Economy of Thought

I didn’t get to study economics at University. I sat in on a few lectures, and was glad that I didn’t. But it would be nice to understand why and how economists arrive at their often counter intuitive conclusions. Science and philosophy often surprise us with what they turn out — things that run counter to what we’d expect from appearances. And it must be so with economics, because The Economist magazine has a story today, which claims that,

Shale gas will not solve Britain’s energy problems

This is very disappointing news indeed. I for one was pleased when Cuadrilla Resources announced estimates of gas reserves amounting to a possible 200 trillion cubic feet. More energy, and cheaper energy was surely an answer to Britain’s energy problems, especially for the 5.5 million households — up to 12 million people — living in fuel poverty. So what’s stopped the flow?

Cuadrilla thinks gas will start flowing by 2014. Alas, the finds will not solve Britain’s energy problems. Mike Stephenson of the British Geological Survey is sceptical that accurate predictions can be made from Cuadrilla’s two drill points. Even if the numbers are right, recovery rates may be only 10-20%. And mining such seams is controversial. Shale traps gas more tightly than other rock. To extract it, the shale is blasted with huge volumes of fresh water at high pressure, a practice known as hydraulic fracturing, or “fracking”. France and two American states have halted fracking because of fears that chemicals used may pollute water sources.

Right, the numbers do seem too good to be true. But even 10-20% of 200 trillion feet is still 20-40 trillion feet. That’s not going to hurt! And even if fears about ‘chemicals’ polluting water sources have some foundation, there seems to be scant evidence for them. The possible cost of a water source becoming contaminated should surely be put into perspective. It’s not as if the UK was a massive desert, landlocked at the middle of a vast continent. And, in contrast to the states, which is far less densely populated than the UK, people rely far less on private wells for their water supply. Furthermore, we know that France objects to shale gas because it’s so heavily invested in nuclear. The problems here are technical, not insurmountable. And have very little, as far as I can see, to do with economics. The Economist, whoever he is, continues…

Generating electricity from natural gas is relatively clean. Other fossil fuels produce more carbon dioxide, so replacing Britain’s coal-fired power stations with gas-fired ones would decrease the country’s carbon emissions. But cheap, plentiful fuel (both indigenous and imported) may lead to an increase in overall energy use, worries Kevin Anderson of Manchester University. Shale gas is also likely to divert investment in Britain from pricier but carbon-free nuclear and renewable-energy sources. “From a climate-change perspective this stuff simply has to stay in the ground,” he says.

The immediate consequence of Cuadrilla’s announcement, though, is to undermine the economic logic of the government’s energy policy. Chris Huhne, the energy secretary, recently told delegates at the Liberal Democrat conference that renewable generation is necessary because fossil fuels will be increasingly expensive; he wants to get the country “off the oil and gas price hook”. Yet even if Cuadrilla’s bounty is smaller than it hopes, the earth is riddled with shale rock; its exploitation may check the upward pressure on prices, weakening the economic case for reducing dependence on hydrocarbons.

Hmm. So, shale gas is cleaner than coal… It is easy to turn into electricity. And if it is abundant as it seems to be, it will create cheaper energy…

So in what sense exactly is it that ‘Shale gas will not solve Britain’s energy problems’? Is there some complex theory of economics I’m not getting here? What has this one-time wannabe-economist got wrong? Is there a graph, expressing a function as some exotic curve, which would explain why cheaper, more abundant stuff isn’t an answer to a shortage of stuff and rising prices? I am well and truly flummoxed.

It is time Mr Huhne admits it will be costly to curb global warming, says Dieter Helm of Oxford University. Shale gas may generate taxes. But the political price of saving the planet has gone up.

Ah, so that’s it. ‘Shale gas will not solve Britain’s energy problems’, because the likes of The Economist, and the Secretary of State for Energy and Climate Change simply don’t want it to.

We didn’t need an economist to tell us that.

31 thoughts on “Economy of Thought”

  1. Surely The Economist lost whatever credibility it might have had when it devoted a major article to “The Anthropocene” some months ago. This newspaper never has lacked self-confidence but its style seems to have developed into both hubris and unthinking propaganda when it comes to energy and global warming.

