Risk or Reward? Assessing the Economic Impact of Fracking

Natural gas extraction from shale rock can provide many economic benefits to communities. Gas wells can increase local tax revenues and provide lucrative leasing payments to property owners. However, the potential or perceived environmental risks of shale gas extraction might also depress economic activity, especially economic activity related to housing.

In a new working paper, “Shale Gas Development and Property Values: Differences across Drinking Water Sources,” authors Lucija Muehlenbachs, Elisheba Spiller, and Christopher Timmins examine the economic impact of natural gas extraction on local economies. Addressing a gap in existing research, the authors consider how the drilling of shale gas wells affect nearby property values, and whether that impact varies between properties serviced by groundwater or piped water.

Hydraulic fracturing of shale rock, “fracking,” involves injecting chemical solutions deep into the ground at high pressures to free natural gas trapped in shale rock. One of the most widely noted risks of fracking is the possibility of groundwater contamination from the improper management of wastewater and “flowback fluid.”

To understand how the risk of environmental damage impacts economic activity, the authors examine data on property sales in Washington County, Pennsylvania. Their analysis incorporates a data set of all properties sold from 2004 to 2009, and a second data set of the location of shale gas wells in the county. By geocoding these data sets and comparing variables such as proximity to wells, population density, and drinking water sourcing, the authors are able to investigate how the environmental risks of fracking are reflected in local property values.

The authors conclude that economic activity and lease revenues generated by well drilling can positively effect local property values, if the neighboring area is protected from the environmental impact of fracking. Properties that used piped water, to protect them from waste water contamination, had an average increased property value of 10.7 percent. However, for those households that relied on ground water, the authors found that proximity to gas wells decreased property values by 23.6 percent.

Across the country, policymakers developing rules to govern shale gas development must balance the dual goals of protecting property owners from the negative effects of shale gas exploration, while harnessing the economic development that wells can bring to local communities. As policymakers seek the optimal level of regulation, they can look to this working paper to better understand the true costs and benefits of fracking to surrounding communities.

Feature Photo: cc/Em Jay Bee