Tuesday, 24 May 2016

The fracking = lower energy bills myth


In the wake of the decision by Tory dominated North Yorkshire County Council to approve a fracking licence just a few miles south of the North York Moors national park, the fracking apologists have been out in force to try to defend the decision to completely ignore the massive 131:1 scale of opposition to the plans.

One of the favourite tactics of the fracking apologist is to pretend that there is some kind of correlation between fracking and lower domestic energy bills. In this article I'm going to explain how this argument is not only wrong, but actually completely backwards.

Evidence-free assertions

The claims that the introduction of fracking rigs in the English countryside would bring down domestic energy bills is a classic evidence-free assertion. Fracking enthusiasts just seem to take it as an article of faith that fracking would reduce domestic energy bills in the UK. It's like some kind of unquestionable religious to these people.

If you see anyone making these claims it's a good tactic to ask them to direct you to a peer reviewed scientific study detailing a link between fracking and low energy prices in the UK domestic energy market. They won't be able to do so because no such study exists. They'll just continue repeating the claim on the basis that it's true because they want it to be true.

The UK is not the US
 
Evidence of devastating environmental damage in the US and "cut and run" tactics from unscrupulous US fracking companies who abandon their fracking rigs for the taxpayer to clean up is shrugged off by fracking enthusiasts with the excuse that those things happened in the US and it will all somehow all be different in the UK. However, when it comes to their stories about fracking leading to lower energy prices, they immediately point to the fall in domestic gas prices in the US as if it represents compelling and unquestionable evidence.

It would be easy to dismiss such tactics as "wanting to have their cake and eat it" because it is about as clear an example as possible, but there are some specific reasons that direct comparisons between the US and UK dometic gas markets are desperately misleading.

The early 21st Century fracking boom in the US did lead to a fall in domestic gas prices in the US, but their gas industry was not set up for the mass export/import of gas, so the majority of additional supplies remained within the US market, which created a glut which drove down the price of gas. Not only is the US gas market not set up for mass exportation, there are also
laws to disincentivise US firms from exporting energy.

The UK gas industry is very different. The UK gas market is much more interconnected with other countries. If gas production rose in the UK, then domestic prices would be unlikely to fall far because the UK gas market is nowhere near as closed as the US market. In order to significantly reduce domestic gas prices, the UK would need to begin extracting a vast enough quantity of shale gas to impact the entire European gas market. Anyone who thinks that is likely to happen any time soon clearly has no idea whatever about the scale of Russian gas exports to the European market.
In 2015 Gazprom (the Russian state gas monopoly) exported 159.4 billion cubic metres of gas to the European market. Third Energy are reluctant to disclose their projections for how much gas they are planning to extract from the KM8 fracking zone, but it's fair to asume that it's going to be an absolutely tiny drop in the ocean compared to the production of the North Sea gas industry, let alone the scale of Russian gas exports to the European market.

Anyone who tries to point to the fall in gas prices in the US as evidence that UK gas prices would also fall is doing nothing but displaying their ignorance of the structural differences between the US and UK energy markets.

 
Ignoring externalities
 
Even if we allow the entirely unproven assertion that fracking will produce lower UK domestic energy bills to stand, there's still the issue of externalities to consider.

If fracking does shave a few pennies off our domestic energy bills, what will be the hidden/unconsidered costs? 

One of the most obvious potential costs that is excluded from the "lower energy bills" claims is the potential cost to the taxpayer of attempting to repair fracking related environmental degridation (in 2013 the Tories exempted the fracking industry from liability insurance). If fracking causes environmental degridation it will either be permanent (an environmental externality), or the taxpayer will have to foot the bill (a taxpayer subsidy that is excluded from the calculation).

Then there's the cost of George Osborne handing the fracking industry a vast tax break in order to make the industry seem even remotely viable. If lower energy prices come at the cost of the taxpayer propping up an unviable industry with huge tax breaks (lost tax revenues), that's clearly an example of giving with one hand and taking away with the other.

Another potential cost is the environmental harm from continued reliance on the burning of fossil fuels to meet our domestic energy demands. Instead of handing vast tax breaks to the fracking industry, surely a more environmentally sustainable strategy would to invest more in things like renewable energy, increased energy efficiency and research into technology like clean fusion reactors?

