After decades of decline, between 2008 and 2014, U.S. output of crude oil grew by 49 percent. Natural gas output has also been booming. The U.S. oil and gas rebirth is the product of new drilling techniques like hydraulic fracturing (fracking) and horizontal drilling.
Firms and workers supplying producers with everything from drilling rigs, to steel for pipelines, to fracking sand have also profited. Then too, heavy users of oil and gas such as chemical producers, airlines, trucking, and farming have gained from lower input prices. And higher output at home has helped to lower oil imports from roughly 60 percent of total consumption to only about 30 percent. Decreased imports have, in turn, improved U.S. terms of trade and raised U.S. living standards.
Nonetheless, the oil and gas boom entails some costs to society. Modern drilling is noisy, and it can add to air and water pollution. It also requires more public spending on roads, water systems, waste disposal, police, fire, and other services.
These costs are real, but upstream oil and gas production yields net benefits to most communities where it takes place. A recent survey by an independent think tank asked a diverse group of experts to assess the local effects of shale gas development. By more than two to one, the 215 experts who responded judged the net effects to be positive. While a majority of NGO experts dissented, majorities of each of the other three categories—academia, government, and industry—all judged the results to be positive.
Empirical research supports this assessment. One recent study of drilling in Colorado, Texas, and Wyoming found net gains across varied measures of economic welfare. A second study of drilling in Arkansas, North Dakota, and Pennsylvania produced like results. A third, longer time-frame study of drilling in the south, found that oil production caused important and lasting gains in output per worker, population, and wages.
It is puzzling, then, that by early 2014, over 400 local governments had under the guise of banning fracking, had, in effect, banned most drilling, and, since then, other places have done the same—New York State being the biggest among them.
Barring drilling in a few places with very high tourism and scenic values might make sense, but those cases are the exception, not the rule. Why, then, given that drilling is likely to yield local net benefits, has there been so strong a backlash?
The root of the problem is that both costs and benefits of onshore drilling fall unevenly. Drilling raises some property values, but it lowers others. Some voters on whose land no oil or gas is discovered still incur some costs from pollution or added traffic. Hence, majorities of voters, seeking to avoid nuisances to themselves, could support drilling bans that exact high costs from mineral rights owners and from society at large.
Requiring that drilling bans compensate mineral rights owners for lost income would, in effect, quash meretricious bans. At the same time, instead of fracking bans, local governments would gain from allowing drilling, taxing away a modest part of the windfalls from it, and using the revenue to compensate for those nuisances that they cannot avoid.
While these legal and public finance remedies could greatly alleviate the current problems, distorted perceptions of risk can block the path to such win-win outcomes. For instance, the public sometimes demands bans on unfamiliar technologies. Think of genetically modified crops. Such demands can lead to measures that incur high costs to achieve tiny decrements in novel risks that somehow trigger dread. Separate studies by scholars at the Universities of Texas and Michigan have found that media and activist groups have amplified the public’s fears of fracking.
The green groups’ lavishly funded scare campaign promoting so-called fracking bans has certainly made things worse. Climate change concerns appear to motivate the greens’ campaigns. But using natural gas to replace coal actually reduces greenhouse gas emissions. And as long as the world lacks an affordable substitute for oil-based transportation fuels, and none is in sight, where oil is produced is of little moment to the issue of climate change.
In sum, large-scale onshore drilling for oil and gas does entail some social costs. Lowering these costs will require state and local governments to adopt legal and fiscal reforms. But no valid causal pathway exists between the green groups’ calls for U.S. drilling bans and a remedy to the threat of climate change.