The Future of Shale Gas

The Rise of “Unconventional” Gas

Shale gas is a form of natural gas that can be found in shale rock formations which are in abundance around North America, China, Argentina and North Africa. The controversial method of releasing shale gas has started to gain global recognition and may be what is needed to reignite the oil & gas industry.  Currently the largest producers of shale gas are Canada and the United States. Shale gas has begun to gain ground against importation of LNG (Liquefied Natural Gas) and oil, as governments have seen it as an opportunity to become energy self-sufficient and reduce imports. The rise of shale gas as a substitute for LNG has had an effect on the price of gas, and the relationship between supplier and consumer.

Analysis:

Gas prices based on the Henry Hub Natural Gas Front Month Futures reached a peak of $13.50 in 2008 the highest price of gas witnessed since 2005. With the then emerging market of shale gas and the economic crisis, gas prices reached had reached new lows and began to average at a lower price between 2008 and 2010 of $6-7. The developments of new shale fracking technology, government subsidies and guarantees have pushed the price of natural gas in 2012 into the region of $3.00-3.50. This has had a serious impact on the supply &  demand relationship as there has been a major shift in supply.

Picture1

As noted in the graph above there is a radical shift in the position of the supply curve, this is because the determinants of supply have changed making it easier to supply natural gas and the factor that there is another method of obtaining natural gas (shale gas). It is important to note how there would not be a surplus in this example of the United States as it is easy to decrease the amount of natural gas imported. It is also within the interest of the country politically to become self-sufficient, and develop a prospering economic sector. It is speculated that by 2035 the United States will be in a position to begin exporting natural gas, whereas countries such as Japan are still wholly reliant on imports of both gas and oil.

There is no major change in the demand of gas, as there is still the use of oil and coal for energy production and fuel. In time there may be an increase in demand as noted in the article as it will become more affordable to produce cars and public transport driven by natural gas as well as focusing energy production through more abundant natural gas. Another factor identified in the article that is restricting the increase of demand are the negative connotations that the public currently hold towards the shale fracking process, that it harms the environment through the contamination of water supply and causes minor earth tremors.

There is also the factor of the cross elasticity of demand, as shale gas is a substitute for imported LNG. If the price of obtaining LNG through imports increases, then there will be a greater demand of shale natural gas as it easier to obtain and does not rely on importation, therefore an inelastic relationship.

Picture2Evaluation:

The shale gas industry can still be seen as an emerging market, solid foundations have been built in the Northern American market. This now poses a problem to gas exporters as Europe has had to depend upon them for natural gas for the past decade such as Gazprom who are likely to lose market share. The fracking process can also be applied to the extraction of oil from shale formations. This may have an effect on the price of oil around the world, and will bring into question the economic security of countries dependent on oil exports. There is the issue of the environmental impact of the fracking process, and issues surrounding this such as noise pollution and the possible water contamination due to the chemicals used in the fracking process. As the switchover from oil to gas is made, the price of gas will eventually increase due to increased demand. The article states that $90 Billion worth of investment is being injected into the industry as a result of the Shale Gas boom in the USA; this makes it clear that governments are willing to circumnavigate the surrounding issues.

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Overfishing (Market Failure)

What are the main causes and consequences of the market failure in fishing?

The main cause of the market failure in fishing is the over-consumption and demand for all varieties of fish and seafood.  This is driven by government subsidies aimed to help the fishing industry as they are a considerable part of the economy, as some towns and cities are dependent on fisherman traffic. Governments are also contributing subsidies in the interest of keep food prices down, in foods such as fish which have become common in global diets.

The consequence of this over-consumption is the clear over-fishing and exploitation of the varieties of fish that can be consumed. There is now a growing dependence on fish farms to supply for the demand of fish.

The central external costs of the supply in fish contributing to market failure are:

  • The eventual extinction of specific species of fish
  • Accidental catch of other unwanted fish, reducing general population
  • Algal blooms, caused by dead fish left in sea and ocean
  • Weakening ecosystems, to near collapse
  • Loss of large fish i.e. Tuna
  • Forced government subsidisation
  • Less beautiful underwater cultures for tourism
  • Depleting natural resources
  • Driving small businesses out

The cause of the over-fishing is difficult to pin on a single source as it is both the demand of consumers, as well as the argument “well there will be no difference if the fish are taken now or in a months’ time”.

