Fracking is propping up the US economy

No wonder the UK wants a piece.

Rumours of America's death as the world's predominant economic power, to paraphrase Mark Twain, have been greatly exaggerated. Indeed, it now appears that Uncle Sam's hegemony seems set to continue for the foreseeable future. The Chinese dragon, which has for years been predicted to outperform the US eagle and assume the mantle of undisputed economic superpower, seems to have slowed its fiery progress and receded into its cave somewhat. The principal reason for this geo-political shift is largely driven by the USA’s current epoch-defining energy boom, courtesy of the discovery of huge shale gas reserves and the advent of fracking technology.

Fracking, the process of blasting shale gas from rock, is already revolutionising US energy capability and providing a shot in the arm for an economy that only a few years ago was wallowing in a deep recession brought about by the subprime mortgage collapse. The USA was a net importer of gas prior to shale coming to the rescue - now, in a remarkable volte face, it is a net exporter and has the power to drive the US economy into a new era of prosperity. This is not hyperbole; this is the technological breakthrough in energy of this generation and has already started to rebalance the global economic system. With cheap liquefied gas driving brent crude prices down in the US, the economy is no longer as dependent on the OPEC countries’ output and price controls. As the US returns to being self-sufficient, fuel is becoming cheaper and consumer spending is on the rise. The US has got more than 10,000 fracking wells opening up each year and their gas prices are three-and-a-half times lower than in the UK.

Clearly fracking has come at the right time for the US, as the country was beginning to recover it then received a huge boost from shale. As the US economy recovers and returns to growth, the knock-on effect for the rest of the world will be palpable. Global oil prices should fall, particularly good news for countries such as Russia, whose economy is driven by oil production and consumption. In short, prosperity is slowly returning to the economic behemoth and will continue to grow as the shale revolution fuels the US economy. This is happening at a time when the much vaunted rise of the BRIC countries - China in particular - is beginning to slow somewhat in the face of a declining export market, poor interest rates, closed financial markets and ever growing labour and manufacturing costs causing developed countries to repatriate certain higher-end manufacturing services.

It is no wonder that countries like the UK want to take advantage of fracking technology, on the basis that if the UK only sees a small percentage of the impact that shale gas has had in the US, there should be lower energy prices in the UK and greater household wealth. The American energy boom narrative is however a singular one and something that small countries such as the UK would do well not to ape too closely. The US has huge tracts of hinterland devoted to mining for shale gas - the majority of shale in the UK will have to be extracted in and around urban areas, so there is simply not the room for a wholesale energy revolution. Also, shale gas is a finite resource, so even the US will likely only benefit from this cheap energy source for the next 20-25 years.

What is critical for the UK and other major European economies is to continue prioritising research and development into alternative renewable energy technology, an area that the UK already leads in terms of innovation. Perhaps then the UK can find its own shale revolution using renewable, clean energy technology.

Photograph: Getty Images

Co-CEO of DLA Piper

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Stability is essential to solve the pension problem

The new chancellor must ensure we have a period of stability for pension policymaking in order for everyone to acclimatise to a new era of personal responsibility in retirement, says 

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company final salary pension, often a fairly generous figure, which also paid out to a spouse or partner on death.

That normality simply doesn’t exist for most people in 2016. There is much less certainty on what retirement looks like. The genesis of these experiences also starts much earlier. As final salary schemes fall out of favour, the UK is reaching a tipping point where savings in ‘defined contribution’ pension schemes become the most prevalent form of traditional retirement saving.

Saving for a ‘pension’ can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your later life – and also how your money is treated once you die.

George Osborne established a place for himself in the canon of personal savings policy through the introduction of ‘freedom and choice’ in pensions in 2015. This changed the rules dramatically, and gave pension income a level of public interest it had never seen before. Effectively the policymakers changed the rules, left the ring and took the ropes with them as we entered a new era of personal responsibility in retirement.

But what difference has that made? Have people changed their plans as a result, and what does 'normal' for retirement income look like now?

Old Mutual Wealth has just released. with YouGov, its third detailed survey of how people in the UK are planning their income needs in retirement. What is becoming clear is that 'normal' looks nothing like it did before. People have adjusted and are operating according to a new normal.

In the new normal, people are reliant on multiple sources of income in retirement, including actively using their home, as more people anticipate downsizing to provide some income. 24 per cent of future retirees have said they would consider releasing value from their home in one way or another.

In the new normal, working beyond your state pension age is no longer seen as drudgery. With increasing longevity, the appeal of keeping busy with work has grown. Almost one-third of future retirees are expecting work to provide some of their income in retirement, with just under half suggesting one of the reasons for doing so would be to maintain social interaction.

The new normal means less binary decision-making. Each choice an individual makes along the way becomes critical, and the answers themselves are less obvious. How do you best invest your savings? Where is the best place for a rainy day fund? How do you want to take income in the future and what happens to your assets when you die?

 An abundance of choices to provide answers to the above questions is good, but too much choice can paralyse decision-making. The new normal requires a plan earlier in life.

All the while, policymakers have continued to give people plenty of things to think about. In the past 12 months alone, the previous chancellor deliberated over whether – and how – to cut pension tax relief for higher earners. The ‘pensions-ISA’ system was mooted as the culmination of a project to hand savers complete control over their retirement savings, while also providing a welcome boost to Treasury coffers in the short term.

During her time as pensions minister, Baroness Altmann voiced her support for the current system of taxing pension income, rather than contributions, indicating a split between the DWP and HM Treasury on the matter. Baroness Altmann’s replacement at the DWP is Richard Harrington. It remains to be seen how much influence he will have and on what side of the camp he sits regarding taxing pensions.

Meanwhile, Philip Hammond has entered the Treasury while our new Prime Minister calls for greater unity. Following a tumultuous time for pensions, a change in tone towards greater unity and cross-department collaboration would be very welcome.

In order for everyone to acclimatise properly to the new normal, the new chancellor should commit to a return to a longer-term, strategic approach to pensions policymaking, enabling all parties, from regulators and providers to customers, to make decisions with confidence that the landscape will not continue to shift as fundamentally as it has in recent times.

Steven Levin is CEO of investment platforms at Old Mutual Wealth.

To view all of Old Mutual Wealth’s retirement reports, visit: products-and-investments/ pensions/pensions2015/