Resources Policy 66 (2020) 101599

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Resources Policy
journal homepage: http://www.elsevier.com/locate/resourpol

The economic impact of oil and gas development in the Permian Basin:
Local and spillover effects
Haoying Wang
Department of Business and Technology Management, New Mexico Tech, 801 Leroy Pl, Socorro, NM, 87801, USA

A R T I C L E I N F O A B S T R A C T :

Keywords: The Permian Basin is one of the most prolific oil and natural gas geologic basins in the US. With soaring pro­
Oil production duction in the last decade, the economic impact of oil and gas development in the basin has become a pressing
Natural gas policy question to answer. This paper presents the first basin-wide study that examines both the employment
Spatial spillover
effect and the income effect of the Permian Basin development. We consider not only the local impact but also
Industrial spillover
Permian basin
the spatial spillover effect and the industry-level spillover effect. To correct for the estimation bias due to the
Economic development potential simultaneity between drilling decisions and economic activities, an instrumental variables (IV)
regression model is proposed. We find that both the employment effect and the income effect of shale devel­
opment in the basin are highly significant. We also show that there are significant spatial spillover effects and
spillover effects onto the indirect industries. Relevant policy implications for the long-run economic prosperity in
the Permian Basin are discussed.

1. Introduction investment. According to a recent report by the US Energy Information

The revolution in drilling and hydraulic fracturing has led to large-
scale development of several major shale formations across the US
since the 2000s. The unprecedented fossil energy development has
reshaped not only the energy market dynamics but also the regional
economies involved. Among these regions, the Permian Basin is leading
the energy development race, especially when it comes to oil produc­
tion. It is one of the most prolific oil and natural gas geologic basins in
the US. The New Mexico portion of the basin also contains the nation’s
largest known concentration of potash reserves (Austin, 1980). Since the
late 2000s, the production in the Permian Basin has soared both in
production levels and as percentages of total US production (see Fig. 1).
The drilling activities in the basin have maintained at a high level as
indicated by the rig count in Fig. 1. This rapid development has brought
considerable improvement to the revenue of local governments (Iglesias,
2018). However, it is unclear how big and how widespread the eco­
nomic impact is in terms of employment and income in the entire region.
This question is important partly because the semi-arid landscape makes
the traditional economic activities (e.g., agriculture) in the region
different (potentially weaker) than other regions.
The prevailing notion of ‘resource curse’ often adds a question mark
to the economic impact of shale oil and gas development. A shale
development process is usually associated with intensive capital
Administration (EIA) (2016), the total onshore capital costs per well
range from $4.9 million to $8.3 million, which typically covers land
acquisition, capitalized drilling, completion and facilities costs, lease
operating expenses, and gathering, processing and transport costs.
Normally, investors expect a reasonable return from the investment. In
the case of shale development, due to the high demand for capital and
labor in a short timeframe, these required inputs often move from
another region to the region that is going to be developed. When the
resources start depleting, those inputs and the profit withdraw back to
the original region or move to another region. A critical policy question
is what has been left after the resources being developed and depleted.
To answer the question, it is important to conduct an economic impact
analysis. The information can help local governments and organizations
craft policies and sustain the development. The literature suggests that
the economic impact estimates can show great heterogeneities varying
by shale formations (Barth, 2013). Therefore, a basin-specific or
region-wide economic impact analysis is often necessary.
The economic impact of shale development has been long concerned
in the literature. The first batch of studies that focus on major shale
formations in the U.S. came out as industrial reports. The peer-review
literature in energy economics and policy quickly found that most of
the industrial reports have overestimated the positive economic im­
pacts. For example, Kinnaman (2011) argues that the economic impact

E-mail address: haoying.wang@nmt.edu.

