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City Perspectives: Does fracking make economic sense?

As the debate around fracking in the UK intensifies, Professor Michael Tamvakis, from Cass Business School, examines the economic arguments for fracking.
by Ben

nullBy Professor Michael Tamvakis, Cass Business School

On an economic level any activity comes down to a simple equation; if the resale value exceeds the cost of production then it makes sense to bring it to market.

While the production costs associated with shale gas are high its resale values are also high; currently around $4 per million BTU (British thermal unit) in the United States and possibly up to to three times that figure in Europe. So for the US, which potentially has large reserves, there is a clear economic driver for production.

Is shale gas mining a necessity for the UK?

We certainly need another source of gas. Supplies in the North Sea are dwindling and for a number of years the UK has been a net importer of gas and oil from countries like Holland, Norway, Russia and the Middle East. The question that faces the UK is; how important is it for us to achieve energy self-sufficiency?

In the United States, there has been a conscious decision to work towards self-sufficiency. Indeed earlier this year a report from the Organization of the Petroleum Exporting Countries (OPEC) showed that the US is the fastest growing producer of oil among non-OPEC nations.

BP echoed these findings last year when they revealed their own prediction; that the current US energy deficit would turn into a "small surplus" by 2030. In Europe, where governments have been more reticent to turn to fracking, BP project that the deficit in natural gas could increase by 65 percent in the same period.

What are the alternative energy sources?

In the UK we find ourselves in a difficult position. We don't favour coal, which will eventually be phased out to be replaced by biomass, or wood chips which we would have to import from the United States. The other alternatives are to use a lot more nuclear power, which has its own serious considerations, or renewable energy sources which can be very expensive.

France, under Francois Hollande's administration, has taken the decision not to allow fracking. However, in Britain the coalition government has recently renewed its commitment to shale gas mining after it lifted a year-long moratorium on fracking, with UK Energy Secretary Ed Davey saying: "Shale gas could contribute significantly to our energy security, and reduce imports of gas as we move to a low-carbon economy".

Despite strong opposition, particularly on environmental grounds, it seems the lure of a cheap and secure energy supply which fracking appears to offer, is one that the British government cannot resist.

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