Thought we were running out of fossil fuels?

Until recently, the cost of extracting the gas has been prohibitive. But the combination of two innovative technologies — horizontal drilling and fracking to release the natural resources — has changed all that. The consequences are difficult to exaggerate. Not just in terms of the economic benefit of a new and abundant source of relatively cheap energy, but in geopolitical terms, too.

Until now, the West has been heavily dependent for its supplies of oil and gas on an unstable Middle East and an unreliable Russia. Crucially, all that has changed because gas and oil-bearing shale is scattered throughout the world — including in Britain. This has shaken up the old world order — and the global balance of power is being permanently transformed before our eyes.

The dramatic news emerged a few weeks ago that the U.S. will overtake Saudi Arabia as the world’s largest oil producer in 2017. America is already the world’s largest natural gas producer, and it is estimated that, by 2035, almost 90 per cent of Middle East oil and gas exports will go to Asia, with the U.S. importing virtually none. For decades, the West in general, and the U.S. in particular, has had to shape, and sometimes arguably to misshape, its foreign policy in the light of its dependence on Middle East oil and gas. No longer: that era is now over. For decades, too, Europe has been fearful of the threat that Russia might cut off the gas supplies on which it has relied so heavily.

No longer: that era will very soon be over, too. Thanks to the shale gas revolution, the newfound energy independence of the West is a beneficent game-changer in terms of world politics as much as it is in the field of energy economics. That does not mean the West can become indifferent to the threat of war in the Middle East, as Iran continues with its ambition to become a nuclear power, or to the threat of al Qaeda-inspired terrorism.

Nor does it mean that we can or should regard Mr Putin’s Russia as of no importance.

There is more to international politics than oil and gas. But what it does mean is that we are — or very soon will be — no longer in any way dependent on either region, and that the political leaders of both have lost their biggest source of global influence.

Hardly a week goes by without new shale gas and oil deposits being discovered in America. As these new sources of energy are developed and extracted, energy costs are falling because of continuing technological innovation and economies of scale. And there are sizeable shale gas deposits in the UK, too. At long last, at least part of the coalition Government has woken up to the significance of the shale gas revolution.

In his Autumn Statement on Wednesday, Chancellor George Osborne announced a new gas strategy designed to promote the fastest practicable exploitation of the UK’s shale gas deposits. He explained: ‘I don’t want British families to be left behind as gas prices tumble on the other side of the Atlantic.’ In years to come, this may well be seen as a major turning point for the UK economy, when everything else in this year’s Autumn Statement has long been forgotten.

Gas, in liquefied form, is a globally traded commodity, and we will benefit from the cheap gas that is likely to transform the energy market for the rest of this century, wherever it is produced. But transport costs can be significant, and the greatest benefit for the UK economy will clearly come from the development of our own indigenous shale gas deposits.

These are early days, and we do not yet know how much commercially exploitable shale gas there is in the UK. But the signs are encouraging. The first large discovery to be explored, the Bowland shale under the Blackpool area of Lancashire, turns out to be a thicker seam than any in the U.S.

The company behind the exploration has announced that Blackpool is sitting on one of the biggest shale gas fields in the world — with a reserve of 200 trillion cubic feet lying under the Lancastrian countryside. To put that figure in perspective, it’s enough gas to keep the UK going for 50 years and create more than 5,000 jobs. There are other known deposits throughout a large part of the UK and this promises to be as important for Britain as the discovery and development of North Sea oil. It could even be bigger than that.

Meanwhile, shale gas production in the U.S. has rocketed from virtually nothing to 20 per cent of its gas supply in less than a decade. As a result, the price of gas in the U.S. has collapsed from $12 per thousand cubic feet in 2007 to around $3 today. Currently, known shale gas reserves alone will supply the U.S. with more than 100 years of gas at today’s consumption levels. By 2035, almost half of all U.S. natural gas output is projected to come from shale.

Over the past couple of years, huge shale reserves have been identified throughout Europe, Latin America and Asia, too. In Europe, the chances of finding shale gas are, from a geological perspective, as good as in the U.S.

