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The Benefits of the Shale Gas Revolution

A new study out of Yale University, titled “The Arithmetic of Shale Gas” attempts to put a number on how beneficial the shale gas revolution has been for consumers in America. Mark Perry digs into the details:

The Henry Hub spot price in 2008 was $7.97 per mcf and in 2011 was $3.95 per mcf (see chart above) so that the difference in price over three successive years was $4.02 per mcf. Gas production in 2008 was 25.6 tcf so that the surplus to consumers by the price reduction from shale gas equaled $102.9 billion.

This very large amount of consumer gain—over $100 billion—from the new technology induced price reduction in gas is the elephant in the room. It comprised a substantial majority of total expenditures on this fuel nationwide. In past years those expenditures were limited by the higher costs of production of gas produced from vertical wells. These were in part producer surplus but most were the costs of sustaining well operations in the old technology. Even so it is startling to acknowledge that consumer benefits from the technology of shale gas drilling and new gas production can be expected to exceed $100 billion per year, year in and year out as long as present production rates are maintained.”

That is $100 billion in benefits to consumers, via lower energy prices. They also look at potential pollution problems:

The authors then account for the possible environmental costs to society and compare that to the consumer-savings of $100 billion per year:

“How then do we extrapolate individual disaster scenarios across an entire industry to determine the social cost of possible contamination from fracking in order to deduct it from the consumer surplus of $100 billion for each year? We consider that the reported instances of contamination from fracking relate, at most, to an extremely limited minority over hundreds of thousands of wells. Assuming the worst—that the accidents occur in one year; that the cleanup requires a new water well at $5,000; and that one hundred spills occur at $2.5 million per spill given then that the industry drills 10,000 new wells per year. The cost of frackwater contamination is $250 million. Economic benefits, as estimated in as limited methodology as is reasonable, exceed costs to the community by 400-to-1.”

Granted, these numbers are estimates, but the overall message is clear: hydraulic fracturing has been massively beneficial towards the U.S. economy, and we should certainly continue to embrace it.

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