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The Unexpected, Trillion-Dollar Windfall Closing Government Budget Gaps

For government budgets hammered by the recession, the shale-gas boom has created a badly-needed boost to tax revenues.

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The Baby Boomers are aging. Entitlement programs are going broke. Infrastructure is failing. Pensions are unfunded. Congress is at loggerheads.

These are just some of the things concerned people are saying when they talk about how—and whether—the government will pay its bills in the coming decades. But there is at least one less obvious force that has helped drive America's economic recovery since the start of the Great Recession and pumped needed revenues into federal, state and local government budgets: the shale-gas rush.

 

Recent advances in horizontal drilling and hydraulic fracturing techniques are being used to unlock vast stores of natural gas from underground shale-rock formations across the U.S.

For government budgets, which were hammered by the drop in tax revenue resulting from the recession, this has created an unexpected and badly-needed windfall: In 2010, U.S. shale-gas production delivered an $18.6 billion cash infusion in the form of tax and royalty payments to strapped federal, state and local governments, according to a report by IHS. By 2013, those annual revenues are expected to hit $50 billion.

Cumulatively over the next 25 years, unconventional gas development across the lower 48 states will generate nearly $1.5 trillion in tax and royalty payments—enough to put a significant dent in government deficits at every level.

 

"By fully embracing America's energy opportunity, we can accelerate growth, create millions of new jobs, free ourselves from some less-than-stable global suppliers, and create huge new revenues for government, which will help reduce budget deficits," said Thomas J. Donohue, president and CEO of the U.S. Chamber of Commerce, in his 2013 State of American Business address in January.

Skeptics have questioned projections of the shale-gas industry's production levels and economic impacts. Through 2011 and 2012, critics accused the industry of exaggerating production figures and the potential of the Marcellus Shale, in particular, where the natural gas rush began around 2008.

But as the Associated Press noted on Aug. 15, "actual production figures have mostly put that debate to rest."

Production levels in Pennsylvania and West Virginia, which sit atop the Marcellus, are up roughly 50 percent in 2013 compared with last year, the energy market analysis firm Bentek told the AP. Ohio shale gas production, meanwhile, is said to be in the beginning stages and expected to grow significantly in 2014 and 2015.

Production has "definitely outpaced our expectations," Diana Oswald, a Bentek energy analyst, told the AP.

For towns and cities in the producing regions of the northeast, the effects of the boom have been dramatic.

In rural Bradford County, Penn., natural gas development supercharged the local economy. Rents rose. Local businesses went on a hiring spree. People and traffic filled once-sleepy downtown Towanda. County sales tax revenue rose 61 percent from 2009 to 2012, NPR reported.

"The recession that hit the rest of the country passed right over us," Bradford County Commissioner Doug McLinko told Wealth Daily.

In Williamsport, Penn., more than $1 million in impact fees from Marcellus natural gas development will help pave 25 streets this fall and next year—double what it typically spends on such improvements, the Williamsport Sun-Gazette reported on July 21.

"This gives us an opportunity to improve our neighborhoods and to use dollars to address streets and curbs that have needed upgrades for many, many years," said Mayor Gabriel Campana.

Across the country, the state of Oklahoma is also cashing in on the oil and gas boom. Gross tax receipts reached a new high for the third consecutive month in September, led by surging oil-and-gas production tax receipts that were up 31 percent over the previous year.

In Weatherford, Okla., empty downtown storefronts have filled with new shops, Chuck Dougherty, the city's economic development director, told Oklahoma Energy Today. New housing developments are being built. Unemployment has hit rock bottom. And sales tax revenue has soared.

"We're 35 months into sales tax [revenue] increases and it's obviously due to oil and gas," Dougherty said. The city, he said, is spending more than $2 million to improve sidewalks, lights and streets in its downtown.

"The tax revenue helps take care of things in the city," he said.