https://doi.org/10.1016/j.resourpol.2020.101599
Received 4 September 2019; Received in revised form 22 December 2019; Accepted 18 January 2020
Available online 25 January 2020
0301-4207/© 2020 Elsevier Ltd. All rights reserved.
H. Wang
estimates in these reports are often overstated due to questionable as­
sumptions in methodology. Weber (2012) also suggests that the number
of jobs created by developing the Fayetteville and Marcellus shale gas
formations likely has been overestimated in the industrial reports. One
reason is that the quantitative models (e.g., IMPLAN) that these reports
deploy work best when considering modest or marginal changes in
economic activities (Kinnaman, 2011). What happens, in reality, is that
billions of direct investment are injected into the regional economy in as
quick as a few years, which is almost surely going to change the structure
of the economy. Another possible reason is the lack of consideration of
the spillover effects. Increased energy-related employment and income
can spill over to surrounding regions and other indirect industries
through more purchases of intermediate goods and induced local
spending (Munasib and Rickman, 2015). The spatial spillovers are also
found important in energy transitions (Noseleit, 2018). Often time, little
is known about these spillover effects.
This study contributes to the literature by conducting a basin-wide
economic impact analysis with considerations for both the spatial
spillover effects and the industry-level spillover effects. We compile a
panel data of 67 counties (from 1998 to 2016) in the Permian Basin and
its periphery to study both the local effect and the spillover effects of
shale development. The shale revolution did not start until around 2010
in the Permian Basin (Fig. 1). Our longer study period helps to capture
the boom of shale development. The study area covers both the Texas
Fig. 1. Rig count, oil and natural gas production in the Permian Basin (2007–2018).
Data source: US EIA. https://www.eia.gov/petroleum/drilling/, accessed Jan 15, 2019.
2
Resources Policy 66 (2020) 101599
portion and the New Mexico portion of the basin. Previous studies (e.g.
Weber, 2012; Lee, 2015) often ignore the New Mexico portion of the
basin (a four-county area, see Fig. 1). Among the four New Mexico
counties of active production, Lea and Eddy counties are the most
intensively drilled/fracked area in the entire basin. The four-county area
produces over 20% of the total basin-wide oil output. IV regression is
used to correct for the potential bias due to the simultaneity between
drilling decisions and economic activities. We construct the instru­
mental variables by taking advantage of the spatial variation of
pre-existing oil/gas formations and the temporal variation of techno­
logical change. We find that both the employment effect and the income
effect of shale development are highly significant in the Permian Basin.
We also show that there are significant spatial spillover effects and
spillover effects onto the indirect industries. Relevant policy implica­
tions for the long-run economic prosperity in the Permian Basin region
are discussed.
2. Literature review
The economic impact of shale development has been well studied in
the recent literature, mostly on employment and income effects. Wein­
stein (2014) presented a review of the early literature of shale devel­
opment and its economic impact in the US. Marchand and Weber (2018)
provided a more comprehensive review pooling economic impact
H. Wang
studies worldwide with a focus on shale gas and oil development. The
economic impact estimates, however, show a great deal of heterogene­
ity. There are three major reasons for the differences in estimates. First,
the economic impact often depends on the geologic conditions of the
given formation. A simple explanation is that geologic conditions affect
development costs and hence the profitability of related industries. This
variation in geologic conditions can be exploited to tackle endogeneity
issues in empirical regression analysis (Weber, 2012; Fetzer, 2014;
Feyrer et al., 2017). Second, many studies only considered either oil
production or natural gas production, which ignores the interaction
between the extraction and transport processes of two resources. When
both resources have significant production, it is important to consider
the impact of oil and gas development together. Third, there is consid­
erable variation in the analytical methodology employed. Two meth­
odological (in)considerations can affect the economic impact estimates
substantially: the spillover effects and the simultaneity between pro­
duction decisions and economic activities.
Still, several major findings emerged from the literature. First, the
economic impact tends to be strong in the short run but fades out in the
long run. Haggerty et al. (2014) is one of the early studies that document
such a pattern. The study shows that the short-run positive economic
impact from oil and gas specialization decreases as a county remains
focused on oil and gas production. The pattern has also been confirmed
by a few other studies (e.g., Weinstein, 2014; Betz et al., 2015; Komarek,
2016; Tsvetkova and Partridge, 2016). Venables (2016) gives two ex­
planations for the disappearing economic impact in the long run: tech­
nical difficulty in handling resource revenues and lack of governance in
resisting the short-run spending pressures and committing to the
long-run investment.
Second, the employment effect is more pronounced compared to the
income effect. Paredes et al. (2015) show that the employment effect is
more pronounced and robust compared to the income effect although
both types of effects are small in the Marcellus Shale region. Other
studies also suggest that in general the employment effect is more pro­
nounced (e.g., Munasib and Rickman, 2015). One possible explanation
is that the increased income can be distributed through different chan­
nels, which makes it difficult to track (Feyrer et al., 2017). Another
reason is that income is more volatile given that it can be easily trans­
ferred to other regions compared to jobs.
Third, there is a crowding out effect in the local area (e.g., county) as
the direct industries (e.g., mining and transportation) expand. The
crowding out effect happens when previously productive sectors are
“crowded out” by industries with higher costs and even reduced
competitiveness (Karl, 2004). For example, Fleming and Measham
(2015) show that a coal seam gas development area in Australia expe­
rienced a decline in local agricultural jobs. Cosgrove et al. (2015) find a
similar crowding out effect by studying the border counties between
New York and Pennsylvania in the Marcellus Shale region. In the
meantime, there is also a positive spillover effect from the direct in­
dustries to certain indirect industries. For example, Allcott and Keniston
(2018) find evidence against a natural resource curse using a
long-period sample from the U.S. – a county with one standard deviation
additional oil and gas endowment enjoyed a one-percent higher real
wage between 1969 and 2014.
Lastly, government policy plays an important role in fully material­
izing the potential economic benefits of oil and gas development. De
Silva et al. (2016) show that government policy and support are very
important in developing shale gas formation, especially from the
perspective of lowing the development costs. Effective government
policy can also help to reduce market inefficiency and market uncer­
tainty that may affect the development of energy resources (Brown et al.,
2016). Evans et al. (2019) discussed the Community Benefit Provisions
Program in Wales (UK) suggesting the need for policy intervention when
trying to embed locally the economic benefits from unconventional
shale development.
Differences in policy environments can also help to explain
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Resources Policy 66 (2020) 101599
heterogeneities in the economic impact of shale development, even
within the same country like the US. For example, there is a major dif­
ference in terms of land ownership between the Permian Basin and the
Marcellus Shale. The Permian Basin has quite some public lands, espe­
cially in the New Mexico portion of the basin where the governments are
open to shale development. In the Marcellus shale, most of the drillings
happen on private land. A few studies in the literature have revealed the
regional differences in the economic impact of shale development,
directly or indirectly. For instance, Ashmoore et al. (2016) show that
there is a significant regional variation in how newspapers cover the
impacts of shale gas development including the economic, environ­
mental, and social impacts. In Weinstein (2014) and Brown (2014),
including state-fixed effects significantly changes estimation results
suggesting regional differences in economic impacts indirectly. McCol­
lum and Upton Jr. (2018) find significant regional differences in the
positive impact on local economic conditions using mortgage payments
data from shale development regions.
3. Method and data
3.1. Conceptual framework
A common challenge in quantifying the economic impact of oil and
gas development is the misalignment between production activities and
population distribution. For example, Eddy County in New Mexico is one
of the most productive areas in the Permian Basin, but with only a
population of slightly over 50,000 according to the 2010 Census.1 This
suggests that many workers in the oil and gas fields are commuters. A
piece of direct evidence is the increase in demand for hotel rooms and
hence the increase in hotel room rates (Christopherson and Rightor,
2012). One solution is to capture the spatial effects with a spatial
autoregressive model (e.g. Lee, 2015). However, the economic inter­
pretation of the estimated spatial autoregressive parameter often can be
difficult in practical applications (Wang, 2018). Another solution is to
