Does the development of shale gas (and shale oil) resources in the UK hold out the hope of cheaper energy? You’d think so from the chatter on this issue, but we need to be cautious.

For a start, it will be many years before a British shale industry properly gets going. We do, however, have the example of America, where – thanks to fracking – shale formations are producing significant quantities of both gas and oil.

In a op-ed for Bloomberg, Carl Pope reports that US energy users have enjoyed considerable cost advantages as a result:

“A few months ago, crude oil in the Midwest, where most production takes place, averaged $95 a barrel — $17 a barrel lower than the price set by the Organization of Petroleum Exporting Countries. The U.S. price advantage on natural gas is even bigger. In Tokyo, OPEC LNG costs $16. Russian pipeline gas in the U.K. costs $10. In the U.S., the benchmark Henry Hub price is about $3.75 per million British thermal units — and has been as cheap as $2.20.”

“The benefits of cheap gas flow throughout the economy. In the past three years, 95 major manufacturing capital investments, worth $90 billion in new spending, have been announced.”

Yet, in the case of oil, the situation is changing fast:

“We’re already seeing the effects. On July 19, U.S. drivers lost their price edge as West Texas Intermediate oil soared to $109 a barrel, almost equaling the cost of Brent crude in Europe, which only months before had sold at a $20 premium.

What happened? Oil traders reversed two small pipelines so that instead of carrying U.S. crude from Gulf Coast oil fields to the huge trading hub in Cushing, Oklahoma, it was diverted to export docks, from which it traveled to Europe and Latin America. With that, traders set the stage for gasoline prices to rise to $4 a gallon or more.”

Pope is concerned that with the approval of four new LNG export terminals, America will trade away its price advantage on natural gas too. He may be right, but why shouldn’t producers get the best price for their product? Indeed, it can be argued that maximising incentives for the development of new production is the best way to keep prices down.

Of course, it may be that America is already exhausting the most easily recoverable – and, therefore, the cheapest – sources of shale gas. Furthermore, we have to factor in a huge new potential source of demand:

“With oil at $100 a barrel and natural gas at $3.50 per million cubic feet, 1 BTU [British Thermal Unit] of gas energy costs about one-fifth as much as a BTU derived from oil. Argentina, Pakistan, Iran and other nations fuel 15 million cars and trucks with natural gas. In the U.S., companies including Freightliner Trucks and AT&T Inc. are investing hundreds of millions in vehicles powered by natural gas — compressed natural gas for local fleets, LNG for long hauls — to reap annual fuel savings of up to $40,000 a vehicle. Hundreds of new natural gas fueling stations are being constructed along the interstate highway system.”

In short, investment in shale gas does not guarantee low prices.

That’s no reason for us not to do it, though. If shale gas can displace oil from transport in the way that it has already displaced coal from power generation, then that’s a big plus for both the environment and energy security. Moreover, the more expensive that energy gets, the better it will be for our balance of payments if we produce our own.

So, all things considered, there are major benefits for Britain to seize here – just don’t expect them to show up on your household bills.

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