Fracking Nets New Jersey $11.5 Billion

Tom HeadshotTom Shepstone
Shepstone Management Company, Inc.


New Jersey is making out like a bandit on natural gas, achieving consumer savings equal to a 22% state income tax cut – savings that dwarf the gains to oil and gas companies and landowners.

Who benefits most by fracking?  If you listened to the natural gas opposition or “fractivists” you’d have to conclude it’s those greedy landowners and even greedier oil and gas companies but that’s not the case.  No, the greatest beneficiaries of fracking technology are urban consumers of natural gas.

A hard look at the data, all available at the Energy Information Administration (EIA) website, indicates just one state’s consumers netted over $11.5 billion dollars of savings from the reduced prices achieved through fracking and the opening up of new shale plays made possible by the technology.  It’s New Jersey, giving a whole new meaning to the name of their former basketball team (the New Jersey Nets).

New Jersey provides a good test case because, despite being the Garden State, it’s also the most urban state, with a density of 1,189 persons per square mile.  Some 74% of homes use natural gas as their heating fuel according to the latest Census statistics:

New Jersey Fuel Use

New Jersey is ranked 10th out the 50 states in the amount of natural gas it uses, over 660,000,000 million cubit feet annually, but produces none of it.  It is dependent on supplies from the Marcellus Shale and other natural gas regions for its home heating fuel.  Several major pipelines deliver that natural gas.  These include the Tennesse Gas Pipeline (part of the Kinder Morgan system), for example, which fractivists have fought bitterly as the company has sought to develop the additional capacity to serve New Jersey’s burgeoning demand.  Several other pipelines are moving gas from both nearby and far away markets to serve the New York metro area, which includes New Jersey.

The availability of nearby natural gas from the Marcellus Shale region, combined with dramatically increased production, both attributable to hydraulic fracturing technology, have lowered prices equally dramatically for New Jersey consumers.  The EIA database provides both consumption and price data over time for various classes of consumers, making it possible to calculate the savings to these consumers since fracking, together with horizontal drilling, began in earnest in the Northeast in 2008.  Here are the results for New Jersey’s residential consumers:

Screen Shot 2013-08-06 at 6.46.44 AM

Comparing natural gas prices by year with inflation adjusted prices in 2008 when fracking was just taking off in the Northeast indicate New Jersey homeowners and renters have, over the last four years, secured nearly $2.5 billion of savings from what they would have otherwise paid at 2008 prices.  The savings are in 2012 dollars (computed using the Consumer Price Index for urban areas) and include estimates of 2012 consumption and pricing based on those months for which data was available.

This is just the beginning, though, for more and more of New Jersey electricity is produced using natural gas, as this EIA chart demonstrates:

New Jersey Gas for Electric

There are even greater savings in this instance, as the following table demonstrates:

New Jersy Electric Savings

New Jersey electric utilities have, over the last four years, saved nearly $4 billion as a result of lowered natural gas prices and increased use, compared to what gas used for electricity generation at 2008 gas prices would have cost.

Then, there are the commercial and industrial users of natural gas, summarized in these tables:

New Jersey commercial gas use

Applying the same methodology, commercial and industrial users of natural gas, respectively, saved $2.7 billion and $900 million over the last four years.  The following table summarizes for all New Jersey consumers, showing the state saved an estimated $11.5 billion (roughly $2.9 billion per year) from development of new natural gas sources; all accomplished using fracking and horizontal drilling technology in the adjacent Marcellus Shale region and elsewhere.

New Jersey gas savings

The New Jersey state budget indicates taxpayers were, in 2013, expected to pay about $13.3 billion in corporate and personal income taxes.  These savings from natural gas, therefore, are akin to a 22% tax cut for these businesses and individuals.  It doesn’t get much better than that.  Just imagine where New Jersey would have been without these savings during the economic recession that has plagued the country over the entire period.

Now, for some further perspective, consider how the oil and gas companies are doing.  Several are experiencing increased profits as a consequence of lowering costs through better application of technology, enabling them to prosper even with the new low prices fracking and horizontal drilling have delivered.  New Jersey consumed a total of 660 billion cubic of natural gas in 2012, approximately 1.8 billion cubic feet per day.  Two companies combined, Cabot Oil & Gas and EQT, produced roughly the same amount in 2012 and enjoyed combined operating incomes of $264 million that year, roughly 9% of what New Jersey consumers netted.

New Jersey consumer savings also dwarf the royalties paid to landowners.  Pennsylvania produced 6.1 billion cubic feet of gas in 2012, more than three times the amount New Jersey consumed.  Pennsylvania landowners received $731 million in Marcellus Shale royalties paid in 2012, a handsome amount to be sure, but this suggests the New Jersey natural gas usage might generate $231 million annually in royalties.  Once again, this amounts to only 8% of what New Jersey consumers netted.

New Jersey Nets.svgThis data shows neither landowners nor oil and gas companies have been greedy.  Both have done about as well as most reasonable people would say is only fair.  Those New Jersey folks sure have done well, though.  And, their legislature actually wanted to ban on fracking (turned into a moratorium by Christie)!  Never let it be said that politicians will act in the public interest when self-interest in being politically correct intrudes.  Still, those of us who have been around know people ultimately vote with their pocketbooks, especially  when the opposition consists of nothing more than “crying wolf.”  I suspect New Jersey folks are a little tired of that game and are not going to forgo what is, effectively, a 22% tax cut.  Then again, they lost the New Jersey Nets, which are now the Brooklyn Nets.

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