The Tories Want Shale Gas. Could Energy Bills be 35% Lower?
Fracking – a topic controversial enough to trigger protests in the streets and arguments around the dinner table. So why have the Tories included the development of natural gas from shale in their manifesto? They point to the economic success of shale gas in the United States, as manifested in falling prices and less reliance on foreign oil.
Let’s take a look at the facts. Has shale natural gas impacted prices and the level of imported energy in the U.S.?
Changing Reliance on Foreign Energy Sources in America
The numbers speak for themselves – the U.S. is now significantly less reliant on foreign energy. From 2005 to 2015, the percentage of imported energy in the U.S. dropped from 30% of energy consumption down to 7%.
The dramatic change in energy imports is (at least in part) attributed to the domestic production of natural gas from shale. Production of shale natural gas grew from next to nothing in 2005 to over 15 trillion cubic feet per year. In 2015, natural gas accounted for 33% of America’s domestic energy production; half of this natural gas came from shale (the rest came from gas wells, oil wells and coalbed wells).
Changing Reliance on Foreign Energy Sources in the U.K.
The latest data from Ofgem shows that 38% of the U.K. energy supply came from foreign sources in 2015, a higher percentage than America imported back in 2005 before U.S. shale production took off.
The U.K. hasn’t always relied on foreign energy. Twenty years ago, the U.K. was actually a net exporter of energy. But as North Sea oil production tailed off in the 2000’s, the U.K. was forced to import more and more energy to serve the needs of the population, companies and industries. Since 2004, the U.K. has been a net importer of energy.
Shale Gas Impact on U.S. Energy Prices
It does seem that producing more domestic energy (e.g., shale gas) has translated into lower retail energy prices for Americans. Now, with so many complicated factors at work in the energy markets, it’s impossible to envisage exactly how average American household bills would be different now, had there not been a boon in shale gas production. However, we can get a high-level idea of the possible impact of shale gas production on American prices in a roundabout way.
We started by analysing the trajectory of energy prices in the U.S. and the U.K. between 2005 and 2015, a period of time when the U.K. imported more and more energy and the U.S. imported less and less (due to domestic shale gas production). Data on the U.S. market was gathered from the U.S. Energy Information Administration (EIA) and data on the U.K. market was found at the Office of National Statistics (ONS).
Initially, it appears that American households haven't not seeing much relief in energy bills. While consumers pay about the same at the pump as they did in 2005, electricity prices have actually risen about 25%. At first glance, it may seem that shale gas hasn’t put downward pressure on U.S. energy prices. But everything is relative.
Over this same period of time, British households energy bills have risen even faster. Data shows that domestic electricity prices are up about 85% and petrol has risen nearly 50% in the U.K. (while U.K. energy imports have risen from 13% to 38%). In this light, perhaps taking domestic control of energy production has led to lower prices in the U.S. At the very least, currency fluctuations can have less negative impact.
How Does % Imported Energy Affect Local Energy Prices Around the World?
Looking beyond the U.S. and U.K., it appears that less reliance on foreign energy does in fact correlate with lower domestic energy prices.
We arrived at this conclusion by expanding our analysis to include all of the International Energy Agency (IEA) countries with net energy imports, considering the domestic electricity cost (in pence per kilowatt hour) and the percentage of energy that is imported per country. At first glance at the dots in the scatter plot below, the relationship between price and import % might not be obvious. But the prevailing direction of the trend line shows a result - higher reliance on foreign energy and higher domestic energy prices go hand in hand, at least to some extent.
The full data for IEA countries on energy import percentages from the World Bank and electricity prices from the ONS are shown in the table below.
| IEA Country | % Imported Energy | Domestic Retail Electricity Prices (pence per kWh) |
|---|---|---|
| Norway | (581.3) | 3.8 |
| Canada | (72.5) | 6.3 |
| Denmark | 1.8 | 9.4 |
| United States | 7.3 | 7.9 |
| New Zealand | 19.5 | 11.2 |
| Sweden | 24.7 | 6.8 |
| Poland | 28.5 | 8.4 |
| Czech Republic | 31.6 | 8.1 |
| United Kingdom | 34.6 | 14.7 |
| Netherlands | 35.0 | 10.0 |
|
France | 44.1 | 7.8 |
| Finland | 45.3 | 7.3 |
| Switzerland | 50.1 | 11.7 |
| Hungary | 57.7 | 6.6 |
| Slovak Republic | 60.7 | 9.3 |
| Germany | 61.4 | 10.4 |
| Austria | 63.5 | 9.2 |
| Greece | 64.2 | 8.8 |
| Spain | 71.4 | 14.1 |
| Turkey | 75.2 | 7.5 |
| Italy | 76.4 | 10.2 |
| Portugal | 76.9 | 13.4 |
| Belgium | 80.1 | 11.8 |
| Ireland | 85.7 | 14.5 |
| Japan | 93.0 | 13.4 |
| Luxembourg | 96.3 | 9.2 |
Shale Gas Impact on U.K. Energy Prices
Our back-of-the envelope analysis indicates that, perhaps, shale gas production in the U.S. has kept household energy bills lower than they otherwise might have been. We suppose this is what the Tories are alluding to in their manifesto. And further analysis of IEA data also implies that lower reliance on foreign energy is related to lower domestic electricity prices in other countries as well.
However it isn't always the case that less imported energy means lower prices, and we are not at all suggesting that the U.S. shale boon could be replicated in the U.K. In fact, there are many barriers to the potential of fracking in the U.K. The U.K. is more densely populated, which means more impact from water and noise pollution. Fracking involves large lorries transporting sand and water to and from sites, a challenge and nuisance on smaller U.K. roads built ages ago. The investment costs (e.g., building pipelines, developing smaller equipment, etc.) are likely to be prohibitive to the industry, particularly as gas prices have recently come down.
The real question for the experts is (ignoring, for the sake of this analysis, the looming environmental issues), would British energy bills experience the same downward pressure if the U.K. also allows fracking for shale gas? We can't say, but we'd like to know. After all, if U.K. electricity prices had risen in line with the U.S. between 2005 and 2015 (that is, only rising 25%), our electric bills would be 35% lower than they are today.