[With Centrica and EDF announcing hefty retail gas price increases in the UK this week, I thought it was worth reposting this story that was first published in December 2007. The follow on story Daddy will the lights be on at Christmas?, is perhaps more pertinent this year than last.]

OECD European gas production looks set to peak in 2008. After that, falling production combined with rising demand will see OECD European gas imports wanting to rise from current 197 BCM per annum to 442 BCM per annum by 2020. Where will this gas come from and how will rising European imports affect N America and the rest of the world?

Figure 1 OECD Europe gas production and conceptual forecast. Click all charts to enlarge

[break]

Executive summary

• As of 2006, OECD Europe produced 55% of its own natural gas with the majority of gas imports coming from Russia and Algeria.
• OECD Europe has three main gas producers – Norway, The UK and The Netherlands. Norwegian gas production is undergoing a major expansion, but this is forecast to halt at 130 BCM per annum next year for political resource conservation reasons. UK and Dutch gas production are in decline, and combined OECD Europe indigenous gas production looks set to peak in 2008.
• Gas consumption has been rising at 2.6% per annum since 1980 and there are a number of reasons to suggest that rising demand for gas will continue into the future unless it is checked by high price or shortages of supply.
• It is believed that Russia will do what she can to maintain gas exports to OECD Europe. But with their three biggest gas fields – Yamburg, Urengoy and Medvezhye – in decline, maintaining supplies from second tier assets will be a major challenge. In order to maintain supplies to the OECD Europe, supplies may have to be cut to other countries.
• Algeria, Egypt and Libya will all see expansion of gas production in the years ahead, but will also experience growth in indigenous consumption, especially in Egypt. Gas exports from these North African states are forecast to peak in 2015. They may provide an additional 33 BCM of exported gas to the European market.
• OECD Europe gas imports are forecast to grow from current 197 BCM per annum to 442 BCM per annum by 2020 – if we see business as usual growth in demand and consumption. Where will this additional 245 BCM come from? Some may come from N Africa and some from West Africa and Qatar. It seems unlikely that an increase in imports on this scale will be possible and that high price and shortage will ration supply. This market driven outcome may hit the poorer nations hardest and one may suspect this may have a destabalising effect.

Introduction

This post will provide a production forecast for Europe’s main gas producers (the UK, The Netherlands and Norway); it will examine existing import patterns in Europe’s main gas consumers (Germany, Italy and France) and the ability of gas exporters to meet growing OECD European demand – Egypt, Libya, Algeria, and in particular Russia. This article was initiated as part of study of UK gas security. The UK faces rapidly falling gas production and an equally rapid expansion of imports and the key question for the UK is where will this gas come from? This will be dealt with in a separate post.

There are a number of ways to divide Europe for economic analysis. I have chosen to break out data for European states that are members of the OECD. This includes the important oil and gas producer Norway, which is not a member of the European Union (EU) but excludes the Baltic States, Romania and Bulgaria which are EU members but have not yet joined the OECD.

Figure 2 Map of the European Union.

Turkey is a member of the OECD but lies mainly outside of Europe and is not included in this study. Turkey is a major importer of gas, especially from Russia.

Data sources and gas units

Throughout this article I have used data from the 2007 BP Statistical Review of World Energy. I have also used billion cubic metres (BCM) as the standard unit for gas measurement. According to BP, 1 BCM is equivalent to:

35.3 billion cubic feet (BCF)
0.73 million tonnes of liquified natural gas (LNG)
36.0 trillion British Thermal Units (BTU)
6.29 million barrels oil equivalent (BOE)

Gas production forecast

OECD Europe gas production is dominated by three countries – the UK, The Netherlands and Norway, with lesser but significant quantities produced by Denmark, Italy, Poland and Germany.

Figure 3 OECD Europe gas production and conceptual forecast.

The UK

The changing face of gas production in the UK lies at the heart of Europe’s emerging gas problem. In 2003, the UK was a net exporter of gas to Europe but with peak production in 2000 and production now falling at 8.7% per annum it had become a net importer by 2004. The challenge facing the UK gas industry will be the subject of a detailed post.

Figure 4 UK gas production and consumption history

The UK forecast is based simply on extrapolating the 8.7% decline to 2020 by which time production is forecast to be 26 BCM per annum. At peak in 2000, the UK produced 108 BCM per annum and in the space of 20 years the UK will have gone from net exporter to a major importer, being dependent upon imports of over 80 BCM per annum.

