US fracking no competitive advantage, KfW Economic Research paper says

(eceee news, 5 Nov 2013) A research paper from KfW Research in Germany suggests that the US hydraulic fracking offers no major competitive advantage to the US industry. On the contrary, the paper suggests that fracking and low energy prices may even slow down the necessary process of increasing the energy efficiency of the US industry.

A paper from KfW Economic Research from April 2013 entitled Fracking – you snooze, you lose? by Tobias Rehbock and Peter Kolbe has gained relatively little attention. But as the fracking debate in Europe heats up, the paper seems to offer a very timely input to the European debate, not only on fracking but on competitiveness, growth and jobs in general.

In recent years, a new method of extracting hitherto inaccessible natural gas and oil deposits has gained importance.Hydraulic fracturing or, in short, fracking is being pursued in the hope of making the USA virtually independent from oil and natural gas imports by 2035.

In addition to environmental concerns associated with this extraction method, the question is to what extent the regional energy price differences generated by fracking affect the international competitiveness of the US economy, e.g. in comparison with Germany.

In spite of differences in national energy prices that cannot be neglected (especially in the business sector), much seems to indicate that there should be no long-term competitive advantages or disadvantages for the economy as a whole, the research paper claims.

At first glance, the lower natural gas price trends suggest an enormous competitive advantage for the US economy, according to the paper. It is assumed that lower primary energy prices mean lower energy costs for businesses and private households. Businesses have lower production costs than their foreign competitors. Increasing disposable incomes of private households leave more scope for consumption demand.

The Research paper acknowledges the differences in gas prices between the US and Germany and also points at trends towards higher electricity costs for German industry and households. However, the report concludes that the production costs of German businesses in general is not higher than for their US counterparts. One major explanation for this is that German economy in general is more energy efficient than the US economy. In fact, the paper suggests that low energy prices may actually act as an impediment to undertaking measures to make the industry more energy efficient and resilient to price fluctuations and high prices.

Read the full research paper