model the relationship between economic outcome and production ac­
tivities at a larger spatial scale (Feyrer et al., 2017). Ideally, the spatial
scale should be large enough to include the commuting zone. At the
same time, such a spatial aggregation process smooths some
cross-sectional variations out of the data. Therefore, the size of the
spatial aggregation needs to be carefully chosen. In this study, we follow
the second solution.
Another important aspect to consider when designing the model
framework is the relationship between direct and indirect industries. In
general, the mining industry and the transportation industry are
considered being the direct industries of oil and gas development. Other
industries such as professional services and real estate are considered
being indirect industries. Intuitively, we expect employment and salary
income in the direct industries to go up. Employment and salary income
in the indirect industries may go up (complimentary) or go down
(competitive). For example, Fleming and Measham (2015) showed that
agricultural jobs have decreased following a natural gas development
boom while construction and professional services experienced positive
job spillovers. Most of the studies in the literature essentially estimate a
net economic impact on all industries. A few studies distinguish between
the direct industries and the indirect industries (e.g., Fleming and
Measham, 2015; Feyrer et al., 2017).
In this study, we start with a two-way fixed effects model to control
for any county-specific effects and region-wide trends in oil and gas
development. The benchmark model is set up as the following:
yit ¼ βXit þ ηPOPit þ δi þ γt þ εit (1)
1
https://www.census.gov/quickfacts/eddycountynewmexico, accessed 20
January 2019.
H. Wang
where yit denotes the economic outcome and Xit denotes oil or oil
equivalent production volume in the given county i and year t. POPit is
the total population in the given county i and year t. δi represents the
time-invariant county fixed effects. γ t represents the time-varying tem­
poral effects capturing anything unique to a particular year (e.g., an
exogenous shock to the whole regional economy). εit represents the
unobserved random effects on the economic outcome. Different from
many existing studies where oil and gas production is measured in its
market value, we use physical units to measure production output
directly in this study. The main reason is that the estimated model can be
readily used for forecasting purposes. In general, shale production vol­
ume is much easier to estimate than oil and gas prices hence the value of
the production. The prices are highly volatile even in the short run.
3.2. Empirical strategy
This study follows the IV regression approach adopted by Fetzer
(2014) and Feyrer et al. (2017). The estimate of β from the benchmark
model in (1) is likely biased due to the endogeneity of production vol­
ume Xit . As Feyrer et al. (2017) point out, the oil and gas production
level depends on both the abundance of the resource and the firms
willing to develop it. The industry’s willingness-to-develop is driven by
several factors. One of the factors is the cost of development such as the
land leasing cost and severance tax (De Silva et al., 2016). Such factors
can affect local employment and income directly through, for example,
policy channels, which cause simultaneity between drilling decisions
and economic outcomes. Therefore, an unbiased estimate of β requires
instrument variables for production volume Xit . Following Fetzer (2014)
and Feyrer et al. (2017), we first estimate:
lnðXit þ 1Þ ¼ αi þ θZit þ εit (2)
where αi is a dummy variable for each county and Zit consists of a set of
interaction variables between year dummy variables and a variable
indicating the percentage of county land area inside a major sub-basin.
This is similar to the dummy variables of shale play-year combination
used in Feyrer et al. (2017). Note that here we use sub-basins instead of
shale plays to construct the instrument variables. Fig. 2 plots the extent
of all major sub-basins in the Permian Basin. In the case of the Permian
Basin, the extent of sub-basins represents the distribution of oil and gas
resources better than the extent of major shale plays. Based on the es­
timates from the model in (2), the set of instrument variables can be
recovered through an exponential transformation:
α i þ bθZit Þ
b it ¼ expðb
X 1 (3)
The instrument variables constructed above approximate the tem­
poral variations of productivity under a given geologic condition (e.g.,
within a sub-basin). Specifically, here we rely on two sources of varia­
tions exogenous to the region: the change of industry productivity over
time and the spatial variation in pre-existing oil/gas formations. To
account for the unobserved differences in policy environment (e.g.,
taxes, environmental regulations), the standard errors are clustered at
the state level by year.
3.3. Data
We compile the data used in this study from four sources: (1) County-
level employment and payroll income data from the US Census County
Business Pattern database; (2) Texas county-level oil and natural gas
production data from the Railroad Commission of Texas; (3) New
Mexico oil and natural gas production data provided by the Petroleum
Recovery Research Center at New Mexico Tech; (4) annual county-level
population estimates from the US Census. The associated GIS shapefiles
are obtained from the US Census and the US EIA. The sample period
covers 1998–2016, which updates previous studies by including the
shale boom period in the Permian Basin. As shown in Fig. 1, the shale
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Resources Policy 66 (2020) 101599
boom did not start until around 2010 in the Permian Basin. The study
area includes 67 counties (with seven in New Mexico, as shown in
Fig. 2).
In the production data, crude oil and natural gas are reported sepa­
rately. Note that oil production volume includes crude oil and conden­
sate; natural gas production volume includes natural gas and casing
head gas. In this study, we consider two specifications of the production
volume: oil only and oil þ gas (oil equivalent). In the Permian Basin, oil
production on average is about twice as much as (oil equivalent) natural
gas production. Given the potential interactions between oil and natural
gas at both the production level and the market level, it is reasonable to
convert natural gas volume into oil-equivalent barrels (BBLs). This study
uses the standard unit conversion factor recommended by the US EIA:
one MCF natural gas � 0.18 BBL oil.2 The income variables that are
measured in dollar amount have been converted to constant dollars (in
2015 USD) using the standard GDP deflator (from the US Bureau of
Economic Analysis) throughout the analysis.
In the estimation, employment variables are the total employment as
of March of the year. To reflect the lag in economic response, the in­
dependent variables ​ Xit and POPit are all one-year lagged. Income
variables are the per job payroll income computed as the total payroll
amount divided by the total employment. To examine the spatial spill­
over effects in employment and income, we consider both the local
county economic impacts and the economic impacts within a sur­
rounding zone (excluding the county in the center). The range of the
surrounding zone varies from 100 miles to 200 miles. 100-mile is a
reasonable choice of the commuting zone (Feyrer et al., 2017). We
expect the economic impacts to decline as we move away from the
county in the center. The economic outcome in the surrounding zone is
computed based on a weighted average of all counties falling into the
zone.3 The weights are chosen based on the standardization of the in­
verse of distance squared (distance from the given county in the zone to
the county in the center). The weights have a non-linear relationship
with the distance. As mentioned in the conceptual framework subsection
3.1, such a spatial aggregation more or less smooths out the
cross-sectional variation in the data. This restricts one from choosing a
very large surrounding zone.
To see the difference between the direct industries and the indirect
industries, we separate the sample into two based on the two-digit
NAICS (North American Industry Classification System) codes. Similar
to Feyrer et al. (2017), the direct industries include mining and trans­
portation (21 and 48). The indirect industries include all other in­
dustries. Based on region-wide averages for the study period (Tables A1
and A2), the top five indirect industries by employment growth are
warehousing (49), educational services (61), accommodation and food
services (72), health care and social assistance (62), professional, sci­
entific, and technical services (54). The top five indirect industries by
salary income growth are real estate rental and leasing (53), wholesale
trade (42), construction (23), administrative and support and waste
management and remediation services (56), professional, scientific, and
technical services (54). We also consider all industries pooled together.
Note that what we estimate in this study is the net economic impact on
each category of the industries. We cannot tell the inter-flows between
industries. Still, the estimates can inform us on the spillover effects from
the direct industries to the indirect industries. Table 1 summarizes all of
the key variables in regression analysis. Tables A.1 and A.2 in the Ap­
pendix show employment and income growth by two-digit NAICS in­
dustries. Both the direct industries and most of the indirect industries
have experienced substantial growth in employment and annual income
during the study period. For instance, the employment and income
2
https://www.eia.gov/energyexplained/units-and-calculators/, accessed 12
December 2019.
3
A county is considered inside the given surrounding zone if its geographic
center falls into the zone.
H. Wang Resources Policy 66 (2020) 101599