This view on decline of UK gas production is shared by the UK BERR (Department for Business and Enterprise Regulatory Reform – formerly the DTI). See for example Figure 5.2 in this report.

The Netherlands

The Netherlands is home to OECD Europe’s largest gas field. Discovered before WWII, the full extent of the Slochteren Field did not become apparent until the post-war years. It was the discovery of this field in the Permian Rotliegendes sandstone that sparked the exploration for gas and then oil in the North Sea.

Figure 5 Europe’s largest gas fields. Data for Slochteren from Rembrandt Koppelaar. Troll and Ormen Lange from the NPD.

Slochteren lies onshore in the Groningen area of northern Holland and dwarfs the giant Norwegian gas fields of Troll and Ormen Lange. Further fields were found around Slochteren in the on-shore and off-shore areas.

Slochteren was never produced flat out and the Dutch government has laterally set a production cap on the field. In the period 2006 to 2015 this cap is set at 425 BCM over the 10 year period. NAM (the Shell – Exxon operating consortium) can optimise production over this time frame but strictly within this overall limit. The production cap on Slochteren has resulted in a long drawn out production plateau analagous to that seen in the Saudi super giant oil fileds – a very enlightened production strategy on behalf of the Dutch government.

Figure 6 Dutch gas production and forecast based on data provided by Rembrandt Koppelaar. The smaller offshore fields are showing a decline similar to the UK. Note that the volumes here are substantially larger than quoted by BP (see Figure 7). Rembrandt suggested this could be due to adjustment by BP for the energy content of the gas.

The other fields were not subject to regulation and are now in decline in similar manner to the UK gas fields. According to Rembrandt, Slochteren will also begin to decline naturally after 2015 and the bottom line is that Dutch gas production is now in an irreversible decline phase.

The forecast for the Netherlands is based on data kindly supplied by Rembrandt. This has smaller fields declining at a similar rate to the UK, while Slochteren has a somewhat lower decline rate.

Figure 7 History of Dutch gas production and exports.

Figure 8 Destinations of Dutch gas exports. Note that the Dutch import gas from Russia and Norway for re-export.

It can be seen that Dutch gas exports have been declining irregularly since the late 1970s and that some day post 2020, the Dutch may become an importer of natural gas.

Norway

Norwegian gas production has expanded rapidly in recent years, mainly the result of the Troll Field development. This expansion is set to go on for another couple of years, but then I suspect the expansionary phase will come to a halt.

In 2006 Norway produced 87.6 BCM of gas. Since then the Langeled pipeline that connects the Ormen Lange Field to Easington in England (and also to continental Europe) has been completed. The capacity of Langeled is about 20 BCM per annum. Furthermore, the development of the Snøhvit Field in North Norway with an LNG train provides Norway with an additional 5.7 BCM capacity.

The Norwegian export pipeline system is reported to have a capacity of 120 BCM per annum. With domestic consumption running at 4.5 BCM and LNG production at 5.7 BCM, future Norwegian production is forecast to run at 130 BCM per annum.

With Europe becoming ever more thirsty for gas, there was a plan to expand production in the Troll Field by 20 BCM per annum. Most significantly, this consent was refused by the Norwegian parliament. Hence Norway is in a position of having ample reserves to sustain a short term production boost, but instead seems to be choosing the path of restrained production which will favour an extended plateau at lower than maximum possible production levels.

Figure 9 Norwegian gas infrastructure.

The map of the Norwegian gas pipeline export system shows where Norwegian gas enters the UK and Continental Europe. The UK imported gas from Norway during the 1970s and 1980s where gas from the Frigg Field was piped to Scotland via the Vesterled pipeline. Since then the UK has had no need for Norwegian gas – until recently where a massive expansion of import capacity has been built. The Vesterled pipeline is now connected to the Norwegian gas transmission network and has been one route into the UK for Norwegian gas in recent years. There are, however, two new pipeline systems. The already mentioned Langeled pipeline that connects the UK to Ormen Lange via the Sleipner hub. And the Tampen Link that connects Statfjord and other mature fields in the Tampen Spur area to the UK operated FLAGS pipeline system. FLAGS transports associated gas from the northern UK fields to St Fergus in Scotland and since that UK gas production is now in decline, the Tampen Link will fill that surplus capacity – for a while at least.

