20/05/2010 - 00:00

US quick to realise shale gas opportunities

20/05/2010 - 00:00

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Shale gas extraction is a game changer, both in terms of the energy sector and for its geopolitical implications.

WHEN cash is plentiful, no-one seems to notice that politicians are inclined to buy their way back into office by spending taxpayer funds in a popular, but foolish, way.

The bankrupting of Europe is a big example of what happens when the money runs out. Renewable energy subsidies in Australia are a smaller example of how to waste money.

The common thread linking Europe and renewable energy projects, such as geothermal, wind, solar and bio-fuels, is that both categories have depended heavily on government subsidies because their business case is so weak, or has already failed.

In time, the subsidies have to end, which is why Europe’s grand experiment in making itself the world’s lifestyle leader has come to a crashing end, with deep trouble ahead.

The Australian government’s decision to throw more taxpayers dollars at fashionable renewable energy projects is yet to reach the same point, but it will because of the absolutely fascinating fact that science has found a way to add at least 50 years to the global fossil fuel inventory.

In other words what we have been told for the past 30 years, that the world’s oil and gas will run out in our lifetime, was wrong – not that many people outside the energy business, or high finance have yet spotted a mega-trend which will change the future.

Bystander has explored this mega-trend of ‘unconventional’ fuels a few times already this year but saw the development illustrated dramatically over the past week while visiting the US, where shale gas in particular is turning the energy market in that country upside down.

Not only has the price of gas crashed, it is expected to stay down for decades to come, such are the volumes of gas being discovered, developed, and piped into the nation’s factories and homes.

Last week, The Wall Street Journal produced a special supplement on energy with the lead story titled: ‘How shale gas is going to rock the world’, with the secondary heading reading ‘Huge discoveries of natural gas promise to shake up energy markets and geopolitics. And that’s just for starters’.

The core argument in The Wall Street Journal’s article is that the US discovery of how to extract gas from rock types previously considered too hard to flow easily, and therefore not commercial, will spread around the world, totally altering the nature of energy politics, including a breakdown in the oil cartel, OPEC, and the attempt to create a gas cartel.

For Australia as a major energy exporter this trend is not good news because it means that future gas prices are more likely to fall than rise, which is perhaps something the Australian government has not factored in to computer models that encouraged it to add a fresh layer of tax on the resources sector.

But the potential gas glut is much worse news for the renewable energy sector, which now looks like it will require perpetual government subsidies, or hand-outs until taxpayer patience runs out.

Or, as The Wall Street Journal put it: “The shale gas boom is also likely to upend the economics of renewable energy.

It may be harder to persuade people to adopt green power that needs heavy subsidies when there’s a cheap, plentiful fuel that’s a lot cleaner than coal.”

That’s the trend that interests Bystander because it goes to the heart of the folly of government subsidising an industry (or entire lifestyle) when the rules of the game are changing.

Beyond its means

IF shale gas, and other unconventional sources of fossil fuel, is a trend in its infancy then Europe is an example of what happens when you allow politically popular subsidies to outrun the capacity to pay.

Last week’s massive European financial rescue package designed to save this pseudo-country from complete collapse is being seen in the US as a trillion dollar band-aid, which will not stop the rot that has started in Greece and is spreading across Club Med, the lazy southern half of Europe.

Three events triggered Bystander’s realisation that Europe was nothing but an example of the trouble that occurs when taxpayer-funded subsidies are stretched to breaking point.

First was an interview with a Greek women involved in an anti-rescue package demonstration in Athens, who was unhappy that her full pension was about be cut. Why did she have a pension? Because she had turned 50, had one child, and had worked for 25 years. For those ‘achievements’ the taxpayers of Greece (the few there are) had promised to fund her lifestyle for the next 30 years, and perhaps more.

Second was the political price being paid in Germany where its once-popular leader, Angela Merkel, is heading for a heavy election loss as hard-working German voters protest at the rescue of their indolent southern neighbours.

Third was the realisation that Europe had been led up the garden path by governments which bought votes by funding impossible lifestyles given that Europe’s once-powerful manufacturing industry is being crushed by cheap Chinese imports.

Tough times loom for Europe, a region that has had 50 years of living lazily but which must now pay the bill – just at a time when it lacks the means to do that.

What is it that Greece actually produces which the world wants, apart from kalamata olives, ouzo and tourist destinations (which have just become no-go areas).

Bet on Buffett

IF Europe is preparing for a very difficult period of austerity and the end of a subsidised lifestyle, then the US is roaring back as only it can with its hard-nosed approach to business.

The big winner, not that this should be a surprise, is the sage of Omaha himself, the multi-billionaire investor, Warren Buffett.

Late last year, when everyone else was fretting about the future, Mr Buffett placed a $US44 billion bet on economic recovery when he acquired control of the Burlington Northern railway, a major freight carrier.

Critics said at the time that he had bitten off more than he could chew. Not so, it seems. The volume of rail freight in the US is up 10 per cent on this time last year which, in theory, means Mr Buffett’s bet has risen in value by the same proportion – or that the world’s smartest investor has just made another $4.4 billion.

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“We’ll never know the worth of water, until the well runs dry.”

Old Scottish saying

 

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