Shale gas could frack up our manufacturing

Fracking won't help our industrial base, if the Dutch disease is anything to go by.

Among the many extravagant claims made by supporters of fracking, perhaps the most absurd is that it will lead to a renaissance in British manufacturing. George Osborne picked up this theme last week when he argued that cheap energy was leading manufacturers to return to the US and he wanted to see this happen in Britain. A revival in the fortunes of our hard-pressed industrial regions would be warmly welcome, but sadly fracking will not deliver this. Even if all the major obstacles to extracting large amounts of UK shale gas could be overcome, our manufacturers are unlikely to benefit from much cheaper gas. To make matters worse, they could even suffer a big loss of competitiveness, as they did in the late 1970s when the discovery of North Sea oil pushed up the value of the pound.

The obstacles to major shale gas production in the UK are well known. To start with there are uncertainties about the geology. The estimate of UK shale gas reserves in the north of England was recently revised up substantially to 1300 trillion cubic feet and it is often suggested, based on US experience, that it might be feasible to extract 10 per cent of these reserves. Yet given that there are differences in the geology between the US and UK, no-one really knows whether it will be economically viable to extract anything like this volume of gas.

Even if the economics of extraction turned out to be viable, there are a multitude of environmental concerns and substantial political opposition. Unlike the US, where fracking can take place in the wilderness, we live in a crowded island. Developing our shale gas reserves will inevitably bring substantial local and national opposition that will make it much harder for the industry to take off in a big way.

But as many commentators have already pointed out, even if these substantial obstacles could be overcome, it may not mean cheap gas for our manufacturers. Unlike the US which has little capacity to export its newly found gas reserves, the UK is heavily integrated into the European energy market and our gas prices are set at the European level. Extra gas production from UK shale gas is unlikely to be large enough to lead to major reductions in European gas prices.

But what has been overlooked is that the discovery of a natural resource should lead to an appreciation of the exchange rate, which makes the manufacturing sector less competitive. The most celebrated example of this happened in the Netherlands after the discovery of a large gas field in 1959 which led to the term the “Dutch disease”.

There is also an example closer to home when the UK made the discovery of North Sea oil in the 1970s and sterling became a "petro-currency". Interestingly, if the claims of proponents of fracking are to be believed, the scale of shale gas reserves in the UK could be of a similar magnitude to the discovery of North Sea oil. If 10 per cent of the estimated northern shale gas reserves were accessible, this would be equivalent to around 3250 million tonnes of oil which is almost exactly the same as UK offshore oil production since 1975.

And the precedents from when the UK discovered it had large offshore oil reserves in the 1970s are hardly encouraging. Despite an almost perpetual economic crisis, the real effective exchange rate of sterling rose by nearly 30 per cent in the six years after the first North Sea oil was landed in 1975. Over this period gross output of UK manufacturing fell by over 22 per cent and unemployment rose sharply.

That’s not to say that no-one benefits from exploiting natural resources. The companies extracting shale gas could take on more workers and may generate higher profits for their owners. There may also be additional tax revenues for the government if they are not squandered on excessive tax breaks to stimulate the industry in the first place. But the beneficiaries will not include UK manufacturers. Even if one ignores all the practical, political and environmental obstacles to exploiting our shale gas, the argument that it will lead to a renaissance in UK manufacturing does not stack up. It is unlikely to significantly reduce our energy prices and is more likely to push up sterling and erode the competitive position of our manufacturing firms.

"Frack off, u motherfracker". Photograph: Getty Images
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Nicola Sturgeon and the SNP’s echoes of New Labour

The fall of Blair should be a set text for anyone wishing to know what happens next to the SNP.

If there was one thing the SNP and New Labour had in common, it was the hope. Both offered themselves as a burning torch of optimism to publics that had become tired of the same old gang running things in the same old way. Both promised a fairer, more equal society and fearless embrace of the modern world with an appealing freshness and energy. The voters bought it: both won big, repeatedly.

The thing is, if you’re elected on a mandate to be different, you’d better be different. In many areas, for a long time, New Labour managed to be just that. The smiling PM with the huge majority pushed through bold policies, some of which even worked. Tony Blair’s strategy was so successful that the Conservatives and the Lib Dems reshaped themselves in his likeness.