Five other pipelines make landfall in continental Europe at 4 import terminals. Three pipelines feed two terminals in North Germany. And one pipeline lands at Zeebrugge in Belgium and one at Dunkirk in France. These entry points are connected to a broader European gas transmission system which pipes Norwegian gas as far as Spain, Austria, the Czech Republic and Poland.

Figure 10 Export destinations for Norwegian gas. Up until 2006, all Norwegian exports were via pipelines to Europe. In 2007, Norway opened its first LNG train and it will be interesting to see where these LNG exports end up.

It can be seen that Germany is by far the largest importer of Norwegian gas, followed by France, Belgium, the UK and Italy. One curiosity in this data is that the Netherlands are shown as a net importer of Norwegian gas. I can but speculate that The Netherlands are importing Norwegian gas to meet export contracts whilst conserving their own gas reserves.

Demand and import patterns

Natural gas consumption within OECD Europe has grown on average at 2.6% per annum since 1980. Back in 1965, Europe consumed less than 25 BCM per annum and this grew to over 470 BCM per annum by 2005, fuelled by North Sea gas. Higher prices and shortage of Russian supply saw consumption fall in 2006.

Figure 11 Forty years of gas binge in OECD Europe.

Where next for European Natural gas demand? Will the past trend continue, or will high price curtail demand? This is impossible to answer, but there are a number political, demographic and resource factors consistent with demand continuing to grow unchecked.

• Growing prosperity in former Eastern European states leading to growth in energy consumption.
• Migration from East to West placing greater strain on infrastructure and energy use in the West.
• Migration from Northern to Southern Europe leading to greater prosperity in the latter and ever increasing energy needs – see for example gas consumption data for Spain.
• Climate policies which as a quick fix continues to drive gas power generation forward as a more efficient and CO2 friendly means of generating electricity.
• Pending shortages in oil supplies may lead to substitution by natural gas in automobiles.

If demand for natural gas continues to grow then source of supply and the security of that source is highly relevant. The following section shows the main sources of supply for Europe’s main consumers (excluding the UK). One thing all gas import strategies have in common is diversity of supply.

Germany

Germany has some significant and stable indigenous gas production, but is heavily dependent upon The Netherlands, Norway and Russia for pipeline imports. With Dutch gas production in decline, Germany will presumably be looking to increase supplies from elsewhere.

The cornerstone of the German strategy is the Baltic pipeline that will assure supplies of Russian gas direct to Germany that will by-pass former Soviet republics and East European states.

Without LNG, the German strategy seems constrained, since falling UK and Dutch production will place greater demand on Norwegian and Russian gas from several other states.

Figure 12 The import sources of gas to Germany.

France

France is unique among major European gas consumers with no indigenous gas production. France produces no oil and only a little coal – hence their reliance upon nuclear energy for power generation.

Like Germany, France relies heavily upon Dutch, Norwegian and Russian gas pipeline imports. France also has a mature LNG import trade with significant imports from north and west Africa.

Figures 13 & 14 The import sources of gas to France.

Italy

Italy has significant but falling indigenous gas production. It also has a highly diversified gas importation infrastructure born in part from its geographic location. Italy imports gas from Norway, The Netherlands and Russia but is also linked to Algeria and more recently Libya by pipeline.

Italy also imports small amounts of LNG, mainly from Algeria. Note how there were significant imports from Nigeria in 2004 – but then nothing. It seems these cargoes may have switched to France in 2005 / 06.

Figures 15 & 16 The import sources of gas to Italy.

Current and future sources of supply

The chart shows that Russia and Algeria are by far the most important sources of imported gas to OECD Europe. This raises the questions of whether or not these countries will be able to maintain or increase future supplies and if not, where will Europe’s growing thirst for gas be met in the future?

Figure 17 Sources of gas in OECD Europe in 2006.

Russia

Russian gas production had an interim peak in 1991, and with the fall of the Soviet Union went into decline for a number of years. Since 1997, production has begun to rise again and a new high was reached in 2006 of over 600 BCM per annum. The $60K question is where next for Russian gas production? This question is just as important as the future direction of Saudi oil production.

Figure 18 Russian gas production, consumption and exports.

Figure 19 Destinations of Russian gas exports

Russia exports less than one third of its gas production. The majority of exports are to OECD Europe, though a significant amount still goes to former republics. But the amount going to Ukraine, Belarus and Moldova is not documented in the BP statistics, and is presumably included with Russian consumption data. The structure of Russian gas production makes exports vulnerable to any down turn in production and / or increase in domestic consumption. Russian gas exports have been essentially static since 1990, and with the largest fields in decline (see below) it seems unlikely that Russia could at this stage raise production to meet the rising import requirements of OECD Europe.

