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Fracking in the UK is out for the foreseeable future

no-frackingListening to Osborne waxing exuberant over Britain’s energy future because of his obsession with a fracking revolution in the UK to match that in the US, you might be excused for thinking that he had a trump electoral card. Any such idea is nonsense, for several reasons. The predicted fracking deposits in this country are only a fraction of those in the US and, an equal no-go area for Osborne, are largely located in traditional Tory areas where the public resistance has already shown itself to be formidable. But there is another critical factor which rules out fracking for a long time ahead, maybe decades. It is now utterly uneconomic.

Since mid 2013 crude oil prices have fallen 60% from $115 per barrel to about $45 now. This price collapse was not accidental or purely the result of market forces. It has happened in large part because of the surge in the US shale oil industry (hydraulic fracturing) which has increased the world supply of oil, which in turn has depressed oil prices. Normally in such circumstances Saudi Arabia, the leader of the OPEC cartel and the world’s single largest oil producer, would cut back on production and thus stabilise the oil price around the pre-existing level. But not this time. The Saudis have simply sat on their hands and let the oil price plummet. So why not this time?

Apart from Saudi pique that the Americans are not playing their part to try to stabilise the world price of oil, there are two deeper possible reasons. One is that the Saudis are acting in synch with the US to put maximum pressure on some of the biggest oil producers who happen to be their main enemies, namely Russia, Iran and Venezuela. These countries depend heavily on oil (and gas) exports for their foreign currency reserves, so a plummeting oil price hits them hard. But there is another possible explanation. If the Saudis do nothing to halt the collapsing oil price, it will decimate the US shale oil industry, much to the benefit of the Saudis (a good example of predatory capitalism!). The floor for profitability of shale oil is a price of about $80 per barrel, so $45 a barrel is a wipe-out. Moreover when most of the shale producers are bankrupted, the loan defaults will be passed through to the banks which made the loans – exactly as happened with the housing sector in 2008 (maybe this is Sub-prime fiasco Mark II?).

So Osborne’s bravura about a UK shale revolution leading to untold British prosperity is just so much hot air. It reminds one of his similar boasts about his great economic recovery and his long-term economic plan, with all the credibility of a bucket of warm spit.

One Comment

  1. James Martin says:

    It shouldn’t need pointing out that one of the main reasons for the fall of the oil price (which incidentally is rising significantly again) is the success of shale extraction in the US meaning that for the first time in decades they are an energy exporter again.

    And while I get the issues that come with lack of proper regulation for shale extraction (which are in fact the same sort of issues you get with lack of regulation and safety for ‘normal’ oil extraction that has led to disaster in the Niger Delta), if we did have a nationalised and highly regulated gas extraction body then shale should be supported. In other words the issue is not the technology but who owns it and for whose benefit,

    The problem with Michael Meacher’s position is that he opposes shale, opposes nuclear and so in a situation where the technology isn’t there yet for constant solar and wind renewables in enough numbers what’s left? High carbon coal, or Russian gas and Saudi oil? Personally I’d rather have investment in nationalised UK shale myself…

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