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Why I focus on the economics of fracking

Image: La Veu del País Valencià

Amid the contested claims and counter-claims over the environmental damage that might result from widespread hydraulic fracturing in the UK there is a single, glaring (and erroneous) point of agreement for Britain’s frackers and their opponents: that fracking is economically viable.  It follows, therefore, that opponents must take every lawful (and sometimes unlawful) step to obstruct fracking operations; while fracking companies must use the courts aggressively to prevent the obstruction of their activities.

The difficulty for the opponents of fracking is more or less the same as past difficulties with anti-tobacco and anti-sugar campaigns – the science is anything but simple.  It took decades for the link between tobacco and cancer to be established.  The link between carbon dioxide and climate change – first observed in the 1820s – is a matter of contention despite the science.  And while we all know sugar is dangerous for a range of reasons, we keep buying it and they keep selling it.  There is no reason to believe that hydraulic fracturing will be any different.

For every report claiming that fracking causes everything from cancer to birth defects and from dangerous greenhouse gases to earthquakes, there is another (usually industry-funded) report claiming the opposite.  Meanwhile, few people stop to ask what should be the two most important questions for any investigator or campaigner:

  • Why this?
  • Why now?

Contrary to the technoutopian media coverage of fracking, it is not a new technology.  Nor are the vast shale deposits in the USA new discoveries.  The reason the USA has enjoyed a “fracking revolution” is almost entirely due to low interest rates and quantitative easing; which left investors with very few sectors from which to make an above-inflation return.  Dig beneath the hype in the investment brochures and we discover that while fracking companies can service their debts, they cannot repay them – i.e., they are not profitable.  Fracking is a Ponzi scheme and it is always on the lookout for new suckers to fleece.

From a European and UK perspective, the lack of US profitability matters because the USA enjoys advantages that we simply do not have, such as:

  • An existing land-based oil industry
  • Open geography
  • Privately owned mineral rights
  • Simple geology.

The simple takeaway is that if US fracking companies cannot make a profit; UK ones certainly won’t.  Indeed, several UK fracking firms are already experiencing solvency issues and even the pro-fracking Tory government is seeking financial reassurances prior to approving fracking operations.  Yet without these operations, nobody knows if there is any recoverable shale gas beneath the UK.

What we do know – from the British Geological Survey – is there is a large quantity of “potentially gas-bearing source rock” beneath parts of Great Britain.  It is from this fact that most of the hype around fracking was generated.  But there is a huge difference between the source rock and the gas itself.  Some geologists have argued that the way in which British geology developed over time means that most, if not all, of the gas will have vented into the atmosphere millions of years ago.  Even if there is gas in the formations, Britain’s tortured and twisted geology with its myriad small fault lines makes horizontal drilling over any distance impossible (the same geological problem that caused coal mining to be unprofitable in most of the UK’s coalfields).

Then there are the geographical issues.  One reason why fracking companies are attracting bad publicity is that they wish to drill beneath national parks and other natural heritage sites.  The reason for this is that they are the few open spaces within the UK where drilling would not require the compulsory purchase and demolition of buildings and/or infrastructure.  For this reason, three-quarters of the “potentially gas-baring source rock” would only be accessible at enormous cost.

Unlike the USA, frackers in the UK will need to create a service industry from scratch to supply drilling rigs, trucks, fracking fluids and fracking sand.  This involves competing on the world market for materials and supplies whose price will inevitably increase with demand.  Labour may be less of a problem because of the transferrable skills from the declining offshore industry.  However, were competition to pick up, so too would demand for – and thus the wages of – skilled workers.

Against these cost pressures, we have to balance the price issue raised by Dieter Helm in the recent government energy review:

“It is not particularly difficult to set out what an efficient energy system might look like which meets the twin objectives of the climate change targets and security of supply. There would, however, remain a binding constraint: the willingness and ability to pay for it. There have to be sufficient resources available, and there has in a democracy to be a majority who are both willing to pay and willing to force the population as a whole to pay. This constraint featured prominently in the last three general elections, and it has not gone away.” (My emphasis)

In fact, gas is what economists refer to as an inelastic item.  That is, with around half of the UK’s electricity generated from gas and almost all of our cooking and heating powered by gas, we have little choice but to buy it at any price.  This was why the prices of oil and gas were able to spike upward in 2010.  The broader impact is on the wider economy as households are obliged to rein in their discretionary spending to pay for their energy.  But ultimately this causes an economic downturn and a falling demand for energy that forces prices back down (as happened between 2014 and 2017).  The profitability problem for UK frackers is that any rise in gas prices that might allow their industry to become profitable will plunge the economy into recession before they can extract a single Btu of shale gas.  But without (and possibly even with) a sustained period of high prices, UK frackers are simply unable to compete with gas piped in from Europe or with compressed liquid natural gas from Qatar.

