Shale gas boom makes some Pennsylvanians richer — and some poorer

October 31, 2012

In recent years, states like Pennsylvania have seen a massive natural gas boom as improved drilling techniques have allowed companies to extract natural gas from shale rock in the Marcellus. The boom has helped drive U.S. natural gas prices down to stunningly low levels and has upended the country's energy sector. But how does it affect the people living in those regions?


Map of the Marcellus shale, which stretches from Virginia up to New York.

For states such as Pennsylvania, there are pros and cons. On the plus side, all that production creates thousands of jobs and boosts income for locals. Residents with land that's suitable for drilling can sign over their mineral rights to a gas company. In exchange, they can receive up to thousands of dollars up front, as well as royalties on the gas that's extracted. For some landowners, that can mean tens of thousands of dollars or more.

But there are risks, as well. Scientists are still trying to assess whether drilling for shale gas — through a technique known as hydraulic fracturing, or "fracking" — can contaminate nearby groundwater. Fracking involves cracking open the shale rock with pressurized water, chemicals and sand in order to extract gas. If the well casings are faulty, or if fracking occurs too close to aquifers, either chemicals or methane could conceivably contaminate nearby drinking water. For now, there's little evidence that this is occurring, in part because studies are still scarce, but it's an ongoing concern. 

Ideally, in trying to craft regulations around gas drilling, state governments would try to balance those risks against the benefits. So far, however, those risks have been fairly difficult to quantify. That's what makes this new NBER working paper by Lucija Muehlenbachs, Elisheba Spiller and Christopher Timmins so interesting. The authors try to look at how shale-gas drilling has affected property values around drilling sites in Pennsylvania. Doing so, they say, can help give a better sense of how to tally those upsides and downsides.

The authors looked specifically at Washington County, just southwest of Pittsburgh. And after running a variety of statistical tests and controlling for as many relevant variables as they could, they found that proximity to a well has a fairly large effect on nearby property values. A property near a drilling pad gets a 10.7 percent boost in value, on average — presumably reflecting the benefit of those lease payments from gas companies.

But the story didn't end there. Properties that depend on groundwater, meanwhile, take a large home-value hit — up to 24 percent — if they're within 2,000 meters of a new well.

This decrease in value, the authors argue, is one way to quantify the perceived risks of groundwater contamination. And for some properties, the downsides of groundwater risk may currently outweigh the upsides from having a well nearby: "To the extent that the net effect of drilling on groundwater-dependent properties might even be negative," the authors write, "we could see an increase in the likelihood of foreclosure in areas experiencing rapid growth of hydraulic fracturing."

Now, the authors are very careful to note that this paper is far from the final word on natural-gas regulations. (Property values are only one slice of the economy, and there are other environmental considerations, like air pollution, that aren't studied here.) But it does suggest that there's an economic case for more careful oversight of groundwater contamination risks.

Further reading:

 — How states are regulating fracking, in one map. Note that there's a lot of variation between states.

 — The International Energy Agency made the case for why regulating fracking could be cheaper than the alternatives.

 — Here's a decent overview (pdf) from New Scientist looking at the potential health risks from fracking, including groundwater contamination. There's not a lot of firm evidence either way, mainly because "studies are few and hard to interpret." 

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Ezra Klein · October 31, 2012