Economies of Shale: Hydraulic Fracturing Has Unlocked Huge Amounts of Oil and Gas, Helping Boost State Economies Even as It Generates Environmental and Public Health Concerns

By Hartman, Kristy | State Legislatures, June 2015 | Go to article overview

Economies of Shale: Hydraulic Fracturing Has Unlocked Huge Amounts of Oil and Gas, Helping Boost State Economies Even as It Generates Environmental and Public Health Concerns


Hartman, Kristy, State Legislatures


North America's energy outlook has significantly changed over the last decade. With the widespread use of hydraulic fracturing and horizontal drilling, oil and natural gas resources--previously locked within thick, dense shale and tight sandstone formations--are no longer as expensive to develop.

These new technologies have helped boost the domestic supply of crude oil and natural gas, and they continue to reshape the U.S. energy economy. In fact, the United States is the world's largest natural gas producer and third largest oil producer--with oil production reaching a 30-year high.

The processes involved in hydraulic fracturing--injecting water, sand and chemical additives deep into the ground at high pressure to create and expand fissures in the rock, allowing oil and gas to flow to the surface--have led to a shale revolution.

But the rapid spread of fracturing, or "fracking," has also generated concerns and drawn the attention of state legislators and their constituents. This year alone, lawmakers in 31 states have introduced more than 200 bills relating to hydraulic fracturing.

Barrels of Benefits

Oil and natural gas development can offer tremendous benefits to state and local economies, but the recent drop in global oil prices isn't helping some states. After five years of stability, the price of a barrel of oil has fallen by almost 50 percent, dropping from a high of more than $100 in 2014 to a low of $48 in January this year.

Oil and gas revenues and their associated economic activity have taken huge hits in the oil-producing states of Alaska, Louisiana, North Dakota, Oklahoma and Texas. In North Dakota, to boost production, lawmakers recently passed a bill to lower the extraction tax on oil and to eliminate the current practice of tying the tax to the price of crude oil. Opponents of the bill argued that the new tax structure could prevent the state from receiving future revenue. But supporters "thought it would be beneficial to have a stable tax system," says House Majority Leader Al Carlson (R), which, he argued, would ultimately boost production.

Targeting Severance Taxes

Many of the bills would change the severance taxes states place on oil and gas development. Thirty-four states levy a fee or tax on the extraction (severance), production or sale of oil or natural gas, which in 2013 generated more than $16 billion nationwide. In Alaska, North Dakota and Wyoming, severance taxes generate more than 40 percent of total state tax revenue. Alaska tops the list with 78 percent of its total state tax revenue coming from severance taxes.

Only three natural gas-producing states have no severance tax, with Pennsylvania being the largest. The state hasn't totally missed out on benefiting from the boom, however. Since 2012, it has imposed an impact fee on every oil- and natural gas-producing well in the state. Supporters, such as Pennsylvania's Budget and Policy Center, estimate that a severance tax will bring in greater revenue than an impact fee, while severance tax opponents argue that the tax will deter natural gas production.

Pennsylvania's tax structure could change now that Governor Tom Wolf proposed the Pennsylvania Education Reinvestment Act, which includes a 5 percent severance tax on natural gas and charges 4.7 cents per 1,000 feet on the volume of natural gas extracted. Its future is uncertain, however, as the General Assembly has several similar severance tax proposals to consider this session.

"Most Pennsylvanians agree that we should enact a drilling tax as a matter of sound public policy, but the discussion at this point is what that tax will look like and what priorities it would fund," says Representative Gene DiGirolamo (R).

The use of revenue from oil and gas severance taxes varies among states, but includes conservation efforts, education and transportation projects. Colorado, Michigan and Oklahoma, for example, all use a portion of the funds for conservation or environmental remediation projects. …

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