Fig. 2. The study area and the extent of major sub-basins in the Permian Basin.
Data source: US EIA.

growth in the mining industries (21) from the 1998–2002 period to the
2012–2016 period were 112% and 38%, respectively.
Table 1
Summary statistics of variables. 4. Results
Variable # of Mean Std. Dev.
OBS Tables 2 and 3 show the benchmark fixed effects model regression
Annual oil production (lagged, million BBLs) 1273 5.84 9.75 results for employment effect and income effect, respectively. The esti­
Annual oil-equivalent production (lagged, 1273 10.76 17.48 mation results correspond to equation (1). Each cell in the table repre­
million BBLs)a sents a separate estimate regressing employment (or income) on the
Annual natural gas production (lagged, million 1273 27.84 52.67
volume of energy production (oil or oil equivalent). Panel A presents the
MCFs)
Employment (all industries) 1257 9588.05 29,410.40 estimates with oil production only, which is supposed to be the domi­
Annual income per job (in $1000, all 1223 33.81 11.73 nating driver of the economic impacts. Panel B presents the estimates
industries) with oil and natural gas (converted to oil equivalent) production
Employment (direct industries) 1168 953.18 2546.61 together. Columns (1)–(3) show the economic impacts on the direct
Annual income per job (in $1000, direct 800 41.33 20.75
industries)
industries, the indirect industries, and all industries from left to right.
Employment (indirect industries) 1254 8826.61 27,894.78 The first row in each panel represents the within county economic im­
Annual income per job (in $1000, indirect 1199 19.90 10.38 pacts (no spatial spillover effects). Each rest of the rows represents the
industries) spatial spillover economic impacts from the county in the center to the
County population estimate (lagged, in 1000) 1273 31.72 97.66
specified surrounding zone excluding the given county in the center.
Sample period (years) 1998–2016 Note that the income effects in Table 3 and throughout the paper are
Total number of counties 67 measured in $1000 and they are converted to constant values in 2015
a
Note: According to the US EIA and the SPE standard: one MCF natural gas � USD.
0.18 BBL oil. Due to the potential endogeneity associated with the production
volume variables, the estimates in these benchmark models are likely
biased. However, we can still make several observations on the general
pattern of economic impacts. First, the local (within-county) economic

