Consciousness of Sheep
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Frack off
As Versailles-on-Thames wakes up to the full horror of the energy crisis it has inflicted on itself, we see a desperate scrabble for any potential energy source that might fill the gap. Which is why, among other things, fracking is back on the agenda. The problem though, is that fracking was little more than a get-rich-quick scheme that took advantage of the peculiar financial landscape in the aftermath of the 2008 crash. In the USA, companies could borrow billions of dollars at real negative interest rates in order to produce millions of dollars’ worth of oil and gas before eventually going broke… and British companies like Cuadrilla and Ineos wanted a piece of the action.
When the pre-pandemic push for fracking was called off, protestors fooled themselves into believing that chaining themselves to the railings or standing around in the rain had some how resulted in the moratorium on fracking being imposed… as if protest ever really changes anything. The reality though, is that potential investors got cold feet. Following a string of bankruptcies in the USA, and Wall Street taking a harder look at the losses incurred in the fracking industry, City of London investors pulled out.
The cover narrative which was used to keep the possibility of UK fracking alive, was that Britain should wait until gas was in short supply before unlocking the huge resource beneath our own feet. Well, for a string of reasons – an incompetent Brexit, lockdowns, and sanctions blowback – those gas shortages have materialised about a decade sooner than expected. And because the UK has heavily invested in a wind energy sector which depends upon gas to iron out intermittency, the supposed 40 years’ worth of UK shale gas estimated by the British Geological Survey is more necessary than ever.
Politicians, eager to avoid the backlash for their own role in running Britain out of energy, are turning in ever larger numbers to support fracking, despite a large body of evidence that the BGS estimate is hopelessly optimistic. Indeed, some geologists go so far as arguing that we are around 280 million years too late, and that whatever gas there may have been has long since vented into the atmosphere through myriad small faults and fractures which characterise British shale formations.
This may not be enough to prevent a handful of heavily state-subsidised test wells being drilled. But just as a lack of investment scuppered fracking in 2019, so an even more risk-averse financial sector is unlikely to support fracking today until and unless large volumes of cheap gas can be demonstrated to be recoverable. This may be more difficult than the proponents of fracking claim. For example, Gethin Baker, Senior Technical Research Analyst at IHS Markit, in an S&P Global Commodity Insights note to investors, warns:
“A total of 14 wells have been drilled to explore for shale gas in the UK, with only three wells being fracked to date. Currently, there are no proven shale gas reserves due to the lack of wells drilled and tested, which limits the understanding of well deliverability…
“Reversing the moratorium will not provide a quick fix to reducing UK gas prices because UK gas is traded on an international market where prices are set in relation to global supply and demand. If the resource potential of shale gas is proved, gas storage facilities could be required if production exceeds demand. The UK has some of the lowest storage capacity in comparison to other major European countries. Therefore, the gas could be exported rather than used domestically until capacity issues are addressed…
“Shale gas… will not provide an immediate solution to energy security due to the time it will take to drill the number of wells required to produce commercial quantities, coupled with the requirement of drilling rigs with specialist equipment and highly skilled fracking crews which are not currently available in the UK. Finally, local support and planning permission are key to commencing operations and this remains an enormous hurdle for the industry…
“Based on the aforementioned points, the lifting of the moratorium on fracking could lead to an increase in domestic production, however the understanding of the environmental impacts and gaining societal acceptance must be addressed before shale gas can positively contribute to the UK’s energy security.”
In other words, now is not the time to rush in with investor’s money… something which will be reinforced by the current chaos at the heart of the British government and, indeed, the anticipated two-year recession planned by the Bank of England. But without shale gas, from where else is the UK to meet its growing energy gap?
A question of time and money
Another alternative to using gas to generate electricity has also enjoyed a surge in popularity in recent weeks. Even Greta Thunberg seems to have come around to the view that nuclear is the only viable large-scale alternative to fossil fuels. As with fracking though, nuclear takes time to deploy, and comes with a price tag that nobody can afford just now.
One problem with nuclear power – as we do it today – is that it is essentially a nineteenth century technology. Yes, I know that Chicago Pile-1 didn’t provide the first sustained fission reaction until December 1942. Nevertheless, nuclear fission was merely a new and slightly hotter – because of the pressurised water – means of generating the steam to drive nineteenth century turbines. Like the other two technologies that I referenced in my book Why Don’t Lions Chase Mice? – steam locomotives and aeroplanes – modern nuclear power stations are equivalent to Mallard and Concorde insofar as they have taken the technology beyond the point where further productivity gains are economically viable. As a result, they require huge public subsidies for a product that a growing part of the population cannot afford to use.
