The FTSE 100 share index has risen 6% since the arrival, six days ago, of the new Governor of the Bank of England, George Clooney lookalike, Mark Carney. The value of sterling collapsed but who cares? We have a heat wave and a low pound is good for exports. The British mortgage holding public breathed a sigh of relief as the Governor made it clear that low interest rates are here to stay.
Hidden away in all the news was something of far greater importance. The real threat to the British economy is inflation (which the Monetary Policy Committee (“MPC”) have found no way of controlling). It has stabilised to around 2.7% (well above the MPC’s target of 2%). Some economists still believe that the £375 billion of Quantitative Easing (“QE”) will fuel the liquidity needed to create inflationary pressures.
However, lurking beneath the surface is “zipper fracturing”. The City loves an esoteric lexicon (do ‘bid’ and ‘offer’ really mean ‘buy’ and ‘sell’?) and before long the hedge fund managers will be dazzling their clients (so they can charge higher fees) with a new nomenclature.
The subjects are shale oil and shale gas. “Zipper fracturing” refers to where two parallel wells are drilled and alternately fractured. This can aid the release of oil by up to 10%. Fracturing has been called, by Dr. John Llewellyn, the former head of international forecasting at the Organisation for Economic Co-Operation and Development, a ‘game-changing’ technology. It involves the shattering of rocks deep underground to release new reserves of oil and gas.
Dr. Llewellyn believes that most estimates are under-stating the potential of this development. Official figures suggest that Britain has enough shale gas to provide energy for the next 43 years. The suggestion that the oil price could fall to around $50 a barrel would have the effect of improving Britain’s GDP by 4%. It will, together with shale gas, have a huge impact on the rate of inflation.
A new report from Harvard University says that by 2017 the US will be producing nearly 11 billion barrels a day. Even in this year US imports of oil will fall to below 40% of consumption. Because gas is expensive to export the implications for the price of oil has far greater international consequences. The Middle East, Canada and Venezuela all produce high cost fuel.
In 2005 George Clooney played Fred Friendly in the drama film ‘Good Night And Good Luck’.
It sounds as though the new Governor of the Bank of England has brought his luck with him. “Good Night And Good Zipper Fracturing”.