According to Deloitte
* By the end of the twentieth century a new era of cheap energy seemed to have arrived.
* In late 1998, the price of oil hit a 14-year low of $9.87, making oil cheaper, in real terms, than in 1973. In March 1999, the Economist suggested that $5 a barrel could be the new normal for oil and noted that, “consumers everywhere will rejoice at the prospect of cheap, plentiful oil for the foreseeable future”.
* It was not to be. Energy has, instead, become expensive and scarce. Since its late 1998 low, the price of Brent crude oil has risen tenfold.
* Soaring energy prices have squeezed consumers hard. Since the onset of the global financial crisis in early 2008, the price of petrol, domestic gas and electricity in the UK has risen by almost 50% – more than ten times faster than growth in incomes over the period.
* Strong demand from emerging market economies has put upward pressure on energy prices. On the supply side, last year’s nuclear accident at Fukushima led to the virtual closure of Japan’s nuclear power programme and the mothballing of Germany’s programme. Italy and Switzerland decided not to open any new reactors.
* But in a world of soaring fuel prices America has, in the last five years, developed a vast new source of cheap energy.
* Extracting natural gas through the fracturing of shale deposits using water and chemicals – so-called fracking – has created a boom in US gas production. It is a sign of the speed of this revolution that the first press reference we can find on Google News for fracking is a June 2007 article in the Boston Globe.
* Output of shale gas has gone from 4% of total US gas production to almost a quarter in the last seven years. Advances in hydraulic fracturing technology have expanded America’s reserves of exploitable natural gas from 12 years’ supply to more than a century’s.
* Fracking has delivered a massive supply shock to the US natural gas market leading to a collapse in gas prices, down roughly 80% from their 2008 peak. Today, US gas prices are about a quarter of European levels.
* Indeed, America now produces three billion more cubic feet of natural gas a day than it consumes. It has gone from being an importer to an exporter of gas in a few years. Plans are afoot to convert facilities designed for the import of liquefied natural gas to export US shale gas.
* Cheap and plentiful gas provides a stimulus which has contributed to the relative resilience of America’s economy. Crucially, in a world where industrialised economies are trying to export their way to growth, cheap gas gives the US a sizeable competitive advantage.
* The key to realising it will switching America’s power stations from burning coal, which currently generates 45% of US electricity, to gas. It costs half as much to generate electricity from natural gas than from coal. Changing to gas will mean cheaper and cleaner US electricity.
* This will give US industry a significant competitive advantage. The Peterson Institute estimates that lower energy prices could give US manufacturing plants a 60–80% cost advantage over competitors in east Asia and Europe.
* US consumers will also benefit from lower electricity prices. IHS Global Insight estimates that savings from lower gas prices will add an annual average of $926 per year to US household disposable incomes between 2012 and 2015.
* The gains would be greater were compressed gas to become widely available as a fuel for cars, although the costs of setting up a network of fuelling stations and converting cars may be prohibitive.
* Recently there has been growing talk of exploiting shale gas in Europe, including the UK’s Blackpool reserves. A number of factors suggest that Europe will struggle to replicate America’s gas revolution.
* Higher population density in Europe makes extraction of shale gas reserves more disruptive and politically contentious than in the US. France has banned fracking on environmental grounds. In the UK, and most other countries, the rights to oil and gas belong to the government, not the landowner. US landowners own the mineral rights and have an incentive to exploit gas reserves. And the US gas industry benefits from significant economies of scale and operates more intensively than its European counterparts.
* Fracking seems likely to be more costly and trickier in Europe than in the US.
* For now the economic effects of fracking are most likely to be seen in the US. It will boost the US economy at a critical time and give US exporters a valuable boost. In time rising exports of cheap US gas will put downward pressure on gas prices in Europe.
* In a world of pricey energy America’s fracking revolution offers some rare good news.