The Arithmetic of Shale Gas: Consumer Surplus from Technology of Shale Gas Exceed $100 Billion

It's been well-documented now that falling prices for natural gas (see chart above) and the resulting drop in utility rates have saved consumers billions of dollars (see CD posts here and here).

A new study by researchers at Yale University, "The Arithmetic of Shale Gas," provides some additional evidence of the consumer benefits of shale gas using a cost-benefit approach (where consumers include residential, industrial, commercial and utilities) here's an excerpt:

"The Henry Hub spot price in 2008 was $7.97 per mcf and in 2011 was $3.95 per mcf (see chart above) so that the difference in price over three successive years was $4.02 per mcf. Gas production in 2008 was 25.6 tcf so that the surplus to consumers by the price reduction from shale gas equaled $102.9 billion.

This very large amount of consumer gain—over $100 billion—from the new technology induced price reduction in gas is the elephant in the room. It comprised a substantial majority of total expenditures on this fuel nationwide. In past years those expenditures were limited by the higher costs of production of gas produced from vertical wells. These were in part producer surplus but most were the costs of sustaining well operations in the old technology. Even so it is startling to acknowledge that consumer benefits from the technology of shale gas drilling and new gas production can be expected to exceed $100 billion per year, year in and year out as long as present production rates are maintained."

The authors then account for the possible environmental costs to society and compare that to the consumer-savings of $100 billion per year:

"How then do we extrapolate individual disaster scenarios across an entire industry to determine the social cost of possible contamination from fracking in order to deduct it from the consumer surplus of $100 billion for each year? We consider that the reported instances of contamination from fracking relate, at most, to an extremely limited minority over hundreds of thousands of wells. Assuming the worst—that the accidents occur in one year; that the cleanup requires a new water well at $5,000; and that one hundred spills occur at $2.5 million per spill given then that the industry drills 10,000 new wells per year. The cost of frackwater contamination is $250 million. Economic benefits, as estimated in as limited methodology as is reasonable, exceed costs to the community by 400-to-1."

And they also estimate the consumer benefits of switching from oil to natural gas:

Replacing 1.0 million bbls per day of crude oil with the 6 billion cubic feet (bcf”) equivalent of natural gas, would generate approximately $25.6 billion ($70/bbl*1 million bbls*365 days) of consumer surplus for the US economy over one year." 

Note: There are also gains to shale gas producers from increased production, and while those are less than the gains to gas consumers, they are significant and are estimated be multi-billions of dollars per year.

Here's a Forbes article that summarizes some of the key findings of the Yale study.