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The Economic Effects of Hydrofracturing on Local Economies

A Comparison of New York and Pennsylvania

By:Diana Furchtgott-Roth & Andrew Gray

Complete report in PDF format
May 06, 2013
 
 

Executive Summary

 

In 2013, New York’s state government will decide whether to permit extraction of natural gas by hydraulic fracturing or, instead, turn its current moratorium into a permanent ban on this technology. In weighing their choice, New York officials have an abundance of useful data from neighboring Pennsylvania. There, nearly 5,000 wells have been hydrofractured since 2002. If New York lifts its moratorium, companies will be drilling the same type of wells to exploit the same subterranean source of gas—the Marcellus Shale. Pennsylvania’s experience is a good guide to what would happen in New York. In this paper, we analyze the effect of hydrofracturing—at modest, moderate, and high levels—on jobs and income growth in Pennsylvania counties. We then use these data to project the benefits that New York counties stand to gain if the state again permits hydrofracturing.

 

We find that:

  • Pennsylvania counties with hydrofractured gas wells have performed better across economic indicators than those that have no wells.

  • The more wells a county contains, the better it performed.

  • Between 2007 and 2011, per-capita income rose by 19 percent in Pennsylvania counties with more than 200 wells, by 14 percent in counties with between 20 and 200 wells, and by 12 percent in counties with fewer than 20 wells.

  • In counties without any hydrofractured wells, income went up by only 8 percent.

  • Counties with the lowest per-capita incomes experienced the most rapid growth.

  • Counties with more than 200 wells added jobs at a 7 percent annual rate over the same time period.

  • Where there was no drilling, or only a few wells, the number of county jobs shrank by 3 percent.

  • Using the Pennsylvania data to project hydrofracking’s effect on New York counties, we find that the income of residents in the 28 New York counties above the Marcellus Shale has the potential to expand by 15 percent or more over the next four years—if the state’s moratorium is lifted.

  • Our data also suggest that had New York allowed its counties to fully exploit the Marcellus Shale, those counties would have seen income-growth rates of up to 15 percent for a given four-year period, or as much as 6 percent more than they are experiencing. 

 

INTRODUCTION

 

Large parts of Pennsylvania and western New York are located above the Marcellus Shale, a vast subterranean expanse of rock that is estimated to contain up to 489 trillion cubicfeet of natural gas. Pennsylvania has allowed companies to extract natural gas with the technique known as hydraulic fracturing, hydrofracturing, or, as its vociferous opponents like to call it, “fracking.” Usually, this method is combined with horizontal drilling (in which the drill turns off the vertical to extend horizontally through the rock formation, allowing more of it to be tapped). Today, many Pennsylvania counties are bustling with this “unconventional drilling.”

 

In neighboring New York, all is quiet. Although New York once al- lowed hydraulic fracturing and horizontal drilling,2 the state placed a moratorium on the technique in 2010. This year, the state government will either end that moratorium or make it permanent. While New York ponders, drilling companies hold their pre-2010 leases on land, uncertain whether they will ever be able to use the resources beneath.

 

Any reasonable decision about hydrofracturing will weigh its costs against benefits. One of these benefits is economic growth in the areas where modern drilling techniques are used. A broad analysis of hydraulic fracturing by the Yale Graduates in Energy Study Group compared the cost of repairing potential environmental damage with a projection of likely benefit to consumers as well as producers.3 The study concluded that benefits exceeded costs by a factor of up to 400.

 

This paper aims to inform the New York debate by assessing the economic benefits of hydrofracturing on counties in neighboring Pennsylvania. We find that: 

  • Those counties in Pennsylvania that contain hydrofractured gas wells have performed better across economic indicators than those that do not.

  • Economic performance correlates with a county’s number of such wells and therefore is best among the counties most prolific in hydrofracturing.

  • Pennsylvania’s counties are narrowing the economic growth-rate gap that existed between them and New York’s counties, and this is most pronounced in counties where many hydrofractured wells have been drilled.

  • Income of residents in the 28 New York counties above the Marcellus Shale has the potential to expand by 15 percent or more over the next four years if the state’s moratorium is lifted.