5
H. Wang Resources Policy 66 (2020) 101599

Table 2
Employment effect – fixed effects model.
Panel A: Oil only Direct Industries (1) Indirect Industries (2) All Industries (3)

County 69.6465 (12.0600)*** 26.4787 (11.0362)*** 94.3752 (22.5508)***

Zone - 100 miles 33.9845 (9.2054)*** 11.6594 (7.2542) 45.6104 (16.2343)***
Zone - 125 miles 31.3622 (8.2080)*** 11.8711 (6.5293)* 43.2035 (14.5152)***
Zone - 150 miles 28.7552 (7.4613)*** 11.3465 (5.9478)* 40.0675 (13.2163)***
Zone - 175 miles 26.2196 (6.8362)*** 10.6479 (5.3531)** 36.8098 (12.0038)***
Zone - 200 miles 24.4881 (6.5004)*** 9.7116 (5.0018)* 34.1629 (11.3325)***

Panel B: Oil þ Gas

County 34.5171 (6.5616)*** 8.1075 (5.3885) 40.3949 (11.3310)***

Zone - 100 miles 20.0293 (5.1973)*** 5.7223 (4.0643) 25.6564 (9.1024)***
Zone - 125 miles 17.9325 (4.5481)*** 5.7567 (3.5659) 23.6593 (7.9454)***
Zone - 150 miles 16.5999 (4.1743)*** 5.7705 (3.2826)* 22.3377 (7.3279)***
Zone - 175 miles 15.3827 (3.8683)*** 5.5175 (2.9625)* 20.8689 (6.6994)***
Zone - 200 miles 14.5222 (3.7050)*** 5.1153 (2.7970)* 19.6102 (6.3889)***

Note: 1. Throughout the paper, asterisks (*, **, ***) indicate statistical significance at 10%, 5%, and 1% level, respectively, unless otherwise noted. 2. Each cell in the
table represents a separate regression corresponding to equation (1). Population and fixed effects estimates are suppressed to save space, available upon request.

Table 3
Income effect – fixed effects model.
Panel A: Oil only Direct Industries (1) Indirect Industries (2) All Industries (3)

County 0.0264 (0.0560) 0.1451 (0.0340)*** 0.2523 (0.0610)***

Zone - 100 miles 0.0742 (0.0372)** 0.0730 (0.0135)*** 0.2829 (0.0583)***
Zone - 125 miles 0.0873 (0.0335)*** 0.0670 (0.0135)*** 0.2362 (0.0467)***
Zone - 150 miles 0.0846 (0.0304)*** 0.0597 (0.0113)*** 0.2052 (0.0396)***
Zone - 175 miles 0.0731 (0.0270)*** 0.0532 (0.0103)*** 0.1858 (0.0360)***
Zone - 200 miles 0.0606 (0.0247)** 0.0469 (0.0093)*** 0.1687 (0.0330)***

Panel B: Oil þ Gas

County 0.1338 (0.0505)*** 0.0626 (0.0310)** 0.1155 (0.0320)***

Zone - 100 miles 0.0278 (0.0221) 0.0382 (0.0068)*** 0.1526 (0.0335)***
Zone - 125 miles 0.0377 (0.0194)* 0.0336 (0.0065)*** 0.1253 (0.0264)***
Zone - 150 miles 0.0364 (0.0170)** 0.0310 (0.0057)*** 0.1090 (0.0224)***
Zone - 175 miles 0.0329 (0.0151)** 0.0275 (0.0052)*** 0.0987 (0.0201)***
Zone - 200 miles 0.0263 (0.0138)* 0.0242 (0.0047)*** 0.0891 (0.0184)***

Note: 1. Each cell in the table represents a separate regression corresponding to equation (1). Population and fixed effects estimates are suppressed to save space,
available upon request. 2. The unit of estimate here is $1000/million BBLs.

