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The UK government has recently given its approval for exploratory drilling and hydraulic fracturing – ‘fracking’ – for shale gas at two sites in Lancashire. This follows a similar decision for North Yorkshire earlier in the year.
Some will see these approvals as landmark planning decisions marking the way to a low-cost energy future for the UK. For others, particularly those who live locally, the decisions will be seen as leading to potential environmental catastrophe. These fears are fuelled by many reports from the United States about the risks associated with shale gas extraction by fracking – including water contamination and earthquakes – plus concerns about the local impact of traffic and extraction infrastructure.
Our research investigates whether these fears affect what people are prepared to pay to live in areas affected by fracking, by tracing out the impacts of shale gas licencing and exploration on house prices in England and Wales.
Although commercial shale gas development has not yet taken place in the UK, exploration licences have been offered since 2008 and many exploration wells have been drilled. Figure 1 shows the location of these exploration licences (in red) and potential shale gasbearing areas (in grey). Our findings suggest that licencing and exploration in themselves had little or no impact on house prices throughout most of England and Wales.
Figure 1. Shale gas exploration in the UK
Note: The map shows blocks that were licensed for gas exploration in 2008 (red) and previous rounds (blue)
The one exception is the one site in the UK where exploratory fracking – the high-pressure injection of fluids to extract shale gas – has taken place (the red dotted area in the North West in Figure 1). Here we find that house prices fell, on average, by up to 5% after fracking commenced. A specific trigger for this was the occurrence of two highly publicised earthquakes in 2011 that were linked to the fracking.
What happened is illustrated succinctly in Figure 2, which plots the trend in adjusted house prices at quarterly intervals up to and after the earthquakes in 2011. The solid line represents the earthquake zone, while the dashed lines show trends in other licensed areas and where licences specifically mention shale gas. Clearly, there was quite a marked fall in transaction prices in the months after the fracking and the earthquakes.
Figure 2. The effects of shale gas licencing, exploration and earthquakes on local house prices
Note: Prices are scaled relative to the beginning of 2011
These earthquakes were minor and would not have caused personal injury or damage to property. So the most likely explanation for any impact on house prices is that the earthquakes reminded people of the potential risks, and so reduced demand for homes in the vicinity.
The implication is that there are ‘psychological costs’ associated with fracking, which should be compensated. An existing industry ‘community engagement charter’ already recommends payments by drilling and exploration companies to local communities: around £100,000 for exploration plus 1% of revenues during extraction.
In addition, the government has recently consulted on a new shale gas wealth fund that proposes using 10% of revenues from shale gas to fund payments up to a maximum of £10 million per site to individuals and communities affected by extraction. But aggregate costs per site implied by the house price reductions are far in excess of these.
Compensation to communities could prove to be very costly if local objections to fracking are to be overcome by those who see fracking as the answer to securing the UK’s energy supply. Note: Prices are scaled relative to the beginning of 2011.
- This article appeared originally at CentrePiece, the magazine of LSE’s Centre for Economic Performance (CEP). It summarises the authors’ paper Fear of Fracking: The Impact of the Shale Gas Exploration on House Prices in Britain, LSE’s Spatial Economics Research Centre (SERC) Discussion Paper No. 207.
- The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
- Before commenting, please read our Comment Policy.
Stephen Gibbons is a Professor of Economic Geography, and teaches urban economics, quantitative methods, applied spatial analysis, and geographical information systems. Gibbons is also Director of the Spatial Economics Research Centre at LSE.
Stephan Heblich is a Reader (Associate Professor) in Economics at the University of Bristol. His research interests include Urban Economics, Political Economy, Environmental Economics and Economic History. His research looks at spatial disparities in the distribution of consumptive or productive amenities that attract individuals or firms. In turn, this helps him explain spatial variation in house prices, the share of high-skilled workers, innovative activities and entrepreneurship, or economic development. Another stream of research focuses on causes and consequences of regional disparities in voting behavior. To establish causality heoften studies historic developments that explain present-day economic outcomes. This explains my interest in economic history.
