America’s economy is cooking on shale – FT.com

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his winter Jim Ratcliffe, the British billionaire founder of Ineos, the chemicals group, is trying to spark a local shale gas revolution. He has offered to share 6 per cent of future revenues with communities or landowners if they work with Ineos to develop the energy source – far more than anything offered in the UK before.

“This will be a game changer,” he argues, explaining that he copied the idea of a 6 per cent pledge from America, where similar handouts have helped start a dramatic expansion of shale gas extraction since 2010.

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In truth, the chances of this offer being widely accepted are not high: extracting shale gas remains so contentious in the UK that it has hitherto largely been blocked. But Mr Ratcliffe deserves a cheer for trying. To understand why, take a look at the latest World Economic Outlook report from the International Monetary Fund, released this week.

Buried in the document is a sidebar which tries to calculate the impact of the shale revolution on US industry. The results are sobering, not just for European industrial groups, but taxpayers and politicians too.

As the IMF points out, the revolution in the US has caused natural gas prices to fall sharply there, even as they have risen in Europe and Japan. This is because gas, unlike oil, cannot be easily transported around the world, meaning that regional prices vary widely according to the location of the energy source.

Earlier this year a paper released by the US Federal Reserve calculated that these price variations had boosted the output of American manufacturers by 3 per cent since 2006, while raising investment by 10 per cent and jobs by 2 per cent; the impact on specific energy-linked industries was far higher. However, the IMF’s research suggests that the difference in energy costs has boosted US manufacturing exports by 6 per cent, and it argues that each 10 per cent fall in the relative price of natural gas in the US will boost US industrial production by a further 0.7 per cent, compared to that of Europe.

At first glance, this 0.7 per cent differential may not sound important. But if this gap is maintained over several years, the impact for competitiveness and output will be significant. It is not just the productivity statistics that matter; what the shale gas revolution has also done is create something that the IMF report does not mention: a transatlantic gap in psychology.

There is a recognition now that people need to work together. This is spreading to other states

– Fred Krupp, Environmental Defense Fund

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For many business leaders in America today, shale gas has not merely lowered energy costs; it has also fostered new respect for technological innovation. Think about it. A decade ago it seemed almost impossible to imagine that America might ever break its dependence on Middle East oil imports, let alone see some rust-belt industries become competitive.

Shifting attitudes are helping to spur a second change: as American businesses enjoy the benefits of lower energy costs, a new spirit of collaboration is taking hold among environmentalists, politicians and energy groups. Take Colorado. Previously, environmental groups were strongly opposed to the expansion of shale gas. But some, such as the Environmental Defense Fund, are now working with John Hickenlooper, the governor, to find ways to deal with issues such as methane gas leakage or water contamination. “There is a recognition now that people need to work together,” observes Fred Krupp, head of EDF. “This is spreading to other states.”

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Not so in Europe; or not yet. This week Nick Clegg, the leader of Britain’s Liberal Democrat party, threw his weight behind shale gas. But many British politicians remain suspicious of fracking, and environmental groups are stridently opposed. In France and Germany, antipathy is even more intense. “There is a such a big gap [in attitudes],” laments Edmond Alphandéry, a former French finance minister.

This gap partly reflects differences in geography: Britain is a crowded island, and in France the main shale gas reserves are found in places such as Paris and Provence. There are big differences in the legal structure of landholding too. But the other problem, it seems, is one of zeitgeist. American business leaders (and voters) have an incentive to gamble on bold technological change; in Europe, it is harder to dream about pleasant surprises.

Perhaps a few bold pioneers such as Mr Ratcliffe can help change this. It would be nice to hope so. But the longer shale gas remains a dirty word in Europe, the more the transatlantic gap in productivity – and psychology – will widen. And that is bad news for Europe, at a time when the continent needs every iota of growth it can find

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