Figure 20 Map showing the west Siberian gas fields of Russia. The three giant fields of Yamburg, Urengoy and Medvezhye have historically provided the bulk of Russia’s gas. All three are now in decline (see below). Much of Russia’s remaining potential lies in this area, particularly on the Yamal peninsula, to the left of the circle. The map is borrowed from a presentation by Kjell Aleklett.

Figure 21 Russian gas production forecast by Jean Laherrere showing how second tier fields may compensate for decline in the three giants – Yamburg, Urengoy and Medvezhye.

Historically, more than 50% of Russian gas production has come from 3 giant fields – Urengoy, Yamburg and Medvezhye. This excellent chart (unpublished) from Laherrere shows that all three of these core producers are in decline. Since Russia has relied upon these three supergiants for core production they now have an inventory of second tier giant fields to develop that may compensate for the decline from The Big 3, as shown on Laherrere’s chart.

The challenges for Gazprom are immense. Bovanenko lies on the Yamal peninsula below permafrost. It is at the end of proposed piplelines shown as dashed red lines on the map above. Shtockman lies out of helicopter range in the Barents Sea. Recent reports suggest that the Russians want to use a floating nuclear reactor to power the production platform.

Figure 22 Russian gas production scenarios by Jean Laherrere. WEO forecasts show rising consumption matching rising production with flat exports of around 200 BCM per annum.

This new chart from Laherrere 2007 shows a peak in Russian gas production about 8 years from now with unconstrained production which is unlikely to happen. Instead, constrained production as indicated by the slowly rising WEO 2006 forecast matched by rising consumption will give rise to relatively flat gas exports forward to 2020. So it seems likely that Russia will be able to maintain gas exports but will unlikely be able to increase exports to compensate for falling OECD Europe production.

A critical geo-political question, however, is how these exports are distributed in future? The Sakahlin projects will see East Siberian gas entering the Asian markets for the first time. Furthermore, the Baltic Gas Pipeline will witness a new prioritisation of gas energy security in Germany and western Europe.

The Baltic Gas Pipeline, which is under construction under a joint venture between Gazprom and German companies BASF and E.ON, will deliver 27.5 BCM per annum direct to Germany in the first instance with the option to rise to 55 BCM. All of OECD Europe’s gas from Russia currently has to cross The Ukraine and then either Slovakia or Poland in order to reach the main destinations of Germany, Italy and France. As we saw in the winter of 2005 / 6, Russia struggled to meet all commitments given extreme cold weather at home and cut gas supplies to some unfavoured former Soviet enclaves. The spat with Ukraine at that time highlighted how dependent OECD Europe was on the goodwill of the Ukrainians and the Baltic Pipeline circumvents that problem, providing gas security to Germany at least.

Figure 23 Map of pipelines in Ukraine that carry Russian gas to western Europe via Poland and Slovakia. From Ukraine vs Russia: Tales of pipelines and dependence by Jerome a Paris

The Baltic pipeline will be fed primarly by gas from a new field. The Yuzhno-Russkoye field, which recently started production, is located in the same area as Urengoy, is included in Laherrere’s chart and is one of the new fields that will offset decline from The Big 3. This new export capacity, therefore, does not necessarily represent new productive capacity but merely a more secure route for Russian gas into the OECD.

OECD Europe currently receives 115 BCM per annum from Russia, so the Baltic pipeline may eventually secure almost half of those deliveries. However, should OECD Europe face gas shortages, it is those countries at the end of the pipeline that will still be most vulnerable. Some interesting negotiations may lie ahead.

In summary, it is exceedingly difficult to predict how reliable Russian gas exports to OECD Europe will be in future. It seems most likely that Russia will maintain current production levels of 600 BCM per annum until 2020. However, increasing domestic consumption, and exports to East Asia may see gas exports to the west declining. Germany will be in the strongest position to secure supplies. If the remaining supplies are rationed by ability to pay then some of the poorer eastern European states may suffer.

Algeria

Figure 24 Map of oil and gas infrastructure in Algeria. Europe is fortunate to have gas rich North Africa lying off its southern shores.

