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Local Implications of Shale Gas

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Pennsylvania Convention Center, 204-B
Hosted By: Association of Environmental and Resource Economists
  • Chair: Gregory B. Upton Jr., Louisiana State University

Response of Consumer Debt to Income Shocks: The Case of Energy Booms and Busts

Jason Brown
Federal Reserve Bank of Kansas City


Understanding how consumers respond to income and wealth shocks is a core
topic in economics. Economic theory indicates that consumers spend gains in income
differently depending upon whether they view increases as permanent or transitory in
order to smooth consumption. To test this theory, economists have often used abrupt
changes in income to estimate changes in consumption. Researchers can also leverage
quasi-natural experiments that allow for the estimation of differential effects of responses
across space and time. This paper investigates how consumers respond to local income
shocks as a result of booms and busts in oil and gas development. Oil and gas
development generates potentially large streams of income via wages and salaries to
workers and royalty income to mineral right owners. Changes in development may lead
consumers to increase their debt depending upon their exposure to income shocks. Using
quarterly information on consumer debt and oil and gas activity, I find that consumer
debt increased at a peak of $840 per capita in counties with shale endowment and
increased drilling. At the margin each well drilled was associated with $6,750 in
consumer debt. I find that the marginal response in previously undeveloped counties is
over three times higher compared to counties previously developed. My results suggest
that areas with previous development likely do a better job of internalizing that booms in
development often giving way to busts. This is consistent with consumers in these areas
viewing income shocks arising from oil and gas development as more transitory. As a
result, consumers in previously undeveloped areas may be most at risk of the irrational
exuberance that good times will continue indefinitely, and therefore, be more at risk of
default on their debt during busts in development.

Local Economic Shocks and Entrepreneurship: New Business Formation During the Shale Oil and Gas Boom

Ryan Decker
Federal Reserve Board
Meagan McCollum
City University of New York-Baruch College
Gregory B. Upton Jr.
Louisiana State University


Empirical evidence and models of firm dynamics ascribe an important job creation role to new businesses and a particular sensitivity of young firms to economic shocks. Studying the role of new businesses in the economy's response to economic shocks is difficult due to the complicated causal connections between economic growth and entry. The recent revolution in shale oil and gas extraction---which created rapid, strong gains in economic activity in areas possessing certain geological characteristics---presents a unique opportunity to study the response of firms---both new and existing---to an expansion of local economic conditions. Using a diff-in-diff research design, we show that establishment entry accounts for most of the employment growth in shale regions; new firms and new establishments of existing firms account for about a quarter and three quarters of the increased growth rates, respectively, relative to plausible counterfactuals. Cumulatively, establishments that opened after the shale boom began account for three quarters of cumulative net employment gains by 2014 and new firms comprise the majority of the growth from new establishments. These results have important implications for theories of firm dynamics.

Collateral Damage: The Impact of Shale Gas on Mortgage Lending.

Ashley Vissing
University of Chicago
Yanyou Chen
Duke University
James W. Roberts
Duke University
Christopher Timmins
Duke University


We analyze mortgage lenders’ behavior with respect to shale gas risk during
the period of the U.S. shale gas boom, which coincided with the U.S. housing market
rise, collapse and subsequent increase in industry scrutiny. Shale gas operations may
place affected houses into technical defaults such that GSE’s (Fannie Mae and Freddie
Mac) are unable to maintain them in their portfolios. We find that lenders did indeed
increase the weight they place on shale risk relative to income risk in mortgage pricing
behavior after 2010. This effect is particularly evident for groundwater dependent
properties, indicating that lenders view shale activities as placing the residential value of
these properties at great risk.

The Local Effects of the Texas Shale Boom on Schools, Students, and Teachers

Jeremy Weber
University of Pittsburgh
Joseph Marchand
University of Alberta


The Texas shale boom had large and localized effects on labor markets and school finances. Exploiting shale geology across space and oil prices over time, the empirics indicate that the boom decreased test scores in shale districts despite adding more than a million dollars per student to the tax base. Additional spending went to capital projects and servicing debt, not to teachers. Higher labor market wages had no effect on high school completion rates, but a growing gap in wages between the private and education sectors led to more teacher turnover and more inexperienced teachers in the classroom.
Martin Stuermer
Federal Reserve Bank of Dallas
Nida Cakir Melek
Federal Reserve Bank of Kansas City
Anil Kumar
Federal Reserve Bank of Dallas
Soren Anderson
Michigan State University
JEL Classifications
  • Q4 - Energy