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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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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