According to the BP Statistical Review, Algeria has 4.5 TCM remaining gas reserves placing it number 8 in the world. Accordng to the analysis of Jean Laherrere, Algeria has 4TCM gas reserves remaining, which is in fair agreement with the BP figure. It is fortunate for Europe that Algeria lies close to the southern border of the continent allowing Algerian gas to be piped into Italy and Spain. There is also a significant trade in LNG between Algeria and Europe.

Figure 25 Discovery and production gas models for Algeria by Jean Laherrere.

Laherrere provides a more detailed picture of gas production than can be compiled from the BP data. The main difference is production reported gross of re-injected gas. An unconstrained production peak some 17 BCM per annum higher than today’s production is shown around 2015.

Figure 26 Algeria gas production, consumption and exports. Production and exports have not risen since 1999.

Algerian production grew steadily until 1999 but has since stagnated. There was a new discovery cycle during the 1990s and it is this that may provide impetus for some new production growth. Algerian consumptin is growing slowly and this will consume a portion of new production. New gas export capacity is estimated roughly to be 12 BCM per annum by 2012.

Figure 27 Destinations for Algerian pipeline gas exports.

Algeria exports about 37 BCM per annum by pipeline but is also active in LNG production with LNG exports of 25BCM in 2006. Most of the LNG was exported to Europe (and Turkey) with only small quantities going further afield. Europe is a short trip for an LNG tanker from North Africa, and in terms of tanker utilisation I suspect it will continue to be more profitable to deliver N African LNG to Europe than further afield.

Figure 28 Destinations for Algerian LNG gas exports.

The IEA 2005 energy outlook had this to say:

Algeria is the third-largest exporter of natural gas in the world. Exports are expected to increase as pipeline and LNG projects are brought on line. Gas exports were 64 bcm in 2003 and are expected to climb to 76 bcm in 2010 and reach 144 bcm by 2030.

The IEA target for 2010 looks marginally optimistic and their target for 2030 is a reserves busting feat as indicated on Laherrere’s chart (Figure 25).

Libya and Egypt

Both Libya and Egypt have seen rapid expansion of their gas production and exports in recent years. This is set to continue at a slower pace for a number of years according to these forecast models from Jean Laherrere. Growing population and domestic gas consumption in Egypt looks set to outstrip production growth and Egypt may cease to be a gas exporter beyond 2025.

Figure 29 Gas discovery and production models for Libya by Jean Laherrere.

Figure 30 Gas discovery and production models for Egypt by Jean Laherrere. In the export model (Figure 31) I have used the “slow” production model for Egypt.

Combining the three production models of Laherrere from Algeria, Egypt and Libya provides this picture of gas exports from N Africa peaking at around 120 BCM per annum in 2015. That represents a 33 BCM per annum growth from current export levels.

Figure 31 Gas export model for N Africa showing expansion of production and exports in the years ahead but with a conceptual export peak around 2015.

OECD Europe gas security

With OECD Europe indigenous gas production set to decline and good reasons for believing that demand for natural gas will continue to expand in the future, OECD Europe faces the prospect of importing ever larger amounts of gas (LNG) from ever more remote parts of the world. Current imports are running at 197 BCM per annum and the BAU scenario shown below shows imports burgeoning to 442 BCM by 2020. Where will this additional 245 BCM come from?

Figure 32 Gas scenarios for OECD Europe summarising the indigenous supply forecasts and demand forecasts from the preceding sections. With the BAU demand scenario, imports will need to grow from current 197 BCM per annum to projected 442 BCM per annum by 2020 – an increase of 245 BCM per annum. It is doubtful that this quantity of gas may be sourced from African and Middle East markets. It is therefore considered more likely that high price and supply shortages will curtail demand for gas. It is conceivable that conservation, more efficient energy use and substitution with alternative sources of electricity may fill the gap left by declining gas supplies.

This is near impossible to answer with certainty. My feeling is that Russia will strive to meet current commitments which will result in their gas exports neither increasing nor decreasing in the 2020 time frame. N Africa will see strong growth in production that will be offset by strong growth in their domestic consumption. Up to 33 BCM of new supply may come from N Africa and it seems reasonable to assume that the majority of that gas will come to Europe. That leaves 212 BCM to source from else where and will inevitably entail a massive expansion of LNG export and import infrastructure beyond that which already exists. In the period 2010 to 2020 Europe will face fierce competition for LNG supplies from the mature markets of Japan, South Korea and Taiwan and growing competition from new markets for LNG in the USA and most likely also in China.