 

Between 2007 and 2011, per-capita income rose by 19 percent in Pennsylvania counties with more than 200 wells, by 14 percent in counties with between 20 and 200 wells, and by 12 percent in counties with fewer than 20 wells. In counties without any hydrofracking wells, income went up by only 8 percent. It is important to note, too, that counties with the lowest per-capita incomes experienced the most rapid growth. Moreover, counties with more than 200 wells added jobs at a 7 percent annual rate over the same time period. Where there was no drilling, or only a few wells, the number of county jobs shrank by 3 percent.

 

Similar benefits could also be realized by residents of New York State, and they would not have long to wait: shale gas drilling start-up expenditures make the first hydraulically fractured wells especially lucrative for a local economy. We calculate that a New York county that permits the drilling of a mere 20 wells could, in a four-year period, see per-capita income rise 3 percent more than it would have if no wells had been drilled. If all New York counties above the Marcellus Shale were to pursue this course, our estimate is that they would collectively have $4.2 billion more in income just in the last year of that four-year period. On the other hand, drilling 400 wells in a county, which some Pennsylvania counties have done in a similar time frame, could raise incomes by over 6 percent, with commensurate increases in statewide gains. Tax revenues would increase with incomes.

 

BACKGROUND AND METHOD

 

University of Wyoming professor Timothy Considine and Penn State professor Robert Watson have completed multiple studies specifically concerning the economic effects of the Marcellus Shale. They estimate that, in 2009, more than 44,000 Pennsylvania jobs were created because of the local shale gas drilling industry, through direct employment and the indirect and induced effects of the industry’s equipment purchases and land royalties. Their input- output models also show that $3.87 billion in total value was added to the Pennsylvania economy because of the Marcellus drillers’ activities.4

 

Modeling the New York economy in a similar fashion, Considine and Watson project that a reopening of that state’s shale formation to hydrofracturing could result in $11.4 billion in economic output and create 15,000 to 18,000 jobs in southwestern counties (Allegany, Steuben, Chemung, Tioga, and Broome) alone.5

 

The New York State Department of Environmental Conservation (NYSDEC) commissioned a study of potential hydrofracturing-spurred growth in the state in 2009, finally addressing the full results in a 2011 release. The authors estimated that with an average projection for growth, hydraulic fracturing would directly create nearly 25,000 jobs in well construction and operation, as well as 29,000 jobs in indirectly influenced industries such as transportation.6 These 54,000 jobs would, in 2010, have represented approximately 0.7 percent of the labor force. This is a significant number at any time; but in 2010, it would have been especially high, with New York’s unemployment rate then exceeding 8 percent.

 

Our inquiry focuses on job and income growth—the direct benefits from expanded drilling operations. Thanks to the contrasting policies of Pennsylvania and New York, there is no need for hypothetical projections to examine what exploration of the Marcellus Shale might do for New York’s economy. Moreover, counties within Pennsylvania differ widely in the extent of their exploitation of natural gas resources. These circumstances provide a rich vein of comparative information with which to estimate the potential benefits of hydrofracturing in New York.

 

Using data from the Pennsylvania Department of Environmental Protection, the Bureau of Labor Statistics, and the Bureau of Economic Analysis, we have found a correlation between the presence and scale of hydraulic fracturing operations in a particular county, on the one hand, and improvement in economic indicators, on the other.

 

First, we compare average measures of economic growth among counties that are at different levels of Marcellus Shale development. This allows us to estimate whether the existence of shale energy reserves, along with the use of hydraulic fracturing to access those reserves, has offered an economic benefit to residents of individual counties.

 

Second, we perform a regression analysis, which suggests what specific economic effects might be predicted for Marcellus Shale counties in New York if the drilling moratorium ended. These analyses make clear the economic benefits of hydraulic fracturing.

 

Economic effects are just one part of a decision on the societal usefulness of hydraulic fracturing. But well-paying jobs and more tax revenue are important to consider in such an evaluation. Therefore, measuring the effects of hydrofracturing on local economies is an important step toward a fair and useful assessment of this approach to energy extraction. 

