Come on down, the price remains high…

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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.