The supposedly state-of-the-art “third generation” nuclear power plant being slowly built just across the Severn Estuary from me, promises to provide double the electricity lost with the closure of the coal-powered Aberthaw plant just along the coast. But crucially, it comes at an estimated cost of £26 billion and – following delays – is not expected to begin operating before 2027… and all else being equal – which, of course it isn’t – you would need five – Sizewell C is the only other one being considered – Hinkley Point C nuclear power stations to generate the equivalent electricity that we currently get from gas.
The point is that we need a replacement for gas this winter, not in the year 2050 – by which time Britain is likely to be in the depths of a new dark age. Which is why another form of generation gaining support among the political class is also unlikely to go anywhere.
Although the peak of coal-based coal production in the UK was in 1913, there is still an enormous volume of coal beneath the ground. Indeed, several open caste mines still operate to supply coal to the last two coal power stations and a handful of steelworks that still operate in Britain. Certainly, if – as is very likely – the lights go out this winter – most probably due to freezing high pressure air settling over the country – the current environment-based opposition to burning coal is likely to dissipate… not least because those same climactic conditions give the lie to the idea that a modern economy can run on renewable energy alone.
Fortunately for the wider environment, as with nuclear, the problem with coal is less to do with securing the fuel – although most of Britain’s cheap and easy coal was consumed decades ago – than with the cost and time required to build or rebuild coal power stations.
The fact is that future energy shortages were understood decades ago, but nobody in Versailles-on-Thames was prepared to take the hard decisions needed. And so, each new government has left the problem to governments of the future to resolve. The result is that Britain is about to find out the hard way just how much of our current lifestyles depend upon a steady flow of cheap energy… something that we are soon going to discover that money just can’t buy.
Nostalgia fails
Just as generals fight the last war, so we all have a tendency to look back on past crises as a guide to those of today. So it is that Thomas Kingsley at the Independent resurrects the ghost of 1974 as a guide to the ups and downs of electricity shortages:
“As the National Grid warns Britons could face blackouts due to the energy crisis we look back at the last time the country was plunged into darkness…
“Unlike today, most of Britain’s electricity came from coal, and so crisis struck in the 1970s when miners voted to strike over wages for six weeks between January and February 1972.
“Miners picketed power stations in an effort to restrict coal supply, leading to mass blackouts around the country and businesses being forced to close.
“This disagreement stretched until 1974 when then prime minister Sir Edward Heath was forced to implement a three-day working week to preserve energy.”
That “unlike today” applies to a lot more than the means by which Britain’s electricity is generated… which is why comparisons with 1974 are unhelpful. For starters, we had far fewer electrical devices then than we do now. Indeed, it was not uncommon for the houses of the period not to have an electrical socket in every room – today you would be hard-pressed to find a room that doesn’t have several.
This though, is only the start of our troubles, because since then a process of computerisation and digitisation means that we have built an economy which depends upon a steady and continuous supply of electricity to function. And even the time-limited power cuts that the National Grid are talking about in public can have severe negative consequences. One insight into just how bad things might turn out to be came in a 2014 report leaked to the Telegraph of an emergency planning exercise – Exercise Hopkinson – exploring the likely impact of a prolonged power outage across the southwest of England:
“The assessment, which involved officials from all key departments and major industries, took place this summer following 12 months of preparation. It was designed to ensure emergency power plans were ‘fit for purpose.’ Instead it exposed the fact that, where contingency plans against power disruption exist, some of those plans are based on assumption rather than established fact…”
The report accurately describes a cascading collapse in which the failure of one critical infrastructure infects neighbouring ones. For example, fuel would become hard to obtain because filling stations use electric pumps. Similarly, communications infrastructure would decay as back-up generation cannot be maintained. And much of the country’s clean drinking water depends upon electric pumps to transport it from reservoirs to households and businesses. Rail transport would be crippled through multiple signal failures and by a lack of power in electrified sections of the network.
The report also recognised the danger of emergency services being used up and burned out in the initial phase – for example, fire brigades responding to multiple alarms going off as the power fails – leaving insufficient resources for the longer term. Hospitals, similarly, may have to deal with an immediate rush – for example from car crashes and accidents around the home when the lights go out – at the expense of conserving resources for the duration. Indeed, the report warned of a dangerously optimistic expectation that human resources would be available when, in practice, many workers would stay at home with their families rather than attempt to get to work.