impacts are stronger than the spatial spillover effects as expected. Sec­
ond, the spatial spillover effects decrease as the distance increases (the
size of the surrounding zone gets larger), which again fits the economic
intuition. Third, oil production has a much larger economic impact than
natural gas on a physical oil-equivalent base. The difference is clear by
comparing Panel A and Panel B in the tables.4 The result holds for both
employment and income. This is consistent with the findings in the
literature. As Feyrer et al. (2017) point out, the fact that almost all
natural gas is transported by pipeline can explain why oil production has
a much stronger economic impact than natural gas production. Oil often
requires being transported through railway or trucking. Lastly, the
economic impact is stronger in the direct industries compared to the
indirect industries. This is particularly true for the employment effect. It
is consistent with findings in the literature and it is expected in a short
run economic analysis like the current study. The county population
variable has a significant positive estimate consistently across all of the
specifications for the employment effect as expected. For the income
effect, the estimates of the population variable are mixed. The estimates
(available upon request) are suppressed to save space.
Different from some of the existing studies, we find that both the
employment effect and the income effect are highly significant in most
of the specifications. The indirect industries’ employment effect is
4
The results with natural gas production only are suppressed to save space,
available upon request. The economic impact of natural gas production has
similar patterns but with smaller magnitudes as expected.
insignificant in some specifications. The only cases where we see income
effect being insignificant or even negative are the specifications related
to the direct industries. As discussed before, these are likely biased es­
timates. These results may be also driven by the inclusion of natural gas
production. Though we cannot compare the magnitudes of the two ef­
fects, it is reasonable to conclude that overall the oil and gas production
in the Permian Basin has significant economic impacts in the short run.
Note that this study has not much to say about the long-run economic
impact. The literature suggests that the economic impact of shale
development, in general, diminishes in the long run. However, recent
studies based on historical data also find evidence against a natural
resource curse in the US suggesting that the indirect industries can
benefit from oil and gas development in the long run (e.g., Allcott and
Keniston, 2018).
Tables 4 and 5 show the IV regression results. The estimates are
organized in the same way as in Tables 2 and 3 Note that all IV re­
gressions within each panel share the same first stage regression given
that the key independent variable in question – the volume of energy
production – stays the same. The IV results suggest that the benchmark
fixed effects model underestimates the economic impacts substantially.
This is consistent with the findings in Feyrer et al. (2017). We interpret
the estimated economic impacts based on the IV regression results.
Tables A3 – A6 in the Appendix report estimation results without control
for the county population.
As for the employment effect, the oil only specification suggests a
total local effect (within-county, all industries) of 203 jobs (2.12% of the

6
H. Wang Resources Policy 66 (2020) 101599

Table 4
Employment effect – instrumental variables regression.
Panel A: Oil only Direct Industries (1) Indirect Industries (2) All Industries (3)

County 131.3663 (10.7751)*** 69.8543 (12.2018)*** 202.6360 (19.7873)***

Zone - 100 miles 74.7552 (3.2862)*** 37.1879 (4.3067)*** 112.3450 (6.6094)***
Zone - 125 miles 66.7021 (2.9623)*** 33.4658 (3.7469)*** 100.5336 (5.8759)***
Zone - 150 miles 59.3495 (2.6501)*** 30.0961 (3.3396)*** 89.7898 (5.2391)***
Zone - 175 miles 53.7577 (2.4728)*** 26.6638 (3.0033)*** 80.7033 (4.8075)***
Zone - 200 miles 50.3698 (2.3520)*** 24.9062 (2.7371)*** 75.5780 (4.4859)***
First stage F-statistic 368.94

Panel B: Oil þ Gas

County 112.8289 (10.1907)*** 53.5092 (11.4570)*** 167.6490 (18.6686)***

Zone - 100 miles 60.7036 (3.2305)*** 26.1251 (4.0788)*** 87.2523 (6.4042)***
Zone - 125 miles 54.6794 (2.9007)*** 23.8239 (3.5499)*** 78.8908 (5.6861)***
Zone - 150 miles 48.9049 (2.5911)*** 22.3174 (3.1608)*** 71.5600 (5.0596)***
Zone - 175 miles 43.8165 (2.4197)*** 19.5754 (2.8432)*** 63.6686 (4.6455)***
Zone - 200 miles 40.5802 (2.3047)*** 18.0062 (2.5936)*** 58.8898 (4.3426)***
First stage F-statistic 414.28

Note: Each cell in the table represents a separate IV regression corresponding to equation (3). Population and fixed effects estimates are suppressed to save space,
available upon request.