Another set of costs that has been excluded from the optimistic and unsubstantiated "lower energy bills" claims of the pro-fracking brigade are the costs to the local community. If roads need to be widened to cope with increased traffic, local taxpayers will pay the cost. If property prices fall because of the gigantic fracking rigs in the area, the local community will pay the cost. If the fracking process ends up damaging or destroying the land, the local community will pay the cost.

One of the classic ways of making a bad deal look like a good deal is to cut out all of the extrnalities such as social harms, environmental degredation and economic costs borne by the taxpayer. If these costs are taken into consideration, an even bigger heap of salt needs to be piled on top of unsubstantiated claims that fracking will cause domestic energy bills to fall.

Fracking depends on high energy prices
  
It's already established that claims that fracking will cause UK energy bills to fall are not based on anything remotely resembling peer reviewed scientific studies. It's also clear that such claims are worthless if they involve the exclusion of externalities like social and environmental costs, and economic costs that are carried by the taxpayer. However the most damning criticism of all is that the whole claim is completely backwards. There's no evidence to prove that fracking in the UK would cause energy bills to fall, but if energy bills do fall significantly, then fracking becomes an economically unviable method of energy extraction.

Fracking won't cause lower energy bills because the whole industry is relient upon high energy prices to survive.

The reason fracking relies on high energy prices is that it generates very low rates of Energy Returned on Energy Invested (EROEI) meaning that the margins are an awful lot slimmer tan traditional forms of fossil fuel extraction like oil and natural gas.

The ever improving EROEI ratings for renewable technologies such as solar, wind and wave power also point to difficult times ahead for the fracking industry (unless the Tory government decide to prop fracking up with even more tax breaks and subsidies whilst directly attacking the renewable energy sector).

A look at the way fracking companies across the US "cut and run" when energy prices fell leaving a trail of envirnmental degridation in their wake is direct evidence that the fracking industry is highly dependent upon high energy prices. If falling energy prices caused such chaos in the US fracking business that left Exxon's Chief Executive complaining that they were "losing our shirts" and Total's boss decying extraordinary losses in Texas with claims that Fracking "doesn't work" and that there's "no point in investing where there is no profitability" - then what on earth makes fracking enthusiasts think that the UK fracking business would be exempt from the consequences of the low energy prices they claim that it would cause?
 
Tory energy market price-fixing

Fracking enthusiasts need not be too worried that falling energy prices will derail their beloved industry though, because the Tories have signed up to a vast energy price-fixing deal to bribe the French state into building a nuclear reactor at Hinkley Point C by paying them double the market rate for electricity for 35 years. A crackpot scam to artificially inflate energy prices like the Tory price-fixing deal with the French is a surefire way of making the horribly inefficient shale gas fracking industry look financially viable.
 
Conclusions
 
Environmental destruction in Wyoming after fracking
companies "cut and run" leaving the US taxpayer to
pick up the bill.
Even after the US propped up the shale gas fracking industry with vast tax breaks and woefully inadequate liability insurance rates, the fracking business in the US has imploded due to falling energy prices, leaving an environmental catastrophe in its wake.

The Tories are utterly determined not to learn any lessons from this debacle in the US, deciding to throw vast subsidies and tax breaks around in order to promote fracking in the UK. It's absolutely clear that a large number of Tory politicians have investments in the fracking business, so it's no wonder they're doing everything in their power to promote an industry that is only viable if energy prices remain high.

If deliberately puncturing the growth of the UK sustainable energy sector; signing completely unjustifiable 35 year price-fixing deals with the French to keep UK domestic energy prices as high as posible; giving fracking companies vast tax advantages over other fossil fuel sourcesbribing local councils into allowing fracking to go ahead in their areas;
 exempting fracking companies from covering their own clean-up costs; riding roughshod over the concerns of local communites where fracking is going to be imposed; and spreading completely back-to-front myths about fracking lowering energy prices - is what it takes for the Tories to support the fracking industry, then so be it. David Cameron and his Tory chums have made it absolutely clear that they're "going  all out for shale".

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