Natural Gas Adds $100 Billion Surplus to U.S. Economy

Published Tue, Jul 3rd, 2012   Matthew Weinschenk, Senior Analyst

We often talk about the profits and losses created by market developments, and the companies that earn them.

But what do things like innovation and resource discoveries do for you?

More specifically, what has the United States’ natural gas boom done for you… even if you’ve never owned a natural gas stock?

A recent paper from Yale Graduates Energy Study Group says that we’ve gained quite a lot.

The calculations are simple, yet insightful. Rather than a complex econometric model with lots of opaque assumptions, the analysis is easy to comprehend with assumptions that anyone can understand (and therefore question). The result is an estimate of just how much benefit the U.S. economy has derived from the expansion of natural gas production.

Of course, the benefits to actual producers of natural gas are substantial. By crunching the public numbers of five top producers, the study estimates that their costs clock in at $1 per million cubic feet (mcf). When you add in fixed costs and taxes, that costs goes up to about $3.41 per mcf.

Compare that to the average selling price of $5 over the last few years, and it’s clear that producers have seen a healthy profit.

But what about consumers?

Well, there’s no doubt that natural gas production has lowered energy prices. That, in turn, lowers electricity prices, shipping prices, food prices… Just about everything! And lower prices lead to better lifestyles for consumers.

For example, the study examines the consumer surplus – an economic concept that measures the aggregate difference between what consumers are willing to spend on a good and what they actually have to pay at market price. (If you’re willing to spend $100 for a ticket to a sporting event, but the tickets only cost $60, you have a $40 consumer surplus.)

Using evidence about demand for energy at different price levels, the authors suggest that based on this metric, consumers gain about $100 billion per year thanks to low natural gas prices.

On top of that, the authors suggest that replacing crude oil use with natural gas use will further reduce prices for oil, generating another $25 billion per year in benefits for consumers.

This study was undertaken in an effort to contrast natural gas’ benefits to the costs associated with any environmental damage that it may cause.

You see, in each of the areas where natural gas production has risen, there’s strong opposition from groups who worry that the effects of hydraulic fracking are not fully understood – and that it may wreak havoc both below, and above ground.

But according to estimates from the authors, that’s not the case. Since the environmental costs of the natural gas boom amount to only $250 million per year… a small fraction of the $100 billion in benefits.

Now, I don’t claim to be an expert on the environmental effects of natural gas, and I’m not taking a position for, or against those effects. Even so, I am skeptical that the environmental effects of an activity can be measured only by its “clean-up” costs, as the authors indicate. In other words, natural gas may have racked up more costs along the way than the study claims.

Either way, the point is this: An industry that was barely growing a few years ago has sprouted and added an extra $100 billion per year to all of our pockets. And that doesn’t even include the jobs it created.

It just goes to show how resilient the American economy can be. Something that’s especially good to see today.

Ahead of the tape,

Matthew Weinschenk