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Daniel Mahoney in Yorkshire Post: Oil glut will not harm case for fracking

    CPS head of economic research Daniel Mahoney wrote for the Yorkshire post on why the oil glut will not harm case for fracking, Tuesday 2 February 2016. 

    "THE dramatic collapse of oil prices by 75 per cent since 2014 has sent shockwaves through the global economy. An aggressive geo-political strategy from Saudi Arabia – which is seeking to challenge US and Russian oil producers – has led to the Gulf State consistently flooding the market with around 10 million barrels of oil a day.

    The 73 per cent increase in US oil production since 2010 has also contributed to a glut on the global oil market, which increasingly resembles “a sponge that cannot absorb anymore”.

    Current oil price lows have led some to speculate about the economic viability of the UK’s nascent shale industry. This concern appears unjustified. Investment decisions in UK shale will be based on prospective prices in the 2020s when development is expected to be rolled out across the country.

    Oil prices are unlikely to stay at current lows by the 2020s. Price pressures are already making many oil extractions uneconomic, which will gradually impact overall supply.

    For example, there are signs that some North American shale producers are struggling after 42 US oil and gas companies filed for bankruptcy in 2015. As supply comes off stream, price pressures on oil are likely to emerge.

    Moreover, current oil prices are unsustainable for the major oil producing countries that are highly dependent on income from hydrocarbon sales. Saudi Arabia’s current policy, for example, is having a detrimental impact on its finances.

    It ran a budget deficit of 15 per cent of GDP last year and government spending as a percentage of GDP jumped from 40.8 per cent to 50.4 per cent in just 12 months, according to the International Monetary Fund.

    Of course, it is gas prices that will be the key consideration for investment in UK shale. British Geological Survey estimates suggest that Britain’s greatest potential lies in the unconventional gas reserves across Yorkshire and Lancashire."

    To read the full article, visit the Yorkshire Post.

    Date added: Wednesday 3rd February 2016