  2. “To extract it, the shale is blasted with huge volumes of fresh water at high pressure, a practice known as hydraulic fracturing..”

    This is a mendacious description. Rotary drilling is a “wet” process, with the hole filled with drilling mud at all stages of the process. Drilling mud is typically water plus additives to increase the density and viscosity, as well as biocides to keep the mud from going “off”. Hydraulic fracturing has been standard oil industry practice for over 50 years. The volume of water required is a function of the hole length, diameter and the number of procedures carried out.

    These practices, including appropriate disposal of the drilling fluids, have never been never been seen as a significant problem until now. The only thing that has changed is shale gas’ challenge to renewables.

  3. But cheap, plentiful fuel (both indigenous and imported) may lead to an increase in overall energy use, worries Kevin Anderson of Manchester University

    Worries!? Yes, it is indeed probable that cheap plentiful fuel will lead to an increase in energy usage. And all the pesky wealth, comfort, freedom and quality of life improvements that invariably come as a result of increased energy usage.

    Very worrying.

  4. Why not use nuclear power to fulfill our energy needs here in Britain, and export the shale gas to Germany and other anti-nuclear countries?

  5. It is commonly ignored that electricity accounts for only a small proportion of energy needs. Here in France it is about 20% and is probably lower than this in most other countries. Incidently, they are building windmills and solar farms here as well, presumably to make electricity more expensive and force people to consider other sources of energy, which will come from fossil fuels. These people are not even rational Luddites!

  6. “So, shale gas is cleaner than coal… It is easy to turn into electricity. And if it is abundant as it seems to be, it will create cheaper energy…”

    This perfectly sums up Green politics. Buy less for more is their mantra. The Greens don’t want cheaper anything, but more expensive everything. They don’t want any more ordinary working class folk gaining “loads of money”. Remember in the 90’s plumbers, builders, bricklayers, people that work were earning loads of money and going on nice hols to exotic places and started buying designer t-shirts. The Greens don’t want a return to those bad old days. I mean builders sending their kids to public schools!

    The decentralisation of energy production is also a good way of destroying capital. The “renewables” will help reduce the amount of new money coming into the system, just by making energy more expensive than it needs to be, whilst concentrating and increasing the value of the money which already exists.

    I can’t see the Green capitalist giving up their core aim.

  7. Paul Ehrlich: “Giving society cheap, abundant energy … would be the equivalent of giving an idiot child a machine gun.”

    He was writing about nuclear power, but the principle is the same. I think that beneath the expressed fears about earthquakes, polluted water and flaming faucets, there is that underlying unease about abundant energy and what we might achieve with it. This is partly why Climate Camp has morphed into Camp Frack, and why the development of shale gas has been met with dismay and hostility by the green lobby.

    Natural gas is not exactly the “carbon fairy” of Solitaire Townsend’s thought experiment, but it comes close. What it represents, apart from abundant energy, is economic growth, increased wealth and consumption, an energy “ascent” rather than a “descent”, and a humanity confident enough to aim for the stars. Anathema, in other words.

    Our politicians are in a cleft stick. They can choose to anger the greens, join the shale gas revolution, and go for a low-carbon, domestic, abundant source of energy that will help to regenerate the economy of Lancashire – in effect, launch a new phase of the industrial revolution in which that area was a key region. Or they can choose to appease the greens, ignore shale, send Cuadrilla packing over to Poland, spend hundreds of billions on offshore wind farms and get us “off the fossil fuel hook” only to leave the economy floundering and powerless like a fish on a slab. Their choice… for now.

  8. I really hope that capital punishment is reintroduced in the UK and that one of, if not the, first to experience it’s full force is Energy and Climate Change Clown Huhne.
    Treason should be punishable by death. Let’s all vote in favour.

  9. that sounds a bit harsh, John.

    I think it would be more fitting to remember Huhne as a product of his time, rather than one who could ultimately take responsibility for it.

