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Welfare and Distributional Implications of Shale Gas

Author

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  • Catherine Hausman

    (University of Michigan)

  • Ryan Kellogg

    (University of Michigan)

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 calculate 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.
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Suggested Citation

  • Catherine Hausman & Ryan Kellogg, 2015. "Welfare and Distributional Implications of Shale Gas," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 71-139.
    • Handle: RePEc:bin:bpeajo:v:46:y:2015:i:2015-01:p:71-139
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    References listed on IDEAS

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    More about this item

    Keywords

    welfare; shale gas; hydraulic fracturing; fracking; natural gas;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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