Following on from our previous fracking related blog I thought it beneficial to look into the economic factors related to fracking.There is certainly a lot of pessimism in the press related to the risks of fracking and very little about potential upside.Are the potential risks outweighed by a financial expansion to the UK economy?Will the exploitation of Shale gas help to decrease the budget deficit? Will consumer gas prices be reduced?
The obvious answer is yes, fracking will help to stimulate economic activity and as a result tax revenues.
Let’s look at a less intuitive way that fracking can increase economic productivity and reduce the deficit.Without getting too technical, the sum of the budget deficit, capital inflow finance the trade deficit and the difference between domestic saving and domestic investment equals zero.If we were to expand to decrease any of these three factors it automatically puts an added pressure on the others to expand or shrink to maintain a net zero balance.
Fracking will undoubtedly expand domestic oil & gas production and as a result it should reduce UK demand for energy imports in order to decrease our trade deficit.The reduction in net capital inflow required to finance the trade deficit.The decreased capital inflow should then reduce gaps between domestic investment and saving and government expenditures and tax revenues, the deficit need to reduce.
As fracking expands domestic oil and gas production, it’s likely it will reduce the UKs demand for energy imports and shrink our trade deficit. This reduces the net capital inflow required to finance the trade deficit. The reduced capital inflow will tend to reduce the gaps between domestic investment and saving and government expenditures and tax revenue—the deficit in question.
The question still remains how much will this affect the UKs deficit and how what effect will this have on the consumer gas prices?
It is hard to estimate before exploration and production are fully underway.One of the major issues is related to production rates, start high and fall fast.It is reasonably well known that Shale gas production declines at a rapid rate as the pressure below the surface closes up fracking fissures.Energy Policy recently released figures that production at wells can drop off by as much 60% – 90% within the first year.
The major risk with declining production falls under the term ‘Boom or Bust Economics’.With falling production, operators have no choice but to drill new wells to ensure that production in sustained.A glut of gas is created every time a new well is drilled and a new site comes into production.The likely result of the process will be an unsustainable shale bubble; structural instabilities masked by temporary recovery.The theory doesn’t bode well for the future of fracking, but we all know that theory rarely holds much substance in practice.
For the majority of the UK population they have a few economic concerns.Will the deficit be reduced?What impact will there be on gas prices for the end user?The answer to both questions is still up for debate and until production begins no one can be certain.One would assume the best place to look for answer would be a country that has already been through the process, the US.
The cost of natural gas in the US in 2008 was around $8 a unit, it’s now $3 for the same unit.What’s more impressive is that the US is now competitive in the fertilisers and chemicals industries, a market that most had assumed was dominated by the east.The Americans have also cut their CO2emissions to levels not seen since the 90’s even with a growing population.There are potential risks that come with this form of production and some areas will be effected more than others but it seems that green enthusiasts and eco-warriors are on the wrong side.
Let’s ignore the financial benefits for a few moments.It appears that the UK has failed to take into account the fact that energy is but a finite resource.Yes we have wind farms that produce about 0.4% of the UKs needs and wave power, solar power and biomass that is yet to have a major impact.Would the public rather see us line the pockets of Vladimir Putin and purchase atomic power from the French or decrease the trade deficit, and create thousands of jobs in areas where unemployment is rife?
I know what I would choose.
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