In 2006, the total global LNG trade was 211 BCM and so we are talking about doubling that by 2020 to satisfy OECD European needs alone. The main sources of new supply will be West Africa (Nigeria), Qatar and Iran. Since Qatar has declared a moratorium on new LNG projects forward to 2011 it is a major challenge for these three countries alone to meet global demand growth.

Figures 33 & 34 The changing face of gas security in OECD Europe. With a BAU demand scenario, OECD Europe will face importing ever growing quantities of LNG from remote sources around the globe.

The crux of this whole issue is how growing demand for gas is managed. The UK, and other OECD governments seem intent on allowing market forces to determine the outcome. I would be the first to admit that the dynamics of supply and demand in the European gas trade has so many dimensions that trying to regulate and plan this trade is not simple. But on the other hand, allowing market forces, national economic strength, and price to determine who gets and who doesn’t get the available energy may have disasterous and unforeseen outcomes. A scenario where the former Soviet Republics and then the east European states and perhaps Turkey are left in the cold whilst western Europe uses historic strengths to secure itself energy supplies may have unpleasant outcomes flowing from a newly destabilised former Soviet bloc. Energy poverty throughout the poorer parts of Western Europe may also have undesirable consequences for the warm middle and upper classes.

The main message of this post, therefore, is to call upon the politicians of the OECD in Europe to show some rare leadership, and to recognise that massive energy conservation, and expansion of sensible alternative energy schemes, offer a better alternative to the polarisation that is likely to result from allowing market forces to determine the outcome of energy decline.

Acknowledgement I am indebted to Jean Laherrere who upon my request sent his most recent work on gas resources in countries relevant to the European market. Many of the charts come from a paper titled “Etat des reserves de gaz des pays exportateurs vers l’Europe” presented at Club de Nice Energie et geopolitique 29 nov. – 1er dec. 2007.

British Prime Minister Gordon Brown – from zero to hero?

…. to set ourselves on a new energy path – a path from our economies that are today over-dependent on oil towards the post-oil energy economies of the future. And moving towards this sustainable energy economy helps us meet our economic, political and environmental goals.

[break]

At this summit the 27 nations of the European Union and our Mediterranean neighbours pledge ourselves to take action to promote our mutual prosperity, security, liberty and democracy.

We must now leave behind the old wasteful, oil dependent ways of yesterday and embrace the new cleaner and sustainable energy future of tomorrow. The increases in oil and food prices we have seen over recent months are causing hardship to families and businesses in Britain and throughout Europe. They threaten economic instability and their production is environmentally not sustainable.

The years of cheap energy and careless pollution are behind us. We need a new strategy. Past total dependence on oil must give way to a clean energy future.

I have called for a better dialogue between oil producers and consumers and a more transparent market, and for measures to increase investment in oil production and refining. Following the meeting in Jeddah, Saudi Arabia last month we will take these initiatives forward at the meeting in London in December, endorsed this week by the G8.

But improving the functioning of the oil market can be only one half of our strategy. The other must be to set ourselves on a new energy path – a path from our economies that are today over-dependent on oil towards the post-oil energy economies of the future. And moving towards this sustainable energy economy helps us meet our economic, political and environmental goals.

Today in Europe more than a third of our energy comes from oil, and a further 40 per cent from other fossil fuels – gas and coal. Only around 20 per cent of our energy comes from low carbon sources – renewables and nuclear. None as yet comes from fossil fuels with carbon capture and storage.

With our ambitious climate and energy package – which we must commit to completing under the French Presidency this year – Europe is on a path to increase the proportion of renewable energy in its energy mix by 2020 from under 10 per cent to 20 per cent. And if we are to meet our long-term climate change objectives – to reduce our emissions by at least 60 per cent by 2050 – Britain, alongside our European partners, will need to do even more.

And at the same time as we move to clean energy sources, we must also become much more efficient in the way we use energy. Over the last forty years the energy intensity of the British economy – the amount of energy we use per unit of national income – has been halved. But as our economy continues to grow we must reduce that still further.

So let me set out the five main points of an oil replacement strategy.

First, since 70 per cent of future oil demand is from transport, we need a step change in the fuel efficiency of vehicles. So Europe must push ahead with mandatory fuel emission standards for new cars. But to drive innovation in the car industry we need not just a target for 2012, but a target for 2020 to match those in the rest of the energy package. The UK is urging that this should be an average of 100 grammes per kilometre, a cut of 40 per cent from the 164 grammes today. This could reduce road fuel consumption in Britain by an average of 2 billion litres of road fuel a year and save the typical British motorist around £500 pounds a year in running costs.

