The Economics of Fracking

“It can be concluded that both shale oil and shale gas are unlikely to be economically viable in this current low hydrocarbon price environment and even if there is a return to recent higher prices; it is likely that the industry would require significant subsidy or significant efficiency progression before it could be used at any kind of scale.”

“Even if the extraction can be proven to be environmentally ‘safe’ the experience of the United States shows that it risks bringing boom-and-bust to our communities as waves of temporary jobs move rapidly through without rooting themselves in local economies.”

CWFrack

My first paper written for the Common Weal has been published today. The Economics of Shale Gas Extraction is the first major paper to be published in Scotland focusing on the economic, rather than environmental, impacts of the industry particularly on the local communities which will be hosting the wells.

Key Findings:-

  • The SGE market in the US and, so far, in the UK is dominated by larger companies occupying the most profitable licences. There is little scope for community owned or small company development to occupy a significant market share.
  • Individual wells become largely non-productive within a few years of development which, due to market demand for constant production, forces companies to continue drilling new wells in new locations at a rapid pace.
  • The low recoverable volumes and high capital and running costs of wells may render profit margins comparatively small and extremely sensitive to oil and gas pricing. There appears to be little scope for economic development of SGE in the UK until and unless wholesale prices return to historic highs and even then significant subsidy may be required.
  • Communities are likely to be significantly adversely impacted by nearby SGE fields. The concentrated pattern of land ownership and comparatively weak situation of local government renders communities vulnerable to being unable to capture wealth generated by nearby wells whereas the burden of environmental degradation or even simply the threat of such degradation can lead to community stress and negative economic effects.
  • The jobs created by SGE appear to be short-lived and highly mobile. The job demographic of the planning, drilling and production phases are each relatively exclusive meaning that they will move to the next site more rapidly than the wells themselves do. This creates the risk of a “Boom-Bust” effect in communities.
  • Shale oil and gas is considered a relatively poor source of fuel due to high extraction costs. The UK’s reserves are also likely to have an insignificant impact on global markets and hence a negligible impact on end-user prices.
  • Significant externalities have been identified in the form of environmental degradation due to methane leaks. The costs to mitigate these may exceed the lifetime revenues generated by the well which produced them. Further, the UK has a poor record in terms of ensuring adequate decommissioning and restoration bonds which may lead to further public funding being required after the SGE companies have left an area.

Whilst much of the attention on the shale oil/gas and fracking industry has been focused on the environmental impact, less attention has been paid to the economic effects. Even if the extraction can be proven to be environmentally “safe” the experience of the United States shows that it risks bringing boom-and-bust to our communities as waves of temporary jobs move rapidly through without rooting themselves in local economies. Scotland’s history of concentrated land ownership and comparatively poor local government also risks creating a vast transfer of wealth benefiting the already wealthy whilst potentially leaving communities to foot the bill for cleaning up. All for a fuel which the government has been told will not even benefit us in the form of lower energy bills.

There should be no place for fracking in Scotland or the UK.

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