Come on down, the price remains high…


Well, too many announcements on one day from DECC and the Treasury to easily contemplate. Even seasoned energy-geeks like Rich Hall (worth following his energy tweets on @richonlyinname are feeling “punch drunk with the …..000s of pages”.  So they’ll need digesting. But one element, from the Treasury, at least stands out – it’s full steam ahead with shale gas. Maybe a good thing, you might say, but there’s still time for a little tempering of what is fast becoming the “tulip mania” of our times (Charles Mackay’s seminal book “Popular Delusions and the Madness of Crowds” has a good chapter on that, incidentally).

One rather basic point that I think needs to be mentioned early on is that, even if we can recover much of the trillion plus cubic metres of shale gas that the British Geological Survey now says are in the rocks, IT DOESN’T MEAN THAT GAS PRICES WILL COME DOWN.

This is for two reasons:

  • Fracking itself is a relatively expensive process and produces gas at a considerable cost premium over conventionally drilled supply. It only becomes economical as scarcity increases and the prices rise.
  • The idea that gas from a fracked well will somehow be piped into our homes at a knockdown price, straight from the well, is just fantasy.

On the second point, I know that no one has exactly said that we will get cheap energy as a result of shale gas, but that’s what is increasingly being implied by fracking cheerleaders. Here’s an extract from the Treasury (“Investing in Britain’s Future”) document out today:

“The price of gas in the US has also fallen dramatically, benefiting many other areas of the economy”.

Implication: and so it could too in the UK.

It’s true that US gas prices have fallen sharply. This is because North American shale gas is traded in one of three, largely unconnected, global trading markets. Gas cannot easily be traded globally, except in Liquid Natural Gas (LNG) form (very expensive) because it mainly departs and arrives in pipelines. So trading takes place in multinational regional markets (North America, Europe and the Far East) which are pretty much unconnected to each other.

Prices are currently much higher in the European and Far East markets than they are in the North American market. This would only be marginally affected by the transport of LNG from that market to the two others.  Shale gas production from the UK would have to trade into the European market and would therefore be subject to the prevailing trading price in that market. As consumers, we would then get our gas supply, shale or otherwise, on that basis.  Only if there was a shale gas bonanza across the whole of Europe, similar in scope and size to that in Texas and Pennsylvania, would that iron fact start to change.

It is worth remembering this arrangement when we contemplate the costs and benefits of shale fracking. Shale gas might be good for energy security (although since we are all interconnected by the European gas market, only marginally so) and it might be good for the Treasury coffers in the future. But will it be good for ensuring rock bottom energy prices? Definitely not.

5 thoughts on “Come on down, the price remains high…

  1. Pingback: Alan Whitehead MP: Come on down, the price remains high… « SERA – Labour's Environment Campaign

  2. You may be interested in this comment on your article which I have just posted at the SERA website..

    “Yet another piece on shale gas which misses the main point. Here’s a comment that I have posted in response to today’s Times editorial on the subject.

    “Stan Rosenthal 59 minutes ago
    A whole editorial on shale gas and not one mention of the elephant in the room – global warming. Whatever its merits, energy derived from this new source will undoubtedly add to greenhouse emissions in the atmosphere at a time when we should be drastically reducing such emissions if catastrophic climate scenarios are to be be avoided.

    It is not just Greenpeace who are raising such fears.Almost all scientists in the field accept that CO2 and methane in the atmosphere traps heat and is causing global warming.. A few weeks ago it was announced that carbon levels in the atmosphere were at their highest since pre-historic times . Global warming has plateaued at record levels. Special factors have prevented temperatures from going higher in recent years but these are not expected to last. The world’s foremost energy authority, the International Energy Agency has warned that if we do not immediately switch to carbon free technologies the tipping point regarding irreversible climate change will be reached in just four years time. Another report has said that most fossil fuel reserves must stay in the ground if disaster is to be averted..

    Exploiting shale gas not just here but all over the world will clearly boost carbon emissions at the expense of the development of carbon free technologies which is the only effective means of dealing with the crisis. As you say, in America “its effect has been so dramatic as to make a sideshow of President Obama’s vision of a US industrial future based on wind turbines and solar cells.” Going for shale gas in the way you advocate could therefore be the last nail in the coffin of a sustainable future. And all this is irrespective of the devastating effect of fracking on the local environment.