  10. Alex, another similar quote comes from Amory Lovins, godfather of renewable energy and “negawatts”:

    “Complex technology of any sort is an assault on human dignity. It would be little short of disastrous for us to discover a source of clean, cheap, abundant energy, because of what we might do with it.”

  11. Ironically, many environmentalists encouraged fracking until it started out-competing their favored energy sources. It was a little too successful for them.

  12. George Carty says: Why not use nuclear power to fulfill our energy needs here in Britain, and export the shale gas to Germany and other anti-nuclear countries?

    Oh way too logical, George, way too insightful and simple. You must understand that humanity MUST suffer poverty .. or at least the poor shlobs whose money we expropriate.

  13. Fay Kelly-Tuncay’s throwaway lines about Greens not wanting their children to mix with plumbers’ sons (#10 above) are well worth taking seriously. Making humorous comments about the class system is the English way of understanding ourselves, and the fact that criticism of environmentalism is considered off-limits by our daring young comedians has deprived us of a useful tool.
    It’s not about Huhne being a bad person, or even about our politicians being stupider then usual, and it’s certainly not about one ideology hiding behind another, as the Delingpole Watermelon theory would have it.
    It’s at least partly about the mental confusion of a social class – the Guardian-reading, left-leaning chattering classes to which I belong. The British left owes as much to Methodism as to Marxism, and this strain of puritain renunciation and self-improvement (plus the lower middle class need to distinguish themselves from the carefree, spendthrift masses) is surely a more active ingredient of modern Greenery than any plan to dominate the world. (“If only the working classes still kept their coal in the bath! The perfect carbon capture scheme!”)

  14. @Chris T

    I could never have imagined environmentalists supporting fracking — I’d be interested to read your source if you can cite it.

    @Robert of Ottawa

    Do Greens not realize that even the most painful sacrifices that we Westerners could make would be cancelled out by Third Worlders who are finally pursuing the means to achieve their most basic aspirations? That’s why some nuclear advocates I’m familiar with (particular the LFTR advocates) believe that global warming can only be stopped if a nuclear reactor can be developed that produces electricity more cheaply than coal…

  15. Last November I dubbed this same Kevin Anderson, of Manchester U “the ration card man” in this blog post.

    Professor Anderson is adept at getting the media to take him seriously even when he spouts the silliest nonsense.

    On that occasion Louise Gray of The Telegraph quoted him as follows:

    The Second World War and the concept of rationing is something we need to seriously consider if we are to address the scale of the problem we face.

    Indeed, he’s he been pushing that idea since at least 2005. In other words, this gent has a great deal invested in the notion that an immense and intrusive bureaucracy is what the world needs now.

  16. “Shale gas will not solve Britain’s energy problems”

    If an unsolved problem is the same as an unmet need, it’s worth wondering if it remains unmet because its object is unavailable to use – or has somehow been misidentified. When The Economist insists that an energy need cannot be met with inexpensive, relatively clean, efficient and abundant shale gas – and (presumably) can be met with expensive, inefficient and environmentally destructive windmills – we might wonder if he has misidentified not only the need, but also who it belongs to.

    If the need – whatever it is – belongs to the Environmentalist (and not to the British), The Economist’s adjusted statement would begin to make a bit more sense… “Shale gas will not solve the Greens’ energy problems”. Or “Shale gas energy will leave the Greens’ need unmet”. Now all we have to do is identify what that need actually is – and we can approach this by acknowledging the otherwise useless and inefficient object (the windmill) which meets it and the useful and efficient one (shale gas) which leaves if frustrated.

    Of course, the only thing a windmill is ‘good’ at – the only thing it is guaranteed to do, virtually 24/7 – is leaving the British people in need of energy. Any group who held this goal as its own overriding need in life would recognise the windmill as the most excellent object with which to meet it. That same group might also know who invariably gets to call all the shots when negotiating with a person – or a population – with a vital unmet need.

  17. @George, Amory Lovins seems an intriguing character; I don’t know a lot about him but the “assault on human dignity” quote appears strangely at odds with his involvement in high-tech projects such as the Hypercar. I’ll have to do some reading-up on him.