basin-wide county average, hereinafter) for every one million BBLs of
new oil production (17.1%). The total employment impact can be
decomposed into a direct industry impact of 131 jobs and an indirect
industry impact of 70 jobs. As for the spatial spillover effects, the total
employment effect ranges from 112 jobs to 76 jobs for every one million
BBLs of new oil production. Among those, the impact on the direct in­
dustries ranges from 75 jobs to 50 jobs. The impact on the indirect in­
dustries ranges from 37 jobs to 25 jobs. As expected, the oil þ gas
specification gives smaller employment impact estimates. The total local
effect is 168 jobs (1.75%) for every one million BBLs of new oil-
equivalent production (9.29%). It can be decomposed into a direct in­
dustry impact of 113 jobs and an indirect industry impact of 54 jobs. As
for the spatial spillover effects, the total employment effect ranges from
87 jobs to 59 jobs for every one million BBLs of new oil-equivalent
production. Among those, the impact on the direct industries ranges
from 61 jobs to 41 jobs. The impact on the indirect industries ranges
from 26 jobs to 18 jobs.
As for the income effect, the oil only specification suggests a total
local effect (within-county, all industries) of $455/job (1.35%) for every
one million BBLs of new oil production (17.1%). The total income
impact can be decomposed into a direct industry impact of $504/job and
an indirect industry impact of $331/job. Both are highly significant. As
for the spatial spillover effects, the total income effect ranges from
$448/job to $266/job for every one million BBLs of new oil production.
Among those, the impact on the direct industries ranges from $483/job
to $325/job. The impact on the indirect industries ranges from $180/job
to $117/job. All of the impacts are statistically significant. As expected,
the oil þ gas specification gives smaller income impact estimates. The
total local effect is $384/job (1.14%) for every one million BBLs of new
oil-equivalent production (9.29%). It can be decomposed into a direct
industry impact of $462/job and an indirect industry impact of $284/
job. Both are highly significant. As for the spatial spillover effects, the
total income effect ranges from $426/job to $242/job for every one
million BBLs of new oil-equivalent production. Among those, the impact
on the direct industries ranges from $337/job to $223/job. The impact
on the indirect industries ranges from $154/job to $100/job.
One noticeable result here is the crowding out effect in the indirect
industries. The significant differences in income impact estimates be­
tween the direct industries (column (1), Table 5) and the indirect in­
dustries (column (2), Table 5) suggest a possible talent loss in the
indirect industries. Even though employment in the indirect industries
does increase due to the high demand for intermediate goods and ser­
vices, workers with better skills and education are likely to switch from
the indirect industries to the relatively high-paying direct industries.
The remaining vacancies and new demand in the indirect industries are
then filled in with workers less skilled and of less education. Such local
labor market dynamics cannot be observed through aggregate statistics
such as employment or average salary income directly, which suggests

Table 5
Income effect – instrumental variables regression.
Panel A: Oil only Direct Industries (1) Indirect Industries (2) All Industries (3)

County 0.5040 (0.1478)*** 0.3309 (0.0380)*** 0.4552 (0.0733)***

Zone - 100 miles 0.4832 (0.0479)*** 0.1801 (0.0142)*** 0.4475 (0.0343)***
Zone - 125 miles 0.4394 (0.0438)*** 0.1641 (0.0126)*** 0.3797 (0.0311)***
Zone - 150 miles 0.3862 (0.0392)*** 0.1438 (0.0115)*** 0.3224 (0.0285)***
Zone - 175 miles 0.3543 (0.0366)*** 0.1302 (0.0105)*** 0.2925 (0.0267)***
Zone - 200 miles 0.3253 (0.0344)*** 0.1170 (0.0098)*** 0.2660 (0.0253)***
First stage F-statistic 368.94

Panel B: Oil þ Gas

County 0.4619 (0.1394)*** 0.2838 (0.0358)*** 0.3837 (0.0688)***

Zone - 100 miles 0.3368 (0.0456)*** 0.1536 (0.0134)*** 0.4260 (0.0320)***
Zone - 125 miles 0.3031 (0.0417)*** 0.1416 (0.0119)*** 0.3493 (0.0292)***
Zone - 150 miles 0.2721 (0.0373)*** 0.1240 (0.0108)*** 0.2943 (0.0267)***
Zone - 175 miles 0.2449 (0.0349)*** 0.1122 (0.0099)*** 0.2671 (0.0251)***
Zone - 200 miles 0.2228 (0.0327)*** 0.1004 (0.0093)*** 0.2420 (0.0237)***
First stage F-statistic 414.28

Note: 1. Each cell in the table represents a separate IV regression corresponding to equation (3). Population and fixed effects estimates are suppressed to save space,
available upon request. 2. The unit of estimate here is $1000/million BBLs.

