A recent paper examining the effects of the shale natural gas boom on U.S. gas prices determined that the abundance of gas has reduced gas prices by $3.45 per thousand cubic feet since 2007, lowering residential bills by about $13 billion per year.
The paper, written by Catherine Hausman of the Ford School of Public Policy at the University of Michigan and Ryan Kellogg of the Department of Economics at the University of Michigan and the National Bureau of Economic Research, found that gas prices from 2007 to 2013 were 47% lower than they would have been had hydraulic fracturing not led to exponential growth in domestic gas production.
Hausman and Kellogg considered four sectors of gas consumption: residential, commercial, industrial and electric power. Combined, the estimated savings from the lower gas prices add up to $74 billion per year. Residential savings came in at $17 billion per year; commercial at $11 billion; industrial at $22 billion; and electric power at $25 billion.
Gas producers, on the other hand, were estimated to have experienced a significant decrease in surplus in spite of the increased production. The decline in prices likely has the most substantial effect on areas that produce large amounts of conventional gas without shale development. However, as the overall difference for producers is only about $26 billion annually, the net overall gain is still $48 billion.
While it might be expected that colder states would see the most benefit from the reduced gas prices, Hausman and Kellogg found that the West South Central area, consisting of Arkansas, Louisiana, Oklahoma and Texas, saw the greatest benefit per person at $432. They were followed by the East North Central area of Illinois, Indiana, Michigan, Ohio and Wisconsin at $259 per person in benefits. The area that saw the smallest benefit was the Pacific, consisting of California, Oregon and Washington, where consumers still saw $181 per person in benefits.
Due to the importance of natural gas as a direct input in chemical and cement manufacturing and an indirect input in virtually all manufacturing for its use in generating electricity, the paper also examined the impact of shale gas on the overall manufacturing industry, which has been declining in the U.S. for decades. Specifically, Hausman and Kellogg examined “the extent to which the new availability of low-cost natural gas has spurred the expansion of U.S. industries with gas-intensive production processes,” the paper said.
According to the determination made by the researchers, the most energy-intensive sectors of manufacturing expanded by 30% as a result of lower gas prices from 2006 to 2013. The most significant change was found in fertilizer manufacturing, which experienced a 233% increase in capital expenditure from 2007 to 2012, the paper said. “It is therefore clear that manufacturing sectors that are particularly gas intensive have expanded relative to other manufacturing sectors since the onset of the shale gas boom, the paper stated.
The paper also considered environmental impacts of hydraulic fracturing and difficulties regulators face. In considering the potential impacts on climate change hydraulic fracturing could have, the paper addressed a range of concerns raised by environmentalists, from methane leaks during gas production to displacement of coal in domestic power generation. The overall effect of hydraulic fracturing’s impact remains uncertain due to the number of variables, the paper noted.
“The climate change impacts of fracking in 2013 could have been anywhere from an increase in environmental costs of 28 billion dollars per year to a decrease in costs of 0.7 billion dollars per year,” it said.
The uncertainty has led to a wide variety in regulatory approaches to hydraulic fracturing.
“While some states and localities have outright banned fracking, other areas have allowed the industry to rapidly move forward,” the paper noted. “From an efficiency perspective, this variation in policy approaches is unlikely to be optimal.”
To alleviate the uncertainty, the paper said that, “Higher quality, comprehensive data on baseline levels of environmental quality, as well as on emissions from individual producers, would go a long way. In the absence of such data, regulatory options remain limited and are unlikely to be cost effective.”
Contact the author, Caryn Livingston, at clivingston@hartenergy.com.
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