FRACKING BOOSTS JOBS, WAGES AND ENERGY-INTENSIVE MANUFACTURING: Evidence from the United States
Fracking has revived US oil and gas production, bringing more jobs and higher wages to counties with shale resources and creating jobs in energy-intensive manufacturing. That is the central finding of research by Thiemo Fetzer, to be presented at the Royal Economic Society’s 2014 annual conference.
His study looks at the local impact of the recent energy production boom, by comparing job growth and average incomes in counties in which shale deposits are being extracted with counties elsewhere in the United States. Among the findings:
• Counties where shale resources are being extracted have seen increases in average incomes, jobs and wages ranging between 10% and 20%.
• Unemployment rates in fracking counties are 2.4 percentage points lower than in the rest of the United States.
• Each job created in the oil and gas sector generates anywhere between one and three jobs in other sectors.
• Local natural prices have decreased dramatically by around 24%, helping the energy-intensive manufacturing sectors to expand despite significant increases in local labour costs.
Fracking has been hailed by the US oil and gas industry as the key technological innovation of the past decade, lifting the industry out of stagnation and a foreseeable decline.
US oil and gas production had been on a declining path since the 1970s, with production levels in 2008 half the levels of production in 1970. Similarly, gas production had been stagnant since the late 1990s, while consumption had been increasing, bringing the dependence of the United States on imports of oil and gas into a sharp relief.
In 2012, the picture has been completely reversed. Gas production is reaching previously unseen levels, making the country self-sufficient in natural gas; similarly, domestic oil production is increasing dramatically.
Hydraulic fracturing, together with horizontal drilling, has made this transition possible in the last five to ten years, by making previously inaccessible shale resources technologically recoverable.
The research estimates the local economic impact of the recent energy production boom, by comparing the job growth in counties in which shale deposits are being extracted as of 2012 compared with the rest of the United States.
The results suggest that income per capita has increased by 16% since 1998 relative to control group counties; similarly, overall employment has increased by 20%, while unemployment rates are on average 2.4 percentage points lower than in the rest of the United States (see Figure below).
It is estimated that every job in the oil and gas industry creates an additional two jobs outside the industry, concentrated in the transport and construction sectors. But the massive expansion of the oil and gas industry has driven up local wages by, on average, 12.7%.
This dramatic increase in wages, which is concentrated at the low end of the skill distribution, could turn out to be harmful for local producers of tradable goods, as they face a disadvantage due to higher labour costs. This has been a longstanding argument why a temporary resource boom may turn into a curse as the boom induces a contraction in sectors of the economy that may be conducive to long-run growth.
The research provides a simple argument suggesting why such sectoral transitions induced by resource booms need not occur. The natural resource, if locally consumed, could provide a source of comparative advantage – lower energy costs.
The research documents that local natural gas prices and electricity prices have gone down dramatically. On average, prices for natural gas used by industrial consumers has gone down by 24%, helping the manufacturing sectors to expand. It is questionable though, whether this comparative advantage will persist, as part of the decrease in energy prices is due to a lack of natural gas pipeline capacity, which may be alleviated through more infrastructure investment.
The research thus highlights that in case there are significant trade costs for the extracted resource and the latter is itself a significant factor of production, the resource boom may create a new comparative advantage in form of lower factor prices. This explains why there may be distinct patterns for a gold or diamond resource boom as opposed to an oil and gas boom.
‘Fracking Growth’ by Thiemo Fetzer
Romesh Vaitilingam: firstname.lastname@example.org, +44 7768 661095