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Could the answer to our troubles lie in a shale oil revolution

Friday, 16 December 2011 Written by 
Could the answer to our troubles lie in a shale oil revolutionBlame for the deteriorating economic position of Europe, including the UK, has been placed by commentators very much at the door of the sovereign debt crisis. Whilst this has no doubt affected confidence, it is hard to believe that a resolution within the eurozone will not be achieved one way or another. After all, so much political capital has been invested in the euro. In the end surely Germany, having held the feet of Italy and Greece to the fire so that they push through reforms to their economies, would not let the euro fail?http://www.ftseglobalmarkets.com/

Blame for the deteriorating economic position of Europe, including the UK, has been placed by commentators very much at the door of the sovereign debt crisis. Whilst this has no doubt affected confidence, it is hard to believe that a resolution within the eurozone will not be achieved one way or another. After all, so much political capital has been invested in the euro. In the end surely Germany, having held the feet of Italy and Greece to the fire so that they push through reforms to their economies, would not let the euro fail?

Whilst it may be convenient to point the finger of blame at the sovereign debt crisis on our current and continuing economic woes, what appears to have been ignored is the effect of increasing commodity prices, particularly oil. As I write, the price of a barrel of Brent crude is just below $105 per barrel. High oil prices have a twofold effect on our economy. Firstly they act as a tax on consumers, reducing spending power, and secondly they increase inflation, which then reduces spending power further. Most commentators believe high oil prices are here to stay, given increasing demand from the developing world. But I wonder.  

Remember only a few years ago, there was a consensus in the US that the country would soon be forced to rely on imported natural gas. Faced with this challenge a number of liquid natural gas terminals and facilities were built in order to handle these imports. Then, almost overnight, vast amounts of shale gas were found and produced, as a result of which the use gas price collapsed and, now, apparently 90% of these LNG facilities are lying idle.  

Now in the US the techniques used to produce shale gas are being used to produce shale oil, leading to increasing US oil production in recent years. So could a shale oil revolution be on the horizon?  If the answer is yes, the collapse in the oil price which result may well ride to the rescue of the world economy.  An interesting thought to get us through these harsh economic times.

Chris Searle

Chris Searle is a partner in the Capital Markets team at BDO where he specialises in advising companies seeking to list on the Main Market or AIM and in undertaking pre-acquisition due diligence on M&A transactions. He also leads the firm's corporate finance technical and prospectus committees and is chairman of the technical committee of the ICAEW's Corporate Finance Faculty.

Website: www.bdo.co.uk

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