Assessment of the Economic Impacts of the Shale Oil and Gas Boom
Farzad TaheripourAssistant Professor,Purdue University (West Lafayette, IN) Wallace E. TynerJames and Lois Ackerman Professor,Purdue University (West Lafayette, IN) Kemal SaricaPost-Doctoral Associate,Purdue University (West Lafayette, IN)
This paper summarizes two papers presented at the 32nd USAEE/IAEE North American Conference in Anchorage, Alaska. The first paper is a general equilibrium analysis of the overall economic impacts of the shale oil and gas boom, and the second is an energy sector model (MARKAL) analysis of the impacts of natural gas exports.
The general equilibrium analysis is done with a well-known computable general equilibrium (CGE) economic model (GTAP), which has been significantly modified for this research. We use the improved model and database to first project what would have been the economic impacts had the shale boom not occurred (negative productivity shocks in oil and gas resources). Then we simulate the economic impacts of the shale boom by positively shocking productivity of resources used in oil and gas production. Finally, we examine the important issue of the impacts of liquefied natural gas export restrictions. The results indicate that the expected expansion in shale resources will significantly enhance US GDP and employment, improves welfare, and reduces imports of oil and gas.
The modeling framework is based on the Global Trade Analysis Project – Energy (GTAP-E) model, originally developed at Purdue University (Burniaux and Truong, 2002 and McDougall and Golub, 2007). This is a CGE economic top-down model which designed to assess regional economic and environmental impacts of national and multinational energy-economy-environmental-trade policies. The model traces production, consumption, and trade of goods and services, categorized in several groups, by region. It considers substitution among energy sources and between capital and energy and takes into account competition for energy and other resources among firms. It also manages allocation of energy between households and firms. The latest version of this model is augmented with the GTAP database version 8 (Narayanan et al., 2012) which represents the world economy in 2007. We made several major modifications in the GTAP-E modeling framework and its database to make it more consistent with independent data sources and the MARKAL model projections for the energy market.
While the GTAP-E model makes the substitution among energy items possible, its nesting structure does not reflect the recent evolution in the energy market. In recent years a direct and major substitution has been observed between gas and coal. Sarica and Tyner (2013) have demonstrated this fact using the MARKAL-Macro model. The original nesting structure implemented in the GTAP-E model ignores this reality, because it first substitutes oil and gas and then combines the mix of gas and oil with coal. We altered the GTAP-E energy nesting structure to directly substitute gas and coal.
For this research, we made four significant changes in the original GTAP-E model and its database. The first changes the representation of natural gas in the GTAP database. The second restructures the GTAP-E intermediate demand structure for energy items and key parameters making use of the MARKAL model experiments. The third restructures the depiction of natural resources in GTAP-E to better represent expansion in the shale oil and gas. The fourth changes the base assumption on unemployment to reflect the current reality of unemployed labor in the US economy.
To quantify the impacts of changes in supplies of oil and gas we developed the following three experiments to simulate impacts of changes in supplies of oil and gas with and without shale resources and to examine the impacts of shale gas exports:
- Experiment I: Changes in US oil and gas with no expansion in shale resources,
- Experiment II: Changes in US oil and gas with expansion in shale resources, while we assume no growth in crude oil exports. Experiment III: Changes in US oil and gas with expansion in shale resources, with no change in crude oil or natural gas exports. Petroleum product exports are free to expand.
Our results indicate that the shale oil and gas boom should have a major impact on the US economy. During the time period from 2008 through 2035 the US GDP on average would be 2.2% higher than its 2007 level with the expansion in shale resources. Without the expansion in shale resources on average the US GDP would be 1.3% lower than its 2007 level during the same time period. That means that US GDP over the entire period of 2008-2035 on average would be 3.5% higher than it would have been without the shale boom. The welfare impacts are also quite large, as shown in Figure 1. On average the welfare difference between the positive shock and the negative shock is $473 billion per year over the time period starts from 2008 and ends in 2035. If we restrict gas exports the magnitude of the annual gains increases to $487 billion.
Figure 1. Annual welfare gains due to expansion in shale oil and gas
Other impacts are important as well. The shale boom creates substantial employment growth with jobs growing on average about 1.8% in the positive shock and declining about 1.1% in the negative shock for a net of about +2.9% employment gains. With the shale expansion oil and natural gas prices drop by 6% and 16% in 2035 compared with their original level in 2007, respectively. This price drop stimulates the expanded economic activity.
