Thursday, June 20, 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) 
  • 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 ?

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

This post first appeared on the Capitalists@Work blog

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