To achieve such a target we will need to see the mass production of electric vehicles – conventional hybrids, plug-in hybrids, and fully electric vehicles. Electric vehicles are now available on our roads – but they are specialist cars and vans available only in small numbers. I want to see the mass production of hybrid and electric drive technology in ordinary family models.

And I want to see those cars manufactured in Britain. So I will be meeting with leaders from the British motor industry next week to discuss their plans for hybrid, electric and other low carbon car technologies.

Already initiatives are under way in several countries to accelerate the commercialisation of electric vehicles by supporting the required charging infrastructure and automotive technologies.

At the European Council in June we agreed to explore the scope to accelerate the introduction of commercially viable electric vehicles – and the infrastructure that their widespread use would require – in the EU.

And today, as a next step, Britain is discussing with other countries – including Denmark, Portugal, Israel and Germany – how we can create a strong policy and consumer environment to promote the development of electric vehicles. And I will propose that we convene a meeting of energy, automotive and planning experts to exchange key information on infrastructure requirements and technology standards in advance of the London energy summit later this year.

Second, we need all countries to commit to taking rapid action to improve energy efficiency in households and businesses. The G8 nations this week committed to implementing the IEA’s 25 recommendations on energy efficiency. If implemented globally these could cut oil consumption by 15 per cent and energy-related carbon emissions by 20 per cent, equivalent to the emissions of the US and Japan combined. Europe must therefore commit to implementing its own energy efficiency action plan.

The UK is the first European country to phase out energy inefficient light bulbs – which we will do by 2011. We want the rest of the continent to follow. We need agreement on lower levels of VAT for energy saving goods, as proposed by Britain. And we need to move faster to develop energy efficient standards for appliances, such as phasing out inefficient standby on electronic goods.

In Britain we will also introduce new measures to encourage the installation of household insulation and energy efficiency appliances, which can together save a typical British family up to 20 per cent – £170 pounds a year – off their energy bills.

Third, I am convinced that we need a renaissance of nuclear power. Britain is now moving quickly to replace its ageing fleet of nuclear power stations. And all around the world I see renewed interest in this technology, as countries contemplate the alternative – continued oil dependence and unchecked climate change.

So Britain will work to make possible the best arrangements for security, safety and disposal. Last week the Nuclear Decommissioning Authority announced a preferred bidder for the clean up contract at Sellafield. We are also collaborating with France in this field, and stand ready to do so with others.

Fourth, we need a massive expansion of renewables. Britain is fully committed to the EU target that 20 per cent of all energy must come from renewable sources by 2020. Last month Britain set out its strategy to meet our own 15 per cent renewable target – a $100 billion investment programme over the next twelve years.

As a result of this strategy Britain will become the global centre for offshore wind. We will see major investment in energy from waste and biomass and in new forms of microgeneration. We are pushing ahead with the development of marine and tidal technologies, including an examination of a tidal scheme on the River Severn, which could supply 5 per cent of all the UK’s electricity.

And now I believe it is time for a major investment in the development of solar power. The IEA suggests that additional investment of up to 215 million square meters of solar panels will be needed every year to 2050. And particularly in the Mediterranean region, concentrated solar power offers the prospect of an abundant low carbon energy source. Indeed, just as Britain’s North Sea could be the Gulf of the future for offshore wind, so those sunnier countries represented here could become a vital source of future global energy by harnessing the power of the sun.

So I am delighted that that the EU is committing at this summit to work with its neighbours – including Egypt, Jordan, Morocco and the League of Arab States – to explore the development of a new ‘Mediterranean Solar Plan’ for the development and deployment of this vital technology from the Sahara northwards.

Last, and because we recognise that fossil fuels will continue to be an important part of our energy supplies for years to come, we must make good our commitment in the EU and globally to the development and deployment of carbon capture and storage. I am pleased that last month the European Council asked the Commission under the French Presidency to develop an incentive mechanism, which would enable the EU to meet its target of up to 12 demonstration plants by 2015.

The UK and France committed earlier this year to work together on an action plan to work towards not just demonstration but the EU’s aspiration to move towards deployment of CCS by 2020. Britain is already working with Norway, Canada and the Netherlands on how to do this. And we are discussing this weekend how we can collaborate with Spain in this field, bringing together British and Spanish companies and experts to examine and exploit opportunities.

