Wednesday 19 June 2013

Shale and the Price of Gas

When push comes to shove, people really don't understand markets very well.  Perusing the increasingly lively meeja coverage of putative shale gas in the UK, we find people who say shale discoveries will bring down the price of gas, and seemingly even more who say it won't - including, remarkably enough, the shale gas lobby itself.  Wishing, I suppose, to be cautious in their claims, some of them say the effect will be minimal. 
At a meeting for concerned residents at a potential fracking site in West Sussex, a Cuadrilla representative was asked to comment on whether shale gas could drive down customers' energy bills. “We've done an analysis and it's a very small…at the most it's a very small percentage…basically insignificant,” said Mark Linder, a public relations executive at Bell Pottinger who is also responsible for Cuadrilla's corporate development.  (Inde)
Some PR he is, eh?  At least he didn't say prices would go up, though we may be sure that in due course someone will - the whole renewables policy is a massive bet on this.  The argument seems to be that under EU trading laws we'll be 'forced' to sell it to the wretched continentals, (read: they'll offer to buy it, and if the price is right we'll sell it !), thus neutralising any tendency to lower UK prices.  (Even Peter Lilley seems to be willing to concede this.)

Let's put some perspective on this.
  •  in 1994 a relatively small gas surplus in the UK brought down the price of (wholesale) gas by 60% in 8 months - and it stayed down for 5 years
  • it went up again when in 1999 the UK became connected for the first time to the gas networks of the continent, where gas prices were higher - set by oil-indexed gas contracts.  The quantities of gas being exported from the UK that effected this price-shifting arbitrage were relatively small (indeed, on a net year-round basis, extremely small, as UK gas was exported in summer, but there were imports from the continent in winter)
  • European gas importers still paying oil-indexed prices (to Gazprom, Sonatrach et al) have been seriously hurt as spot prices have once more fallen, based on another relatively small surplus stemming from the 2009 industrial downturn.  (In consequence they have forced Gazprom to reduce their prices.)
  • US gas prices have been absolutely trashed by substantial amounts of shale gas, and have stayed low despite warnings for several years that this can't go on.  Of course, as yet they are only able to export very small amounts of the net North American surplus (the US is still a net importer, from Canada).
So: gas prices like other prices, as any fule kno, are frequently set by marginal effects, and move in the predictable direction.  Surplus => down, just to be clear ...  If there is any economically recoverable shale gas lurking there, its directional impact on price is not in doubt.  

If and when it is produced in fair amounts (say, equivalent to 10-20% of UK demand - a lot less than some predict will flow) it will have the potential to impact on spot-gas prices not only in the UK but in Europe as a whole.

The absolute effect of this will hinge entirely on the detailed supply-demand dynamics of the time. This being a good few years into the future, we have no idea whatever what those will be.  

OK ?

ND

UPDATE:  The Horizon programme on shale 'n fracking was fairly balanced and well done.  It's on again this evening, and here

13 comments:

Elby the Beserk said...

Whatever happens, the gubbinmint will ensure that we are screwed, I am sure. After all, we are now little more than ATMs for ever bigger and bigger government.

All your money is ours, says the gubbinmint.

Anonymous said...

If we talk about gas prices, the good example is US where over 10 years prices have decreased even to $3 per MMBtu thanks to shale gas extraction. here is more info on that

Barnacle Bill said...

I'm sure before long we will find out that the Fruitcake fae Kirkcaldy gave away our mineral/gas rights to the EU when he signed that treaty in a cupboard in Lisbon.
No wonder they won't let him have the light on.
What with all those added clauses, one of which will come home to roost before the first shale gas is extracted.

Graeme said...

Anon @12.55 I think the US case is not the only outcome. Legislation stops them from selling abroad. So the effect is not a 'given' of shale production.

Demetrius said...

I can predict that prices may go up or down or remain more or less the same. So there.

Sackerson said...

ND, do you see this cheaper energy making British industry more competitive?

Nick Drew said...

it would have to be very much cheaper (the US situation has been turned around by gas-prices falling 70%); and to envisage that happening here as a result of indigenous shale-gas before the end of the decade is a real stretch

what's more likely is that global energy prices soften, but more so in Europe than Asia in the first instance - we are more plugged in to gas infrastructure - tipping things ever so slightly back our way until the Chinese + Indians manage to build large-scale pipeline import facilities

also, if (if) shale gas is found in decent quantities, British manufacturing + civil engineering will benefit from the development work: we know how to do this stuff

and (as Peter Lilley pointed out) even if UK gas prices don't go down, our gas costs will, so the Exchequer will benefit

Anonymous said...

@Graeme That's not entirely true :) I would say that shale gas is one of the reasons for this effect. My example shows that extraction helps to become more independent from foreign gas suppliers. And this is one of the reasons why gas prices in US dropped.

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this is really amaizing "" Some PR he is, eh? At least he didn't say prices would go up, though we may be sure that in due course someone will - the whole renewables policy is a massive bet on this. The argument seems to be that under EU trading laws we'll be 'forced' to sell it to the wretched continentals, (read: they'll offer to buy it, and if the price is right we'll sell it !), thus neutralising any tendency to lower UK prices. (Even Peter Lilley seems to be willing to concede this.)"""

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