Welfare and Distributional Implications of Shale Gas

TLDR

Technological advances in horizontal drilling and hydraulic fracturing have unlocked large volumes of natural gas from shale formations, while environmental externalities and regulatory gaps remain a concern. The study estimates the broad welfare and distributional effects of the shale gas supply boom. The authors estimate supply and demand elasticities to quantify the price decline from the supply expansion and assess its impact on manufacturing, retail gas, electricity, and commodity chemicals. The shale gas boom raises welfare for consumers in residential, commercial, industrial, and power sectors by about $48 billion annually, while producers suffer a net loss and environmental externalities remain uncertain.

Abstract

Technological innovations in horizontal drilling and hydraulic fracturing have enabled tremendous amounts of natural gas to be extracted profitably from underground shale formations that were long thought to be uneconomical. In this paper, we provide the first estimates of broad-scale welfare and distributional implications of this supply boom. We provide new estimates of supply and demand elasticities, which we use to estimate the drop in natural gas prices that is attributable to the supply expansion. We find large, positive welfare impacts for four broad sectors of gas consumption (residential, commercial, industrial, and electric power) and a negative impact for producers, with variation across regions. We then examine the evidence for a gas-led “manufacturing renaissance” and for pass-through to prices of products such as retail natural gas, retail electricity, and commodity chemicals. We conclude with a discussion of environmental externalities from unconventional natural gas, including limitations of the current regulatory environment. Overall, we find that between 2007 and 2013 the shale gas revolution led to an increase in welfare for natural gas consumers and producers of $48 billion per year, but more data are needed on the extent and valuation of the environmental impacts of shale gas production.