The Economic Impacts of Shale Gas Drilling, a Case of Irrational Exuberance
March 19, 2012
The rosy picture from the natural gas industry: A nearly endless supply of energy, jobs, security, and economic growth. Diving in to the projections provided to us by drilling proponents requires a critical look at their underlying assumptions. Economists and other experts studying how much we have, how much its worth, how many jobs created, and how much economic growth generated use complicated algorithms to provide numbers for each of these values.
Natural gas drilling is a race against depletion. There is no better illustration of the law of diminishing returns. When first drilled, production potential can range from 2 to 10 million cubic feet per day. However, shale gas well production declines between 63% and 85% just in the first year. Estimates by some of a 40-year lifetime for a shale gas well are completely unsubstantiated. Chesapeake Energy thought just a few years ago that all 17 counties of the Texas Barnett Shale play would remain equally productive. Instead, we see that production concentrates around a core two and a half county area. The Haynesville Shale play in Louisiana, in 2008 promoted as the fourth-largest gas field in the world, has now retracted to an area 10% of the original projections. This is not brought about simply by lower prices; it’s about irrational exuberance. To get a sense of how speculative supply estimates are, the U.S. Energy Information Administration has revised downward its 2011 estimates of the Marcellus shale gas reserve from 410 trillion cubic feet (tcf) to 141 tcf. In 2011, we thought 410 tcf. Now, we’re thinking more like 141 tcf. What a difference a year makes.
The Sage Policy Group in Baltimore recently released their report sponsored by the Maryland Petroleum Council describing the fiscal and economic impacts of fracking in Maryland. The report relies heavily on the experiences of Pennsylvania. According to the Pennsylvania Department of Environmental Protection, the Keystone state had 27 Marcellus shale wells in 2007. By 2011, the number of shale wells grew to 2,073. While Sage tells us that these wells may yield millions of cubic feet of natural gas in the first year, they leave out production levels for years two through five. Or years ten through twenty. Instead, Sage cites reports from the United States Geological Survey that tell us a typical shale well produces 4 million cubic feet (mcf) per day for a total lifetime production of 2.5 billion cubic feet (bcf). How long then is the lifetime for a typical shale gas well? Let’s divide 2,500,000,000/4,000,000= 625 days. This is because the shale wells dry up incredibly fast. Just to keep production levels constant, the industry has to keep drilling at an enormous rate.
The Sage Policy study estimates that by 2025, the fracking industry will generate 1,814 jobs in Maryland related to well drilling and maintenance, royalty payments, and increased government spending. It’s important to note that Sage acknowledges that many jobs and related services will initially come from already operating entities in Pennsylvania and West Virginia. In practice, a drilling rig moving into Maryland from a nearby location in Pennsylvania would not lay off the experienced workers in Pennsylvania to hire an all-new staff of Maryland residents. In fact, industry-sponsored studies often make similar claims resulting in “new job” numbers where what we are really talking about is the same employees moving from rig to rig. Sage ignores the potential loss of jobs related to the vital tourism and outdoor recreation industries in Western Maryland.
Economic Benefit/ Environmental Cost
Since Maryland has seen little drilling to date, Sage turns to studies from Pennsylvania to determine economic and environmental impacts. Sage cites a report concluding that a typical Marcellus well creates $4 million in economic impacts versus merely $14,000 in environmental damages. This creates an utterly laughable ratio of 286:1. The point seems to be that fracking is 286 times better for the economy than it is bad for the environment and public health.
More than $46,000 worth of that $4 million economic impact comes from the value of not using coal. Just from avoiding the air pollution and community health impacts of coal, the fracking industry calculates a net economic gain more than triple fracking’s environmental/public health cost. When calculating the $14,000 in environmental damages, the study speaks of air, water, and forest impacts, but nothing of public health. The study simply assumes no one gets sick from fracking-related activities. On the one hand, ditching coal apparently creates substantial community health benefits while substituting fracking causes little detriment.
Well, not exactly. When providing the proper range for the $4 million economic number, the study authors suggest separate figures for whether or not one accounts for the Dimock settlement. The settlement in Dimock, PA includes compensation for 19 Dimock Twp. families whose methane contamination was attributed to faulty Cabot Oil and Gas Corp. natural gas wells. So, what we have here is a study where the economic benefits of drilling must account for legal settlements resulting from contamination. But, that contamination is strangely absent from the assessment of environmental and public health costs.
Economists are supposed to reduce water contamination, public health damage, deforestation, unsightly and noisy truck traffic, asthma rates etc. to cold numbers. Using the right assumptions and inputs lends credibility to their studies. Dismissing Dimock as simply part of the cost of doing business rather than as a significant public health cost is inconsistent and disingenuous. So too with assuming a natural gas well continues to pump for thirty years or more. So too with the jobs promised to a scenic region that enjoys a vibrant and diverse recreational and tourist industry.
The industry has to bet on irrational exuberance of the shale gas boom. People need jobs, investors need dividends, governments need tax revenue, and this country has an ever-increasing demand for energy. But lower prices and environmental damage put their narrative at risk. If we do not have as much supply as they tell us, or if we properly calculate the public health costs, it is possible this bubble may burst.
For more information:
- Study Examines Economic Potential of Marcellus Shale http://www.chamberactionnetwork.com/blog/view/study-examines-economic-potential-of-marcellus-shale/
- The Economic Opportunities of Shale Gas Development http://www.manhattan-institute.org/html/eper_09.htm
- Rebuttal to Claims Made by Sage Policy Group http://citizenshale.org/2012/03/rebuttal-to-recent-industry-claims-by-sage-policy-institute/