shale. They did so by combining horizontal drilling with hydraulic fracturing, each of which were already standard industry practices. The challenge was that regular water could not be injected at high enough velocities to fracture the shale. One of the keys to the shale revolution was discovering the right chemical mix to make the water slick enough to work in the fracturing process. The combination of these standard techniques and the right chemical mix to treat the water used in the process had consequences similar to a new technology of extraction (Fitzgerald 2013). One of the results of this new process--often called "fracking"--was a dramatic increase in U.S. natural gas production. (1)

The boom was in part a result of the leadership of gas and oil companies. Much credit has been heaped on George Mitchell, whom The Economist called the "Father of Fracking" ("Father" 2013). Mitchell, alert to the opportunities presented by fracking shale gas, invested millions on a part of the Barnett Shale known as the Wildcatter's Graveyard (Zuckerman 2013). His investment eventually paid off as drillers working for his company, Mitchell Energy, unlocked the secret to economically profitable shale gas extraction. (2) The process exemplifies the importance of Kirznerian entrepreneurial vision as well as Schumpeterian creative and destructive forces of technology-driven economic change: the shale boom was a boon for consumers, but for coal producers it was something of a bane as fracked gas cut into coal companies' producer surplus.

Fracking shale gas sharply increased American natural gas production (Bartik et al. 2016). By one estimate, U.S. oil and gas production increased 69 percent from 2005 to 2014, with nearly two-thirds concentrated on farmland, much of which was a direct result of the shale boom (Hitaj, Weber, and Erickson 2018). However, the shale revolution has been accompanied by substantial debate about its consequences as well as divergent political responses to these new opportunities. For example, despite sharing a shale play--a large accumulation of natural gas in a shale basin--Pennsylvania has seen a massive increase in shale production beginning around 2007-8, whereas New York has yet to see any production because the state adopted a moratorium in 2009 that remains in place today.

The first section of our paper takes up these debates about the consequences of the shale revolution. We review the economics literature on the shale boom, including studies of the effects on prices, employment in the mining and nonmining sectors, and economic externalities, including the consequences for public health and the environment.

Our reading of the literature is that the shale boom produced substantial benefits, among which are lower energy prices, billions in royalty payments to mineral-rights owners, higher employment in the mining sector, and, according to several accounts, positive employment effects in the nonmining sectors. We also address the existing literature on the external costs of shale gas production. Although these costs are significant, and it may be several decades before we can assess the long-run consequences of the shale boom, the benefits appear to substantially exceed the costs. Our provisional conclusion is that the "shale era"--almost twenty years of shale gas development--has been more boon than bane.

In the second section, the paper argues that it is necessary to consider fracking from a political economy perspective to understand the key features of the shale boom, including why the benefits appear to exceed the costs. Several schools of thought provide insight into the performance of political-economic systems, including institutional economics, Austrian economics, the Bloomington School of institutional analysis, and public choice (Boettke and Leeson 2015). …

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