Esther Lho is a graduate research assistant at Duke University
Christopher Timmins is a professor in the Department of Economics at Duke University. His research interests are in environmental economics; industrial organization; and public, development and urban/regional economics.
I would ask two questions on this blog report.
Firstly, where is the justification for the opening statement that “Shale gas offers low-cost energy..”? I have not sen one credible study which could justify this statement as referring to the UK, indeed much has been published and said tho the contrary, that there is no such guarantee or data suggesting the concluision.
Secondly I would ask for verification of this statement –
“… many exploration wells have been drilled”
Where are these “many” wells? Again I am not aware of data supporting this assertion.
I have no comment to make on the research into house prices, but I do hope it is based on a firmer foundation than these two statements here, whichare unsopportable, in my opinion.
Please forgive typos!
I too take issue with the statement that “Shale gas offers low-cost energy”, as the US experience will not translate to the UK for a number of reasons, with the primary one being that the costs of extraction in the UK are much higher, and with no real previous onshore industry, there are enormous start up costs.
As far as I am aware, there have been 3 exploration wells drilled ( all in Lancashire), one of which was subsequently fracked and caused seismicity.
The other issue I have with this piece is that it appears that the authors have not looked beyond a fear of earthquakes when seeking to explain the impact of fracking/ fracking applications on house prices, and to my mind, this is a rather simplistic approach. Maybe, the earthquakes alerted people to fracking and its many consequences.
To date there are over 800 peer reviewed research papers highlighting the impacts of fracking on air quality, public health, the environment, and water – the most recent being the EPA findings that found water contamination at every phase of the fracking process. http://www.nytimes.com/2016/12/13/us/reversing-course-epa-says-fracking-can-contaminate-drinking-water.html
Those of us who live in areas threatened by fracking have great concerns about ALL the impacts that fracking brings in its wake.
Apparently, according to your research, fracking does have a very real impact on house prices, and to be quite honest, NO ONE would choose to live near this dirty industry, and frankly, I am not surprised.
Dear Alan and bailey 61,
You make good points, and I have changed the subhead here to reflect the exact words used in the CentrePiece magazine article. The subhead now reads: “Shale gas offers the prospect of a low-cost energy future, but invokes fears of environmental catastrophe” whereas before it said “Shale gas offers low-cost energy”. It probably doesn’t change the points you make, but it makes this post reflect the authors’ ideas more accurately. Thank you.
Thanks Helena for that, But a change of wording doesn’t affect the implication that the authors accept the premise of reduced energy costs. I object also to the premise that objections to fracking are based on “fears” and the implication that the authors promote the view that those opposed to fracking are irrational. The use of the word “catastrophe” is not one to promote informed debate, and is in no way justified.
I have now read the article itself and I have serious reservations. There are multiple flaws of fact, let alone misleading statements purporting to promote opinion as fact.
The paper is self-inconsistent regarding the facts and timing of the UK fracking experience. And without going into further detail the article itself seems to contradict the “many” shale gas exploration wells having been drilled. But I would be happier to hear the authors’ comments on my remarks, and the detail evidence I can provide them, should they wish to take this up with me. I do not have a profeesorship in any subject but, like many of my peers, I have spent a number of years in reasearch on fracking.
The issue of whether shale gas will provide relatively low cost energy (in a world with potentially increasing energy costs) is not the subject of the research. Neither is it a premise that the authors necessarily support. As the blog states, “Some will see these approvals as landmark planning decisions marking the way to a low-cost energy future for the UK”. This material is simply motivation for the blog.
There is an article which maps some sites that had been drilled (in Jan 2015) here http://www.telegraph.co.uk/news/earth/energy/fracking/11373660/Fracking-UK-shale-exploration-sites-mapped.html. Ten drilled sites are currently shown on the ‘frack-off’ website map.