Which brings us to the thorny question of who gets the blame when UK fracking fails to fill the growing energy gap?

In December 2016, I warned that green campaigners were in danger of being blamed for our coming energy woes:

“The Green Movement, quite understandably, has lobbied – often successfully – for the rapid deployment of renewable energy technology as the best response to our predicament.  They have, however, usually overstated our ability to switch from fossil carbon to renewables, while seriously understating the economic, social and political consequences of attempting to do so…

“In recent years, Britain’s margin of energy supply over demand has shrunk alarmingly.  On several occasions the National Grid has been forced to switch off high-energy consuming industrial customers in order to keep household lights on.  As energy shortages and the “energy death spiral” deepen, we will soon experience unpredictably intermittent electricity supply… As we have documented, our current energy predicament is the product of poor decision-making by successive governments since 1979.  But it is unlikely to be seen that way today… the coming shortage of affordable fossil carbon fuels is disguised by an attack on environmentalists for promoting climate policies that appear to choose renewables over coal.

“It is likely that when the lights go out, anti-fracking campaigners will face similar accusations.  Although fracking on any serious scale is an unaffordable pipe dream, rather than understand that its failure is due to Britain’s tortured geology and the unaffordable cost of extracting what little gas is  technically recoverable, the energy companies will want to blame protestors for standing in the way of the fracking industry.”

This, indeed, is exactly what is now happening.  Faced with unseasonably cold weather in March National Grid put out a warning that Britain had insufficient gas supplies to meet demand.  Although domestic customers did not notice (although we will when the cost is added to energy bills) large industrial users – including gas power stations – were taken offline while energy companies scrambled to buy up spare capacity from European storage.

With the remainder of Britain’s North Sea gas reserves dwindling fast, future cold snaps will be increasingly difficult to deal with; while a prolonged period of cold weather is now guaranteed to result in energy shortages.  And as predicted, fracking protestors are going to get the blame.  For example, Ross Clark in the Spectator informs us that:

“Anyone surveying the wind turbines and solar panels sprouting across the British countryside could be forgiven for thinking that we are rapidly building self-sufficiency in energy – and clean energy at that. But it isn’t true. By far the bigger story is the decline in North Sea oil and gas production, which has taken up back to a level of energy-dependence last seen in the mid 1970s. As recently as 1999, the UK was producing 20 per cent more energy than it consumed. But the last year we enjoyed energy self-dependence was in 2003. By 2015, a net 38 per cent of energy consumed here was imported.

“It could have been different had the UK’s shale gas industry been properly supported. Instead, it was put at the mercy of Lancashire councillors and the anti-fracking lobby was left to win public support largely unchallenged.”

Jeremy Hodges and Kelly Gilblom at Bloomberg at least have the decency to allude to the propagandistic nature of this:

“Britain’s natural gas fracking industry is using a cold snap that’s gripped large swathes of Europe this week and laid bare weaknesses in the U.K.’s energy supply to make its pitch.”

But:

“While the U.S. Energy Department says there may be significant resources in the European Union, there has been little progress because of bans on hydraulic fracturing or poor initial results.” (My emphasis)

The point, however, is that these are the preliminary skirmishes in the coming battle over who is responsible for turning the UK lights out.  Since UK fracking can never be profitable at anything other than recession-inducing prices, it was never part of the solution to declining North Sea gas.  However, the volumes of money and time wasted on promoting a non-starter industry that is little more than a Ponzi scheme in the USA is time and money that should have gone into the development of a range of alternative electricity generating technologies.  Instead, the Tory government’s dash for gas has left us with a gas infrastructure that lacks the fuel to run it.  But unless anti-fracking campaigners make this point as loudly as possible, they will lose the narrative.

This, then, is why I have spent the last few years homing in on the economics of fracking rather than engaging with the wider concerns around the environment and public health.  Because – in a language that even the most diehard neoliberal can understand – UK fracking always was a non-starter because it could never hope to be profitable.

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