7
H. Wang
the importance of examining the spillover effects at the industry level.
Different types of spillover effects from the direct industries onto the
indirect industries have been identified in the literature (Komarek,
2016; Feyrer et al., 2017; Allcott and Keniston, 2018).
5. Policy discussion
Similar to other studies, we have shown that the short-run economic
impact of developing fossil energy in the Permian Basin is significant.
We find that both the employment effect and the income effect of shale
development are highly significant in the basin. This study also con­
tributes to the literature by examining two types of spillover effects as
part of the economic impact: the spatial spillover and the industrial
spillover. Both spillover effects are found significant. The existence of
the spillover effects makes the question on how to embed the potential
economic benefits from shale development a much more important
question. To residents and organizations in the region, this is highly
policy-relevant. Most parts of the Permian Basin have low population
density and a sensitive semi-arid desert ecosystem. Historically, the
economic development in the region depends heavily on local natural
resources and the stability of the ecosystem. It has been well studied that
shale development can bring serious impacts on various natural re­
sources essential to the ecosystem (e.g. Vidic et al., 2013; Muehlenbachs
et al., 2015). Therefore, a key policy implication is to invest revenue
raised from shale development in protecting the local natural resources
and building environmental stewardship including community engage­
ment as proposed by Evans et al. (2019). Only by doing so can we have a
foundation for sustainable development when the fossil energy re­
sources start depleting. This also suggests that local governments and
economic development organizations should focus more on place-based
policies and programs.
Exploring the difference between employment effect and income
effect provides another angle for transforming short-run economic
benefits to long-run economic prosperity. As been shown in this study
and others, the short-run impact on employment is significant across
almost all industries. However, the impact on per job salary income is
not. Largely, an increase in the number of jobs represents an improve­
ment at the extensive margin while an increase in income represents an
improvement at the intensive margin. A common economic develop­
ment challenge faced by regions like the Permian Basin is the slow
growth of the population and the low stock of the labor force. Therefore,
both tax policy and economic development policy should focus more on
creating and maintaining jobs, especially in the indirect industries. The
jobs created in the direct industries will almost surely be gone after the
resources are depleted. However, the jobs in the indirect industries can
sustain and grow in the long run if under a supportive economic
development environment. As Venables (2016) points out, a prevailing
issue is that many state and local governments find it difficult to resist
short-run spending pressures. Thus, a large portion of the revenue from
oil and gas development may be allocated to short-run consumptive uses
(e.g., health care) and less is left for long-run investment purposes (e.g.,
infrastructure).
In light of findings from this study, the significant industrial spillover
suggests that the state and local governments should play a strong role in
supporting the periphery and indirect industries. As Table 4 shows,
about one-third of the increase in jobs goes to the indirect industries.
Moreover, the ratio of jobs going to the indirect industries stays stable as
we move away from the central county to the surrounding zones. When
oil and gas development is active, there is no doubt that the indirect
industries can do well. The question is can the prosperity of the indirect
industries sustain. A relevant policy implication here is that more sup­
port should be given to industries that are not directly tied to oil and gas
development but tied closely to other local or regional resources. For
example, geothermal energy is another important resource in New
Mexico and it is not directly related to oil and gas development. A
portion of the state revenue collected from oil and gas production can be
8
Resources Policy 66 (2020) 101599
allocated as stimulus investments for the development of geothermal
energy for agriculture and food production. In this case, the new in­
dustry only depends on the oil and gas development at its start-up stage.
By the time oil and gas resources deplete, the new industry should have
already been well established.
Lastly, we should emphasize the importance of choosing a proper
methodology for the economic impact analysis. An overestimated eco­
nomic impact can lead to wrong choices in project cost-benefit analysis
and policymaking. The consequences can be many, such as granting too
many permits or drilling in a high cost but low yield areas. The whole
cost-benefit formula would still depend mainly on firms’ expectations
about the future energy market. The policy implication is that given a
more accurate estimate on the economic impact state and local gov­
ernments can regulate the pace of the development properly. Another
related methodological issue is on choosing the right study area. Many of
the existing studies choose their study areas based on state boundaries.
The problem with such a choice is that the spatial distribution of oil and
gas resources usually does not align with the state boundaries. The
Permian Basin is a good example of this. There are only 4–5 New Mexico
counties falling into the extent of the basin. However, it happens that
two of these counties (Lea County and Eddy County) are the most pro­
ductive ones in the entire basin. If an economic impact study chooses to
focus on the oil and gas development in western Texas only, then the
conclusion from the analysis is likely going to be biased. Therefore,
between basin-wide and statewide, we argue that a basin-wide study
area is a more appropriate choice.
6. Concluding remarks
It is estimated that the production capacity in the Permian Basin
could reach over five million BBLs/day in 2020 (Tagle, 2018). The USGS
(2018) estimates that there are 46.3 billion BBLs oil, 281 billion MCFs
natural gas, and 20 billion BBLs natural gas liquids in the most pro­
ductive sub-basin – the Delaware Basin (see Fig. 2). Accounting for
possible technology improvement in extraction and transportation,
these estimates suggest that the production in the Permian Basin could
last for another 20–30 years. An important question then becomes how
the economic landscape would look like in the region after that – the
long-run economic prosperity in the Permian Basin region. Admittedly,
the long-run economic prosperity is difficult to forecast because it does
not simply depend on resource endowments. Other factors also matter,
such as human capital, technology advances, and institutions. In this
study, we seek to derive relevant policy implications for the long-run
economic development from a short-run economic impact analysis.
Based on the findings from this study and the literature, we make
three major policy suggestions aiming at inspiring strategies for the
long-run economic prosperity in the Permian Basin region. First, at least
some portion of the revenue collected from shale development should be
invested in building the environmental and natural resources steward­
ship for the future. Second, governments and economic development
organizations should focus on creating jobs in indirect industries. Third,
local governments should use raised revenue to incubate and foster new
industries that are not directly tied to oil and gas development. When it
comes to developing a new industry, state governments usually play a
major role. It is also worth noting that shale development is not only
about tax revenue, jobs, and income, but also about other aspects of
society. In future research, other aspects such as the environmental
impact (e.g., wildlife, ecosystem) and the social impact (e.g., education)
should also be concerned.
Funding
This research did not receive any specific grant from funding
agencies in the public, commercial, or not-for-profit sectors.
H. Wang
Declaration of competing interest
None.
CRediT authorship contribution statement
Haoying Wang: Conceptualization, Methodology, Data curation,
Software, Formal analysis, Visualization, Writing - original draft,
Writing - review & editing.
Acknowledgement:
The author would like to thank Ms. Martha Cather of the Petroleum
Recovery Research Center at New Mexico Tech for her generous data
support.
Appendix A. Supplementary data
Supplementary data to this article can be found online at https://doi.
org/10.1016/j.resourpol.2020.101599.
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