Association for Public Policy Analysis & Management

Recent changes in the drilling technologies and practices have had a dramatic impact on energy development in the United States.  Hydraulic fracturing (``fracking'') in which water, sand, and chemicals are injected into shale reserves to allow for extraction of natural gas and oil, has led to a large increase in U.S. production of gas and oil. In addition to having trillions of dollars in direct value, shale gas and oil withdrawals may reduce domestic energy prices thereby leading to increases in consumer surplus and enhanced growth in other sectors of the economy.         

While fracking has led to substantial economic gains, fracking has also been linked to various types of social damages, including potential contamination of water systems, increased depreciation and congestion of local infrastructure, and problems associated with rapid in-migration, such as increased crime rates. Due to the potential damages associated with fracking, policymakers have considered regulating drilling through moratoria, taxes, or restrictions on drilling techniques and materials. Debates about drilling policies have centered, at least in part, on how energy booms affect the local economy because communities are more likely to support drilling when more individuals in the community benefit from it. 

In this paper, I attempt to inform state and local debates on drilling policies--which often have national implications--by examining how the recent U.S. energy boom has affected local economies. I focus on wage rates, housing values, and rental prices.  Wage rates are important because they represent the primary way in which workers who are employed and unwilling to switch occupations can be affected by the boom.  Housing values are important because land appreciation is a direct avenue by which energy booms can benefit local landowners. Rental prices are another avenue by which booms can benefit landowners and, perhaps more importantly, provide a measure of local price inflation. 

The analysis is based on a difference-in-differences empirical framework and annual panel data on energy production, wage rates, and housing from non-metropolitan regions in the United States.  To preview the main results, I estimate that the recent U.S. energy boom increased wage rates in local economies in booming areas by 7% between 2006 and 2014. The increase occurred across almost all occupations regardless of whether the occupation experienced a contemporaneous increase in employment, suggesting that the overall labor market became more competitive in booming areas, thereby benefiting local workers.  The wage rate effects were largest in percentage terms in the lower parts of the wage rate distribution. With respect to the housing market, I estimate that the boom increased housing values in booming areas by 12% between 2007 and 2012.  Rental rates increased by an estimated 5% over the same time period.  The increase in rental prices was small in comparison to the economic gains.  For example, there is no evidence that the boom increased the cost of rent when measured as a percentage of household income.  In sum, the results indicate that there are many economic “winners” from energy development in local communities and very few losers.