But, as some say, it’s the hope that kills you. When the inevitable attritional realities of governing start to weigh; when you make, as you will, bad decisions; when the list of enemies grows long; when you’ve simply had your time; you’ll fall like all the rest. Only, when you’ve soared so close to the sun, you have that much further to plummet.

The fall of Blair should be a set text for anyone wishing to know what happens next to the SNP. The debate on 21 May between the Scottish party leaders was, I think, a foretaste of a sure outcome – a public that until recently was politically and emotionally invested in the Nats is growing restive. In time, this will turn to disenchantment, then anger, then revenge at the ballot box. That is the unbreakable cycle of democratic politics.

Some of us have warned since the start that the SNP had over-promised and could only under-deliver. Its raison d’être is independence; everything else is just another brick to build the path. And so its education reform cannot be either brave or unpopular, even if it needs to be so to work, because the SNP cannot afford to alienate teachers or the teaching unions, or parents.

The same goes for the NHS, and doctors and health unions and patients. All the separatists have done – all they could have done, given their nature – is deploy the rhetoric of the radical while body-swerving hard choices and conflict at any cost. And where they have found themselves taking flak, they’ve pointed south to Westminster: “It’s no’ our fault, it’s theirs.”

Yet the voters show signs of wearying. Middle Scotland is either ignored or maligned by the middle-class socialists who drive the nation’s political debate, but it is where elections are won. The SNP has secured the support of enough of these people to win every recent election in style, but somewhere along the way the party seems to have forgotten this was a mandate not for independence, but for good government. Ten years in to SNP rule, each new audit of public services seems to wail like a warning siren.

So, during the debate, it was Nicola Sturgeon, not the Conservative leader, Ruth Davidson, or Labour’s Kezia Dugdale, who found herself in the audience’s cross-hairs.

There were the teachers, who complained about the damp squib that is the Curriculum for Excellence, the SNP’s flagship education policy; who pointed out that a fifth of primary pupils are leaving without basic literacy and numeracy skills; and who warned that lowering the standard of exams in order to push up the pass rate was not a mark of success.

Then there was the nurse who said she had been forced to use food banks (the existence of which has been used repeatedly by the SNP as a stick with which to beat the Conservatives and Westminster). “I can’t manage on the salary I have [which is set by the Scottish government],” Claire Austin told the panel. “You have no idea how demoralising it is to work in the NHS.” She delivered the killer line of the evening: “Do you think your perceived obsession with independence might actually cost you . . . in this election?”

The list of reasonable criticisms of the SNP’s governance is growing. The ideological obsession with free university tuition for Scottish students is increasingly seen as a sop to the better-off. Sturgeon’s demand for a quick second independence referendum, when a worried Middle Scotland was focused on what Brexit might mean for its future, was tone deaf.

The SNP has another problem (one that New Labour, for all its flaws, didn’t face): its doctrine of infallibility. The Nationalists’ constitution explicitly prohibits SNP elected members from criticising the party, its policies or each other. Although total unity is useful when you’re on the climb, it starts to look bonkers when the cracks are showing.

The word “cult” has long dogged the SNP. The party has tried hard to normalise its electoral appeal while keeping the flame of independence burning, but this has been a difficult balancing act. The pro-independence mob is an ugly thing when unleashed (and it has suited the leadership to open the cage door at times). After the debate, Claire Austin found herself at its mercy as the Nats briefed – wrongly – that she was the wife of a Tory councillor. The SNP branch in Stirling said, Tebbitishly, that if she was having to use food banks, “Maybe she needs to tighten her belt a bit more?”

Joanna Cherry, a QC, MP and the SNP’s home affairs spokesperson, was forced to apologise for spreading “Twitter rumours” about Austin. The ravening horde has largely kept its head down since the 2014 independence referendum, but it hasn’t gone away – it is not enough for the SNP’s critics to be debated: they must be destroyed. This isn’t the behaviour of a normal political party.

I have a feeling that when the SNP does fall, it will fall quite quickly. Its belief in its infallibility, and its inability or unwillingness to do self-deprecation or apology, will increasingly exasperate voters. There is nothing to suggest the current public policy failings will be addressed, and many signs that things will get worse.

How then do you arrest your fall? The SNP offered hope and promised it was different, and the voters believed it. The sense of betrayal could make for a very hard landing indeed. 

Chris Deerin is the New Statesman's contributing editor (Scotland). 

This article first appeared in the 25 May 2017 issue of the New Statesman, Why Islamic State targets Britain

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