If gas exports are restricted, natural gas prices drop 24.1% providing additional economic stimulus. The trade deficit increases, interestingly, with the shale boom. This result is driven by the increased economic activity stimulated by the shale boom.
Finally, our analysis shows that restricting gas exports provides a small but positive benefit for the economy. On average, the annual economic welfare is $13.3 billion higher with the gas export restriction in place. Compared with a $15 trillion economy, this is a very small number, but it does suggest that welfare declines if natural gas exports are permitted.
The second paper uses a modified MARKAL model to also address the question of the impacts of natural gas exports. Exports would be economically attractive because there is currently a very large price gap at present between US natural gas price (around $3/MMBtu) and prices in foreign markets, which can range up to $15/MMBtu. Even after accounting for the cost of liquefying the natural gas and shipping it to foreign markets, current price wedges leave room for considerable profit from exports. On the other side, there is potentially large domestic demand for natural gas in electricity generation, industrial applications, the transportation sector, and for other uses. Thus, the question is which pathway provides the best economic and environmental outcome for the US. Our approach is to use a well-established bottom-up energy model named MARKAL (MARKet ALlocation).
Bottom-up means that the model is built upon thousands of current and future prospective energy technologies and resources. These energy resources supply projected energy service demands for the various sectors of the economy. In addition to the standard MARKAL model, we also have adapted a version of the MARKAL-Macro model which permits us to include feedbacks between energy prices and economic activity. Thus the GDP effects of alternative energy policies are captured as well as technology and supply impacts. For these reasons, MARKAL-Macro is an ideal tool for this kind of analysis.
We used two reference cases, since there is a divergence of opinion on the likely supply elasticity of natural gas. The first reference contains the original EPA MARKAL data set (2010) plus the MIT natural gas supply curves. The second reference changes some of the MARKAL growth constraints, which results in a more elastic reference and closely matches the 2013 DOE Annual Energy Outlook. Figure 2 illustrates the price path for these two reference cases.
Figure 2. Relative Natural Gas price difference with elastic and standard references
The major conclusion of this research is that permitting significant natural gas exports should cause a small reduction in US GDP. There is loss of labor and capital income in all energy intensive sectors, and electricity prices increase. The major difference between our results and the other major study (NERA) is that we generally get higher natural gas price impacts and lower export revenues. The higher natural gas prices cause pervasive losses throughout the commercial, industrial, and residential sectors. For example, energy consumption (as a proxy for economic output) in energy intensive manufacturing declines about 1-3% for natural gas exports in the 12-18 BCF/day range, depending on the sector.
The two reference cases essentially bracket the likely supply responses. We get the same small but negative impacts on the US economy from large levels of LNG exports. We recognize that the results of this modeling exercise are subject to uncertainty as is the case with any modeling analysis. However, having two very different reference cases but the same general trends in GDP, price, and other results provides some assurance that the results are meaningful. It is also important that the two studies reported here with two very different models and data sets provide essentially the same conclusion regarding the economic impacts of natural gas exports. The bottom line is that caution is in order in approving large levels of exports.
Notes and References:
 “Economic and Environmental Impacts of Increased U.S. Exports of Natural Gas,” Kemal Sarica and Wallace E.Tyner.
Burniaux J. and Truong T., 2002. GTAP-E: “An energy-environmental version of the GTAP model,” GTAP technical Paper No. 16, Center for global trade analysis, Purdue University, West Lafayette, IN, USA.
McDougall R. and Golub A. 2007. “GTAPE: A revised energy-environmental version of the GTAP model,” GTAP Research Memorandum No. 15, Center for global trade analysis, Purdue University, West Lafayette, IN, USA.
Narayanan B., Aguiar A., and McDougall R., Editors, 2012. “Global Trade, Assistance, and Production: The GTAP 8 Data Base,” Center for Global Trade Analysis, Purdue University.
NERA Economic Consulting, Macroeconomic Impacts of LNG Exports from the United States. 2012: Washington, D.C.
Sarica, K. and W. E. Tyner, 2013. “Alternative Policy Impacts on US GHG Emissions and Energy Security: A Hybrid Modeling Approach”, Energy Economics 40, 40-50.