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Matthew Lynn's London Eye Archives | Email alerts
April 4, 2012, 12:00 a.m. EDT
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By Matthew Lynn
LONDON (MarketWatch) "” It isn't hard to find reasons to be gloomy about the European economy right now.
Unemployment has just reached a 25-year high, industrial production is falling, and Spain has embarked on a kamikaze strategy of imposing deep cuts in public spending on an economy already in recession.
But it is just possible that the continent has a joker in its pack, something unexpected that might turn the economy around. Such as? Well, how about cheap energy? And lots of it.
In the United States, there has been a lot of excitement about the potential exploitation of vast new reserves of shale gas. It has driven gas prices in the U.S. to 10-year lows. And it has sparked talk of a revival of American manufacturing industry on the back of cheap energy.
The European Central Bank President Mario Draghi will have to consider the slew of gloomy European economic data this week ahead of the bank's rate decision tomorrow. WSJ's Terry Roth is looking for any signals on future policy.
But Europe is also sitting on a lot of shale gas.
How much? According to estimates by the U.S. Energy Information Administration, Europe has 639 trillion cubic feet of technically recoverable shale gas resources, three times its proven conventional natural gas reserves. That's not quite as much as the U.S., which has 862 trillion cubic feet of shale gas and 273 trillion of natural gas. But it is in the same ball-park.
Europe's gas is also mostly in countries that haven't traditionally been big energy producers. The early indications are that the biggest reserves are in France and Poland.
There is little question that shale gas is potentially a massive new source of energy. You can already see that in the way that gas and oil prices have diverged in the U.S. While oil has been getting more and more expensive, gas has been dropping fast in price. That wouldn't be happening unless new supplies were starting to have an impact.
Nor is there any doubt that cheap energy can be a major spur to economic development. From the first industrial revolution in the north of England onwards, no country or region ever managed to grow rapidly without access to cheap energy and plenty of it. When oil prices started their 20- year decline after the peak of the early 1980s, the global economy went on a two-decade growth spurt, and stocks soared as well. When oil started rising in price significantly, as it has done over the last decade, the world economy fell off a cliff. You can debate the how and why of the linkage, but it is hard to deny that there is some sort of connection. So if Europe has access to lots of new cheap energy that can only be good news.
True, there are plenty of obstacles to its development. Some of the early results from Poland, where Europe's shale gas industry is most advanced, have been disappointing.
Environmentalists don't like shale gas much, and they are a far more powerful force in Europe than the U.S. Right now, the French seem intent on banning the techniques that allow shale gas to be extracted. So do the Germans, although since Germany doesn't appear to have a lot of the stuff that doesn't matter very much.
But don't count on that opposition staying the course. Over the next few years, France could be a country facing virtual bankruptcy. It has one of the highest levels of state spending in the world, hasn't balanced its budget in three decades, and just lost its triple-A rating.
When rambunctious Occupy protesters at St. Paul's cathedral in London were evicted in February, they moved into Finsbury Square, where another group of protesters had set up a tidy and orderly camp. WSJ's Jenny Gross reports on their current efforts to compromise.
There are few easier things to tax than oil and gas. Faced with a choice between national insolvency and upsetting a few environmentalists, it would be foolish to assume the French will side with the green movement. This, after all, is the country that sells most of the world's nuclear power equipment, not to mention a lot of its weapons. The French rarely allow morality to stand in the way of a deal.
And as the industry gets developed, the chances are a lot more shale gas will be found. It is starting to be discovered in the U.K. for example, and given how much coal and then oil Britain was sitting on, it wouldn't be a great surprise if there was plenty of shale gas as well.
Some attention has been paid to the impact of shale gas on Europe's energy security. Much of the continent's gas comes from Russia, and Vladimir Putin has a nasty habit of turning the taps off. But so far, much less attention has been paid to its impact on economic growth.
And yet, the link between cheap energy and a growing economy is a pretty clear one. So too is the link between cheap energy and industrial restructuring, when Margaret Thatcher reshaped the British economy in the early 1980s, for example, it was only really possible because of the vast wealth generated by North Sea oil.
Could shale gas perform the same kind of role in this decade? There is no reason why not.
Poland is already one of Europe's fastest growing industrial centers. It has low personal and government debt, and a rapidly improving infrastructure. Add lots of cheap energy into the mix, and it could take off like a rocket. Keep an eye on the Warsaw index over the next few years. It could very quickly turn into one of the best-performing in the world.
France used to be one of the major manufacturing centers of the world. It has a fantastic geographical position, right at the center of the continent, and a well-educated and growing labor force. Its ridiculously high taxes and over-regulated labor market have held it back. But lots of cheap energy could help it overcome those obstacles and let it flourish again.
No one is should imagine that shale gas is going to save the euro. It remains the most dysfunctional currency ever created, creating depressions right across the south of the continent. But cheap energy may well help Europe through the breakup of the single currency, and once that is achieved, it may well power its revival.
Matthew Lynn is a financial journalist based in London. He is the author of "Bust: Greece, the Euro and the Sovereign Debt Crisis," and he writes adventure thrillers under the name Matt Lynn.
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