Could shale gas have contributed to the different economic fortunes of Europe and USA?
In a recent interview of George Soros by CNN, he highlighted that shale gas and shale oil have contributed to the economic recovery of the US. The US ISM manufacturing rose 1% in Jan 2012 over the previous month. Shale gas impacts the economy through:
1. direct employment and production in gas producing states
2. lower production costs through power savings and manufacturing feedstock
3. lower trade deficits and stronger USD; lower inflation
In the main shale gas production states of Texas, Wyoming, Louisiana and North Dakota, towns have been revived and employment is at a country-wide low of 3.3%. It is even reported that McDonald’s in Dickinson provided a sign-on bonus for staff in their outlets. An estimated number is 600,000 people employed in the shale gas industry in a survey done by IHS Insight. In another study by PwC, an estimated 1m more jobs is expected to be created through the middle of the next decade. The PwC study also highlighted several companies like Bayer and Dow Chemical reviving their chemical plants in the shale gas rich regions to appropriate the cheaper feedstock of ethane (in natural gas). Shale gas contributes to almost 40% of daily production 65 bcf of natural gas. This amounts to $29b (at a per mmBtu price of $3) in annual production revenue. Notwithstanding the multiplier effect on the GDP, shale gas impact is much larger than this baseline estimate.
Other unintended consequences of shale gas and oil are a lower trade deficit and a stronger USD. A big story in 2011 is the USA turning to a net exporter of petroleum products. This by far is due to the lower domestic demand and stronger domestic production volumes of oil and gas (shale oil contributed 400kb/d). The dual consequence is to lower core inflation, which directly supports fiscal measures and quantitative easing.
Europe case is different
Comparatively, Europe is still deliberating on the environmental aspects of shale gas drilling. Already France and Bulgaria set a moratorium on shale gas drilling. Further, many of the rosy projections on shale gas in Europe by smaller companies appear too optimistic, and it may take another 5 years for shale gas production in Europe to take off according to Exxon. Among the European countries, Germany and Poland hold the most potential for shale gas reserves and production. See also an article by the author “All not so rosy for shale gas“. Whilst Europe shares US’s concern on energy security, it has traditionally been more environmental conscious than the larger American continent. Not that, energy security is a less pressing issue for Europe with Gazprom having delivered ‘less than enough’ volumes of natural gas to the continent during the cold snap last month.
Would shale gas (and oil) have delivered equal benefits to Europe? Firstly, there are much higher electricity tariffs and diesel/ gasoline taxes in Europe than the States. This is due to the higher taxes (VAT and excise) and feed-in tariffs for renewable generation in OECD Europe. The tables below indicate the household and industry electricity prices in Europe and USA, sourced from the Oil Drum and originally from the IEA quarterly database in 2009. Germany electricity data is not in the figure but in 2011, its residential tariff was $0.178 /kwH on the upper range of the prices. Except for Norway, US has lower electricity tariffs than any European country.
A historical comparison between USA and Europe indicates that the USA industrial electricity prices as always below that of Europe. In spite of the increases in fossil fuels (coal and oil) in particular from 2006-2009, industrial electricity prices in USA have remained relatively unchanged in the period.
In theory, Europe could have lower electricity prices from cheaper natural gas which contributes about 19% to its power generation. However, it imports almost 35% of its imports from Russia based on take-or-pay long term oil-indexed contracts. This renders it contractually liable to take a minimum amount of gas imports. The imports are mainly on oil-indexed prices which have remained high, although there have been recent pressure to index it on spot gas prices.
This coupled with its higher taxes and feed-in tariffs would have kept its electricity production costs high. Consequentially, it would also not have experienced a similar revival in its chemical industries, based on price parity on the gas feedstock.