    @Donna, Kevin Anderson’s notion of energy ration cards, or TEQs, is an idea that has been lurking in the wings for some time, here in the UK, elsewhere too? Here’s an internet article from January this year, following a report released over here by a committee called the All Party Parliamentary Group on Peak Oil (handily condensed to APPGOPO), which paints “a bleak picture of a near future of fuel and energy shortages.” It will be interesting to see what sort of response, if any, comes from APPGOPO, in the light of Cuadrilla’s recent announcement.

    @Geoff, “the fact that criticism of environmentalism is considered off-limits by our daring young comedians” is a very curious thing in itself. If there was any area of human life utterly overdue for some irreverent treatment at the hands of comedians, it would surely be greenism in its various forms. But there it lies, like a vast reserve of shale gas beneath our feet, almost totally untapped. Thus far, anyway.

  18. @Mooloo, that Penn & Teller segment is deservedly a classic. And when I heard “maybe they’re not so much environmentalists as they are joiners… of anything”, at the end, I immediately thought “Avaaz”.

  19. Private Eye – the UK satirical magazine – has finally started to question the hypocrisy that’s endemic in the green corner.

    Much of this is angled at greenwashing – where “nasty big companies” pop a few windmills on the roofs of their juggernaut trucks and recycle all their paper clips.

    But some of it is also aimed at the hypocrisy of the greenies themselves.

    A regular columnist is “Old Sparkie” who questions the folly of “renewable” energy schemes…

    this was Xmas 2010:

    “Old Sparky likes his Christmas lights to burn brightly in the cold December nights, as well as his two-bar electric heater.
    Turning, then, to the website of Exelon, the company responsible for balancing electricity supply and demand on the National Grid, we can easily find the various contributions to the nation’s electricity requirements from all the different forms of generation. Coal, gas, nuclear, imports from France – they are all tabulated there hour by hour.

    And what’s this? On a bitterly cold day, with demand close to maximum, at the time of writing we have just gone a full 24 hours where the UK’s wind turbines have provided barely one twentieth of their notional capacity, their output never once rising to as much as even a tenth of their capacity throughout the day and thus contributing nothing but uncertainty to the nation’s supplies.

    That’s the trouble: cold snaps frequently coincide with periods of very little wind. But never mind: we shall all be paying handsomely for ever more of these highly subsidised white elephants, with an ever greater dependence on supposedly unreliable gas imports for backup when the wind lets us down. (A good job Russian gas supplies have proved so reliable over the decades, eh?)

    Keep warm!”

  20. The writers at the Economists may be fools but they are right for the wrong reason. What has been under-reported is the failure of the US shale industry to produce any profits. The companies that were hyping shale gas the loudest five years ago are hyping a move to shale liquids today. The bottom line is that other than a few sweet spots in the best formations you can’t get enough energy out of shale to justify the energy needed to develop the deposits.

  21. So Shell paid $4,700,000,000 for a pup? http://moneymorning.com/2010/05/31/shale-gas/

    Still they did better than Exxon, who put in a staggering $31,000,000,000 for something with no profit attached! http://moneymorning.com/2009/12/14/exxon-xto-energy-deal/

    That is because the oil companies think long term, and they know that the time will come when their gas is profitable. That it isn’t at the moment is due to a combination of lack of gas infrastructure and a glut in other places. That will change.

  22. Vangel – That’s what happens when an industry overproduces; it says nothing about the long term economics. Something similar happened to the oil industry in the 1980’s.

  23. Oil and gas are largely sold by the same companies. Could it be the case that they are using the great profits made from their road and air transport monopolies (oil) in order to sell gas at an unprofitable price?

    The aim of this is to protect their future gas profits, by killing off the nuclear renaissance as much as possible. The main reason why very few new nuclear power stations opened around the world after the mid-1980s was cheap natural gas (plus double-digit interest rates, which favoured quick-to-build gas-fired power stations against slower-to-build nuclear and coal), not Three Mile Island and Chernobyl.

    Of course, cheap natural gas back then did have a major positive impact though — it bankrupted and brought down the Soviet Empire, which was majorly dependent on oil and gas exports to prop up its faltering economy.

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