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JP Floru: Frack, baby, frack! Away with the statism that stops drilling and prosperity

JP Floru is a Westminster Councillor, Senior Research Fellow of the Adam Smith Institute and writer of Heavens on Earth - How to Create Mass Prosperity

In the U.S, shale gas now accounts now for 30% of all gas extraction. Gas prices have reduced dramatically. By 2025 it may acquire energy independence – the current bloated importance of Iran and other Venezuelas will have become a distant memory.  By contrast, notwithstanding substantial reserves, shale gas is in its infancy in the UK.  Why are we lagging behind by about 20 years?

The main cause is one of simple property rights.  An American property owner owns the mineral rights beneath his land (unless those rights have been separated).  By contrast, in the UK the ownership of oil and gas below land belongs to the state.  A property owner may sell access rights, but this will be small fry compared to owning all the shale gas below his land. In addition, a fracker will have to obtain planning permission from local government – a system mainly known because it incentivises neighbours to object at all cost. And if that wasn’t enough, the state impedes development further by way of its slow, expensive, and inaccessible state court system.

Ownership over oil and gas below land was granted to the state through the Petroleum (Production) Act 1934. A fracker will have to obtain exclusive rights through a licence from the Department of Business, Innovation and Skills. Such a licence will not grant him access rights to the land; and this he will have to negotiate with the land owner. Most property owners would be reluctant: lorries droning past their windows or babies shaking in their cods may not be their definition of bliss. The land owner might do well out of this access negotiations with the fracking company, but would be even more incentivised if he also owned the actual mineral rights. 

The communist mineral property rights system the UK enjoys is not the only impediment to fracking. Planning permission will have to be obtained. Planning was nationalised by the Attlee government through the Town and Country Act 1947.  Before this, neighbours essentially agreed development between them (you needed no planning permission but if you annoyed your neighbours they could sue you - so it was in your interest to reach agreement beforehand).

Today, planning permission is granted by local government.  Neighbours can object on the basis of existing planning rules, but loss of property value is not a valid reason to object, and financial compensation for the nuisance is no part of it either.  The absence of financial compensation for their real loss is a massive incentive to reject any planning application coming along.

Theoretically, the neighbours of the frackers could still seek compensation for their loss through the courts.  Unfortunately, our courts are a state monopoly, too.  They suffer from the same ills all state services suffer from: they are slow, expensive, and user-unfriendly.  So he who loses out through a planning decision by government has to suffer in silence and bear the loss inflicted upon him by politicians without recourse.

State mineral rights, state planning laws and state courts: a triple whammy stands in the way of fast development. Instead of fracking to prosperity, the citizens of the industrial wastelands protest, reject, and refuse.  They are right to do so: the state will take the bounty, and they will be left with inconvenience and financial loss.

The alternative? 

1) Privatise the mineral rights to incentivise property owners to allow fracking.  The Treasury would not lose out as it would still tax the proceeds which would be higher if fracking was unimpeded by statism. 

2) Re-privatise the planning system and return to pre-1947 property law.  Apart from sparing Nick Boles a nervous breakdown, it would also allow for financial compensation of those who suffer loss of property value and nuisance through development. Nimbyism would disappear overnight.

3) Privatise the courts and encourage competition (this is of course already partly achieved through the extensive use of private arbitration by which the private sector tries to remedy the failing state court system).  

As with so many things it comes down to a political choice between statism and prosperity. I say: ditch the statism, and frack, baby, frack!


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