There is the developing issue of illegal fishing, even though laws and regulations have been set in place to only allow fishing within certain areas it is costly and difficult to actually enforce these laws and regulations. This issue develops on the point that companies now go to other countries to fish as there are less restrictions on quotas, such as the Senegal example where local fishing business is beginning to be taken by corporations.

A cause of over-fishing can be attributed to the methods used to obtain fish, even though they are the most effective and efficient there is a lot of unwanted catch in fine mesh nets and trawling methods. This is why there is a major breakup in the food chain of the species, and has a residing effect on the ecosystem of the fish whether big or small.

Facts:

Globally, some 75 per cent of wild marine fish are now said to be either fully-exploited or overfished, according to the United Nations’ Food and Agriculture Organisation (UN FAO)

Fish farming, now provides almost half of all the fish consumed by humans.

Development of crime in areas such as Somalia, and Senegal

Have the government solutions to over-fishing made the situation worse?

Overall, it can be argued that the government has not really made a clear attempt for a solution and if anything has made the situation worse. Governments throughout Europe, Asia, and American have made it a prerogative to subsidise the fishing industries.  This is an attempt to keep the industries alive even though they are catching less wanted fish then in the late 19th century and throughout the 20th century.  Governments have made it more worthwhile for fisherman to try and scavenge for what is out there rather than protect fish stocks for the future, and this is what the subsidies have achieved.

In regards to further failure by the government is the inability to abide or follow advice on quotas on the amount of fish that can be fished per day to ensure that there is no complete collapse of a species or ecosystem. Most quotas that governments set range between 20%-40% higher than what scientists advise. There is also the issue of policing this which the government is not completely committed too.  This is because the market failure is heavier on the government and producer side than the consumer. As consumers have not been offered viable alternatives to fish, there is the continued over-consumption.

In a sense government solutions have not done enough as over-fishing is only one cause for the general decline in fish stocks as there is also global warming, and illegal fishing. Global warming has had serious implications on the quality of sea life, and has encouraged the dependency on fish farms to provide common fish. The issue here is that the fish farms still fish to provide smaller fish to larger fish such as tuna.  This has started a vicious cycle which the government has not successfully intervened, and if anything encouraged fisherman to not follow quotas.

There is also the ban of catching certain fish; again this government intervention further contributes to the market failure as it simply makes those fish more desirable. There is also a lower price on farmed fish as they are considered a lesser good than natural fish. There has been no attempt to tax depending on unwanted fish taken, or hand out certain areas of water where companies have to personally decide how to take care of the land.

Facts:

Unfair Fisheries Partnership Agreements that allow foreign fleets to overfish in the waters of developing countries.

The cost of mismanagement, in lost economic output, is huge: some $50 billion a year, according to the World Bank.

 

What action would you suggest to reduce the damage done by overfishing while supporting those who depend on the fishing industry?

There needs to be a clear change in government policy as well as the manner in which fishing is done. There should be a greater stress on achievable regulation, and possibly an increase in prices.

Governments may choose to continue subsidising the fish industry, but should begin to subsidise fish farms that grow all the fish needed to feed bigger carnivorous fish. This will produce self-sustaining fish farms that are no longer reliant on the fishing of small fish to provide feed.

Governments should agree that only local fish is not taxed within a country, so in the case of salmon being supplied in Scotland has no tax, whereas if it was exported to another country there would be an export tax in the country of origin, and an import tax in the receiving country. This would accurately price the cost of the fish, and especially rarer fish.

Industry standards have to change; this can be done by introducing time frames that fishing is allowed within the season. Beyond this if a boat goes out to fish for a week then it may only actively fish on 4 of those 7 days, ensuring that quotas are met not over reached. Also in the equipment used for fishing to ban the use of trawling, and fine mesh nets. The method of trawling has adverse effects to the ecosystems, and fine mesh nets produce a lot of unwanted catch of small juvenile fish therefore further reducing the chances of endangered species.

No fish zones need to be created in areas where the ecosystem has suffered or there is the chance of a fish becoming extinct, this is done today but I would call for an international body to police these zones to ensure there is no illegal fishing whether industrial or local.

For a time temporary bans on certain fish would have to be placed, this would reduce the number of jobs and profitability of the industry, however this ensures job safety in the future by allowing the fish populations to naturally increase without intervention.

Facts:

Restoring these stocks could deliver up to £14.62 billion per year in gross revenues. This is 2.7 times the current (2010) value of their landings

The size of investment required to achieve this is £10.4 billion over the entire transition period (9.4 years) – £9.16 billion in present value terms