 

THE DATA

 

The number of horizontal, hydraulically fractured wells drilled in each of the 67 Pennsylvania counties from 2002 to 2011 is available in tables at the Pennsylvania Department of Environmental Protection website.7 The “unconventional” category encompasses the relevant sets of hydrofractured wells. Numbers of such wells were low until 2007, when unconventional well-drilling began in earnest in Pennsylvania. (See Table 1 for annual and total unconventional-well counts for 2002–11.)

 

 

Based on the total number of unconventional wells drilled between 2002 and 2011, we divided counties into four groups: those counties that did no drilling of this type at all (30 counties); those that participated marginally in unconventional drilling, with fewer than 20 wells (15); those that drilled between 20 and 200 wells (16); and those that drilled more than 200 (6). All six counties in the last category contained at least 409 unconventionally drilled wells by 2011. 

 

Map 1 displays these distinctions in a color-coded visual format.

 

 

Data were collected and analyzed for a variety of county-by-county metrics, including income and jobs totals, population levels, per-capita income levels, and unemployment rates, all on an annual basis.8 County- level economic data are available only through 2011, so that is the last year considered in this study. All periodic economic assessments were made for 2007–11, during which time significant amounts of well-drilling were done in Pennsylvania counties.

 

We measure changes in economic growth in 2007–11 through the use of three variables: the total number of jobs; the rate of unemployment; and per-capita personal income in each county. Per-capita income values are not adjusted for inflation, but comparisons of percentage change across counties and states will not be influenced by changes in this common variable.

 

In the analysis, we had to determine how much, if any, of each county sits on the Marcellus Shale. Most of the state’s counties are either on the Marcellus entirely or not on it at all. In the few cases in which county borders encompassed some land on the Marcellus Shale and some not, we made a visual judgment about its status. We then designated a county as having access to the Marcellus Shale if one-third or more of its land sits on the formation. These assignments were made based on maps provided by the Pennsylvania Department of Environmental Protection.9 For our comparative analysis of New York counties, we used a similar map provided by the New York State Department of Environmental Conservation.10

 

 

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Endnotes:

1New York State Department of Environmental Conservation (NYSDEC), "Marcellus Shale,"
 http://www.dec.ny.gov/energy/46288.html.

2Idem, "What Are Horizontal Drilling and Hydraulic Fracturing?," http://www.dec.ny.gov/energy/46288.html#horizontal.

3Robert M. Ames et al., "The Arithmetic of Shasle Gas," Yale Graduates in Energy Study Group, June 15, 2012, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2085027.

4Timothy J. Considine, Robert Watson, and Set Blumsack, "The Economic Impacts of the Pennsylvania Marcellus Sahle Natural Gas Play: An Update," May 24, 20109, http://energy.wilkes.edu/PDFFIles/Library/The%20economic%20impacts%20of%20the%20PA%20marcellus%20shale%20natural.pdf.

5Timothy J. Considine, Robert W. Watson, and Nicholas B. Considine, "The Economic Opportunmities of Shale Energy Development," Manhattan Institute, Energy Policy & the Environment Report, no. 9 (June 2011), http://www.manhattan-institute.org/html/eper_09.pdf.

6NYSDEC, "Fact Sheet: Economic Impacts of High-Volum Hydraulic Fracturing in New York State," September 2011, http://www.dec.ny.gov/docs/materials_minerals_pdf/econimpact092011.pdf.

7Wells Drilled by County report Viewer, http://www.depreportingservices.state.pa.us/ReportServer/Pages/ReportViewer.aspx?/Oil_Gas/Wells_Drilled_By_County.

8All economic data were retrieved from the Interactive Data tables on the Bureau of Economic Analysis website (http://www.bea.gov/iTable/iTable.cfm?ReqID=70&step=1), with the exception of unemployment rates, which were obtained from the Bureau of Labor Statistics (Local Area Unemployment Statistics, http://bls.gov/lau).

9Pennsylvania map: http://www.dep.state.pa.us/dep/deputate/minres/iolgas/BOGM%20Website%20Pictures/2010/Marcellus%20Shale%20Formation.jpg

10New York map: http://www.dec.ny.gov/energy/46381.html.