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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Cabinet audit: what does the appointment of Andrea Leadsom as Environment Secretary mean for policy?

The political and policy-based implications of the new Secretary of State for Environment, Food and Rural Affairs.

A little over a week into Andrea Leadsom’s new role as Secretary of State for Environment, Food and Rural Affairs (Defra), and senior industry figures are already questioning her credentials. A growing list of campaigners have called for her resignation, and even the Cabinet Office implied that her department's responsibilities will be downgraded.

So far, so bad.

The appointment would appear to be something of a consolation prize, coming just days after Leadsom pulled out of the Conservative leadership race and allowed Theresa May to enter No 10 unopposed.

Yet while Leadsom may have been able to twist the truth on her CV in the City, no amount of tampering will improve the agriculture-related side to her record: one barely exists. In fact, recent statements made on the subject have only added to her reputation for vacuous opinion: “It would make so much more sense if those with the big fields do the sheep, and those with the hill farms do the butterflies,” she told an audience assembled for a referendum debate. No matter the livelihoods of thousands of the UK’s hilltop sheep farmers, then? No need for butterflies outside of national parks?

Normally such a lack of experience is unsurprising. The department has gained a reputation as something of a ministerial backwater; a useful place to send problematic colleagues for some sobering time-out.

But these are not normal times.

As Brexit negotiations unfold, Defra will be central to establishing new, domestic policies for UK food and farming; sectors worth around £108bn to the economy and responsible for employing one in eight of the population.

In this context, Leadsom’s appointment seems, at best, a misguided attempt to make the architects of Brexit either live up to their promises or be seen to fail in the attempt.

At worst, May might actually think she is a good fit for the job. Leadsom’s one, water-tight credential – her commitment to opposing restraints on industry – certainly has its upsides for a Prime Minister in need of an alternative to the EU’s Common Agricultural Policy (CAP); a policy responsible for around 40 per cent the entire EU budget.

Why not leave such a daunting task in the hands of someone with an instinct for “abolishing” subsidies  thus freeing up money to spend elsewhere?

As with most things to do with the EU, CAP has some major cons and some equally compelling pros. Take the fact that 80 per cent of CAP aid is paid out to the richest 25 per cent of farmers (most of whom are either landed gentry or vast, industrialised, mega-farmers). But then offset this against the provision of vital lifelines for some of the UK’s most conscientious, local and insecure of food producers.

The NFU told the New Statesman that there are many issues in need of urgent attention; from an improved Basic Payment Scheme, to guarantees for agri-environment funding, and a commitment to the 25-year TB eradication strategy. But that they also hope, above all, “that Mrs Leadsom will champion British food and farming. Our industry has a great story to tell”.

The construction of a new domestic agricultural policy is a once-in-a-generation opportunity for Britain to truly decide where its priorities for food and environment lie, as well as to which kind of farmers (as well as which countries) it wants to delegate their delivery.

In the context of so much uncertainty and such great opportunity, Leadsom has a tough job ahead of her. And no amount of “speaking as a mother” will change that.

India Bourke is the New Statesman's editorial assistant.