In 1974, people managed to survive the power cuts simply because the economy was far less dependent upon electricity. Indeed, without computers and phones, and with colour TV only just becoming common, people were able to find other ways of entertaining themselves – which is why there was a surge in births the following year. Today though, power cuts – which, because of intermittency, are going to be far less predictable – are going to become a matter of life and death if they are prolonged and/or if parts of the electricity grid break down as a result.
How bad will it get?
With the Tory Party clown show in full flow, this month’s economic data made less of an impact than usual. Nevertheless, both the inflation and the retail sales figures looked bad. Indeed, it might have been more useful if the retail sales data had been published before the inflation figures – because the two paint a very different picture… bearing in mind that they are telling us what the economy was doing in the summer, not what it is doing now.
After a dip in the headline inflation rate, September saw a rise to 10.1 percent, guaranteeing a further – and possibly big – hike in interest rates next month, as the Bank of England’s goal of generating a recession appears not to have been met. Except though, that the retail figures tell an entirely different story. Previously, people had been buying less (the sales volume) but paying more (the sales value). But the latest figures show a drop in both, with the volume dropping below its 2020 level:
“Retail sales volumes and values both fell by 1.4% in September, following a fall of 1.7% in August 2022 (sales volumes were revised from a fall of 1.6%). When compared with the pre-coronavirus (COVID-19) level in February 2020, total retail sales were 12.0% higher in value terms but volumes were 1.3% lower.”
The recorded fall in sales comes on the back of anecdotal evidence of a slowdown, such as the Royal Mail announcement of big redundancies – evidence that business advertising and consumer and business purchasing has fallen – or the growing number of retailers writing off unsold inventory. For example, Rachel Douglass at FashionUnited reports that:
“Asos said it is preparing to implement a 100 million pound stock write-off in 2023, under a new commercial model that aims to increase flexibility within its logistics operations and reduce costs.
“The announcement comes as part of the online retailer’s newly published financial report for the year to August 31, 2022, in which the company also confirmed it had agreed to a 650 million pound banking facility.”
Asos was the lockdown poster child for non-store retail, as the newly created army of home workers shopped online rather than in-store. But like many other retailers, it mistook a temporary boom for a permanent trend. Although online retail volumes are still higher than they were pre-pandemic, the Office for National Statistics reports that:
“Non-store retailing sales volumes fell by 3.0% in September 2022, following a fall of 3.9% in August 2022.”
How is it possible that inflation is still increasing despite a steep decline in retail sales and growing evidence that companies – even large ones like Royal Mail – are struggling? In short, because it isn’t inflation. As Milton Friedman once famously explained, “inflation is always and everywhere a monetary phenomenon.” But the official data shows that the price increases are nothing to do with the money supply. All but two of the items used to measure the Consumer Prices Index (CPI) have been trending down, suggesting that a recession has already begun and that further rate hikes – especially if they accompany government austerity – risk a major economic crisis on a par with the Great Depression of the 1930s.
Gas and food account for all of the CPI increase, and are in effect the result of the same supply-side shock. Gas shortages were initially the result of closures and a drop in investment during the lockdowns. So that, when economies began to open up, there was not enough gas to go around. The obvious consequence was that gas prices spiked upward in the autumn of 2021. The knock-on impact – because we depend upon gas for electricity generation – was that electricity bills also shot up. Less obvious though, was the impact of high gas prices on food production – gas being the chemical feedstock used to produce artificial fertiliser. High priced gas translated into expensive fertiliser. So much so that many farmers stopped using it, and producers cut back production.
Rising food prices today are the result of high fertiliser prices in 2021. Although the problem has been compounded as a result of blowback from the sanctions imposed on Russia. This, of course, points to far more severe energy problems over the winter, together with far worse food shortages in 2023… Although, of course, both the energy and food crises would disappear almost immediately if sanctions on gas and fertiliser were lifted.
Assuming that the political class is not about to lift the most self-destructive sanctions, this raises the question of whether domestic fiscal and monetary policy can do anything to bring prices down. Since the UK consumes just 2.1 percent of the world’s gas, and 1.6 percent of the world’s oil, even if the government and the Bank of England managed to crush the economy to, say, half of its current size, the impact on world gas and oil prices would be little more than a rounding error. Although were the entire European continent to drive itself into a new dark age, that would at least make oil and gas a lot cheaper for the rest of the world.
Worst of all, because the data used by the government and the Bank of England is “backward looking” – a bit like trying to drive the car while only looking out of the rear window – we could well be in a severe – and possibly irreversible – energetic and economic crisis before they even realise that they’ve pushed their policies too far.
As you made it to the end…
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