The economic impact of oil and gas development in the Permian Basin: Local and spillover effects

The Permian Basin is one of the most prolific oil and natural gas geologic basins in the US. With soaring production in the last decade, the economic impact of oil and gas development in the basin has become a pressing policy question to answer. This paper presents the first basin-wide study that examines both the employment effect and the income effect of the Permian Basin development. We consider not only the local impact but also the spatial spillover effect and the industry-level spillover effect. To correct for the estimation bias due to the 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 development 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.