Multi-managerSep 9 2013

Too much faith in fracking

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It was a weak August for US equities, with the country’s markets lagging most others – developed as well as emerging.

There are indeed some signs that the US recovery may soon hit a soft patch, and if this is not the case then the fear of quantitative easing being tapered by the Federal Reserve is likely to be sufficient to send share prices spiralling down.

There are nevertheless a lot of investors who are still positive about US equities. This optimism usually revolves around the idea that the US will soon have access to a near-unlimited reserve of extremely cheap energy thanks to large-scale implementation of horizontal shale drilling. But I believe there are a few factors that could dampen this optimism.

Put simply, hydraulic fracturing, or ‘fracking’, is the process of drilling and injecting fluid into the ground at a high pressure in order to fracture shale rocks to release natural gas inside. It’s a very traumatic process. Wherever wells are drilled the countryside turns into a brownfield site, heavy traffic is generated, and a substantial amount of light pollution also occurs. This is why the technology is unlikely to be deployed extensively in any densely populated regions.

Another misconception about fracking is that current break-even prices for the process are not as low as commonly believed. The average break-even price is estimated to be $6 per 1m British thermal units – equal to roughly 28 cubic metres of natural gas. Current natural gas prices are roughly $3.70 per unit, having dropped substantially from peaks of $14 per unit.

There are nevertheless some positive points. Given its vast reserves of shale gas, it is possible to envisage a scenario where, within a few decades, the US may achieve energy independence.

I do not believe that any support for US equities will come from fracking. I believe fracking creates opportunities for technologically advanced US companies, but would rather identify those than take an overall positive view.

François Zagamé is a multi-manager at Old Mutual Global Investors