    Shale gas – the ultimate Faustian bargain. ”

    I look forward to some discussion in SERA about how we should tackle this crucial issue – perhaps at the coming Fabian conference.

    Incidentally I am a founder member of SERA.

  3. Alan,you are surely aware of the evidence from multiple sources, myself, Thierry Bros and others included that pointed out to the ECC that US shale gas is already having a substantial impact on world prices. Everything I said six months ago on that is becoming true – just faster. This from Bloomberg quotes multiple sources to point out what is happening.

    Renewables are vital, but so is natural gas to match their variability. This from Citibank last year seemed to get ignored by Greenpeace in their constant totemic cherry picking of an outdated Deutsche Bank report (which is now out of date according to the author Michael Hsueh)

    Shale and renewables could be the making of each other

    What I would like the ECC to concentrate on is the complete lack of transparency in domestic gas and electricity bills. That could settle two arguments: The true impact of renewable obligations and the true cost of the commodity.

    This is what US consumers see on their bills every month, this example from Washington State.

    Why can’t we see the same in the UK? Three things are stopping it: The Big Six, Ofgem and Parliament.

    By the way, when National Grid say we can’t do that, ask them about this

    What’s wrong with UK energy prices and how to fix them

    • As will be apparent from my previous comment price is not the main consideration here. In fact lower price shale gas could make the real problem (i.e. the impact of exploiting shale gas on global warming) even worse in that it will facilitate a switch not only from coal (good) but a switch from renewables (very bad) at a time when we should be giving maximum priority to the latter.

      You say shale and renewables could be the making of each other. Yes, if shale was used instead of other carbon fuels as a bridge to a solar future. However in the real world heavy investments require a maximum return stretching over as many years as possible. This means that all the money, power, and influence of Big Oil and their fracking friends will be used to advance shale gas (and oil) AT THE EXPENSE of renewables and even energy efficiency (given that the logic of capitalism is to ensure the maximum use of your product). We can therefore expect a huge campaign to sell the benefits of shale gas to the British people, as is happening elsewhere in the world, and to rubbish the alternatives or at least play to play them down in terms of what the country needs at this time..

      We will therefore be locked in to a carbon future at the very time we should be escaping from it. Once the industry is up and running there will be little chance of stopping it, no matter how many nice things will said in the interim to placate the green lobby. At the very least Labour should be calling for much more research into the impact of going over to shale gas in a big way not only regarding the local environmental effects but also regarding its long term effect on tackling global warming and the feasibilty of running the industry down to make way for a largely renewables future.. No commitment to shale gas should be made until the results of this research are known and debated.

      • Alan’s committee has already done two excellent reports on shale gas which I commend to you. Many others have been done by organisations and governments all over the world. What could possibly be gained by analysis paralysis.
        Two points: The UK shale gas (and oil) reserves are Crown Property. As this gets a 62% tax and royalty take, this is a get rich quick scheme the for Chancellor of whichever party is in power in from 2016 onwards ( I hope it’s Labour). It can do for the next government, what North Sea oil did for Thatcher.
        There is absolutely no reason why, in a national conversation about energy in general, that we cannot invest some of that revenue not only in the NHS and buy planes for aircraft carriers and keep bankers at bay that little longer, but we can do R+D on renewables that are more effective than the subsidy sucking renewables that however much I would like to disagree, simply cannot provide enough power.

        Finally, and again: What we do in the UK is entirely irrelevant on a world basis for two reasons. Firstly, the UK power emissions are a drop in the bucket. Secondly, the shale revolution will cause a switch from coal to natural gas worldwide. That is entirely within reach, and scientifically far more possible than 100% carbon reduction by 2050.

        I suggest that Labour return to it’s roots and work for workers and families. There are few votes for Labour in Greens and the failure of the ultra hard green movement will only drag down Labour. Better to have pragmaticism over purism. Labour had that argument already and we don’t need to repeat the mistakes of the days of Micheal Foot style “purism”

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