The Economic Impact of Shale Gas Exploration in the U.S

[ The Economic Impact of Shale Gas Exploration in the U.S.]

[Yang Yang, Tufts University, Department of Economics, 6175139588,

Overview

The development of hydraulic fracturingtechnology andhorizontal drilling enablesshale gas to become a new source of energy which offsets the decline of conventional gas reservoirs.It is interesting to askto what extent the expanded endowment ofshale gas could positively or negatively affect the price and production ofother energy prices and production and energy-intensive industrial sectors.To address this question, a computable general equilibrium model (CGE) is employed to analyze the energy structure impact of shale gas as well as the social welfare associated in the same frame by usingCGE model.In the scenario analyzed, shale gas endowment is assumed to be 50 percent of total the US natural gas production equivalent according to the Annual Energy Outlook for 2012 from the USEnergy Information Administration(EIA).

The paper is organized as follows: Section 2 presents a review ofrelated literature on the effects of energy shocks and a review of the application ofCGE models to the energy sector. Section 3 discusses the static CGE model’s definition and analytical framework. Section 4 presents the data, parametric specification and the equilibrium model used in the analysis. Section 5 describes each scenario and results. Section 6 summarizes the conclusion.

Methods
Computable General Equilibrium Model(CGE)in GAMS, solving by Mixed Complementarity Problem (MCP) path

Results

First, the expansion of the endowment of shale gas increases the household representative agent’s deposable income by 0.18 percent.The representative agent’s utility level increases by 0.4percent. Second,industrial output increases by 0.2 percent.

Second, the shale gas exploration will have obvious impact on gas price, electricity price. It also widely benefits other industries. Gas production will increase significantly by 9.85 percent. Refinery, electricity, coal, chemistry, energy related industry and energy relative service will all increase their productions by from more than 0.5 percent to 1.3 percent. Only oil extraction will decrease about 1 percentdue to the substitution effect of gas.Gas price decrease by about 40 percent and electricity decrease by about 4 percent as the major input price goes down.

Its impact on social welfare is positive to land, labor and natural source price, negative to capital return. Payment to land will increase by 1.1 percent, together with a slightly increase in natural resource factor payment by 1.1 percent. Labor payment, unskilled and skilled, will increase by 0.4 percent- 0.5 percent. Capital return will decrease by 0.3 percentand then will recover to minus 0.078 percent under multiple scenarios.

Conclusions

The exploration of shale gas will enhance the overall US industries’ production, lowering the price of domestic natural gas and oil products.

However, its economic impact and social welfare benefit is apparently too small to assert that the shale gas discovery is a game changer.

Nonlinear, since the relation is not linear, and the gas price will decrease slower as more shale gas is explored.