For the world as a whole, technically recoverable gas resources are now conservatively reckoned to amount to around 16,000 trillion cubic feet. In short, as a result of the shale revolution, the Earth can now provide us with about 250 years’ worth of gas supplies.

The so-called ‘peak oil’ theory, which suggests that within the foreseeable future the world will run out of fossil fuels — coal, oil and gas — has never looked more absurd.

While the world’s shale gas reserves appear to be massive, they could even be dwarfed by global oil shale reserves in sedimentary rock, which contains solid organic material that can be converted into an oil-like product when heated.

According to the U.S. government, oil shale deposits in an area called the Green River Formation in the western United States are estimated to contain up to 3 trillion barrels of oil — three times more than the whole world has consumed in the past 100 years.

The economic and political repercussions of such discoveries cannot be understated. The cheap energy brought about by the shale gas revolution, for example, is already boosting the U.S. economy. Indeed, sections of U.S. manufacturing are even repatriating their activities from China. Sadly, however, Europe’s leaders have wholly failed to face up to this energy revolution and many European policy-makers are blocking shale gas developments.

There are a mere two dozen test drills around Europe, compared with an estimated 35,000 fracturing sites in the U.S. As a result, instead of benefiting from cheap shale gas, new industries and hundreds of thousands of new jobs, Europe is constraining itself with self-imposed green limits to growth. This is despite the fact that gas-fired power stations emit roughly half the carbon dioxide that coal-fired power stations do, which is why the U.S. is the only country to have significantly reduced its CO2 emissions in recent years.

By going for those green energy targets, countries such as France and Germany are making their energy-intensive industries increasingly uncompetitive. Germany’s largest companies have warned that they are already losing out against their U.S. competitors thanks to rising energy costs. In Britain, too, the Energy Intensive Users Group (which lobbies for companies in the steel, chemical and glass industries) recently warned that the UK’s manufacturing industry can no longer compete against U.S. companies because American energy costs are four times cheaper.

Yet the Department Of Energy And Climate Change (DECC), with its head firmly buried in the sand, continues to maintain that, due to the rising demand for oil, gas and coal, fossil fuel reserves are depleting, and the increasing scarcity of gas and oil will cause prices to increase dramatically.

DECC and the green lobby thus continue to argue that the UK needs to invest in low-carbon energy to avoid disaster. The schizoid nature of the coalition Government is strikingly demonstrated by the new Energy Bill, published last week: a hugely expensive dog’s breakfast based on assumptions (not least about the likely upward trend of gas prices) which the shale gas revolution has already wholly invalidated.

The green lobby, of course, is terrified that, despite the promotion of expensive and heavily subsidised wind power at the heart of the Energy Bill — a subsidy paid to a considerable extent by poor householders through their bills to wealthy landowners with wind turbines — the emergence of large supplies of cheap gas will make this policy unsustainable.

Hence the scare stories, lapped up by the BBC in particular, about shale oil and gas extraction causing earthquakes and pollution of the water supply.
Needless to say, there is no substance whatever in these scares. As a joint study by the Royal Society and the Royal Academy Of Engineering has pointed out, the so-called Blackpool earthquakes caused by fracking last year were, in fact, barely perceptible tremors (no worse than a heavy lorry passing by your house) of a kind that occur quite frequently every year, sometimes caused by coal mining, sometimes naturally.

Scare stories about fracking leading to water pollution are equally unfounded, with upwards of a mile of solid rock separating the shallow aquifers from which we draw our drinking water from the deep deposits where the shale gas is to be found and where the fracking occurs.

The bottom line is that, contrary to the peak oil fantasists, fossil fuels are going to become more available, not less. Today, oil, gas and coal represent 80 per cent of the global energy mix. They will continue to dominate the world’s energy markets for decades to come. And within that picture, natural gas is going to offer the cheapest way to produce electricity: cheaper than nuclear energy and massively cheaper than renewables.

We are living in an era when good news is thin on the ground. The shale gas revolution is the exception: a game-changing piece of good news, both economically and geo-politically, both for this country and for the world.

By Nigel Lawson
Lord Lawson was Secretary of State for Energy from 1981-83 and Chancellor of the Exchequer from 1983-89. He is currently chairman of the Global Warming Policy Foundation (www.thegwpf.org).