The development and deployment of all these low carbon technologies will require a partnership between government and the private sector. Governments can and will provide the right framework of regulation and incentives. The private sector will have to provide the investment. But we can support this too.

So I call on the European Investment Bank to use its 3 billion euro sustainable energy fund to support a clear strategy for the reduction in global dependence on oil and traditional fossil fuels and for the development and deployment of new low carbon energy technologies. And we need to see a similar refocusing of EIB spend within the EU.

We live in a new era. Today our globalised, energy-hungry and warming world requires a shift from oil dependence to sustainable energy.

Only with political leadership from all of us will we be able to move towards a new sustainable economy. This is now Britain’s goal. It must be Europe’s destiny. In this unique partnership of European and Mediterranean nations, let us commit ourselves to realising it.

I will give Gordon Brown 7 out of 10 for this effort. It’s the closest I’ve seen to a coherent plan for the future of energy in the UK. It repeats certain strategies that have been unveiled piece meal in recent months but places these is a sensible context of post-oil, energy security, political security, economy and climate. In particular I like the juxtaposition of:

• Expansion of nuclear
• Expansion of renewables, possibly including Severn barrage
• Discussion of solar energy with Mediterranean states
• Tax breaks for energy efficiency measures
• Electric vehicles are placed on the agenda

My main criticism of the content here is inclusion of carbon capture and storage that will likely be obsolete given the massive CO2 reductions delivered by the non-combustion of non-existent fossil fuels implicit in this strategy.

There are certain key omissions as well. In particular we require an emergency strategy for reducing oil consumption now and abandonment of expanding our fossil fuel based transportation in favor of high speed electric collective transport.

For me, this speech is a significant step in the right direction. One step at a time I guess. And plan delivery is of course imperative.

Hat tip to Zizania at Postmanpatel for the link to GB’s speech.

[break]

High oil prices

The leaders of the G7 have been howling about high oil prices. They have been to Jeddah to beg OPEC to produce more oil. They have tried to blame speculators for bidding the price up. They do seem to understand that prices are high owing to a growing imbalance between supply and demand at the price they would like to pay. But they have done nothing to try and solve this unfolding crisis apart from fiddle while Rome burns.

The only part of this equation they can control is demand. It is therefore imperative that action is taken to curb demand for oil within the G7 – now!

But no. Rather than show any form of leadership the favored course of action by all is to allow the market, via price, to ration oil supplies between countries and within countries – and then quite amazingly to complain about the high price their common policy has produced.

The G7 policy of allowing the market and high oil prices to ration supplies is working. G7 oil consumption appears to have peaked at 1681 million tonnes in 2005. It is unlikely this figure will ever be surpassed (though it was exceeded in the 1970s and 1980s).

It is therefore the conscious decision of the G7 leaders to progressively deny poor people access to oil and to energy in general. The creation of a new impoverished underclass within and without the G7 / OECD will have dire consequences for our society. This is the outcome of G7 policy and the leaders must bear responsibility for these consequences as they unfold.

More equitable means of rationing oil supplies are available, but these options have thus far been spurned by the leaders of the G7.

Energy poverty

Many who have followed this debate for a number of years have wondered how the peak oil story may unfold. The early chapters are now written as electricity bills, natural gas bills, heating oil bills, gasoline bills and food bills all rise, the disposable income of lower income groups is being squeezed. For many I imagine this may already mean selling that car, turning down the heating, eating less meat. All this of course is sensible and good conservation.

But we are likely already in sight of many going cold and hungry in winter time. And we are already witnessing rioting by groups who’s livelihood is threatened by rising fuel prices. I fully expect to see widespread strike action within the public service workers in Europe this year or next, where strong and reasoned Trade’s Unions still exist. With the squeeze on discretionary spending comes pain for a number of business sectors – leisure, airlines, airports, pubs, restaurants and retail to name but a few. Unemployment will inevitably start to rise – and how will the newly unemployed cope with those rising energy bills?

This is just the beginning of a Long Emergency that the G7 leaders meeting this week in Hokkaido fail to understand and are doing absolutely nothing to prevent.

Starving millions

There are a number of different reasons for food prices escalating around the world. But two of the most important ones are converting food to liquid fuel and high energy input prices to farming. The G7 leaders, the OECD and their affiliates are to blame for this. They alone have the power to change the policies that have led to this point.

The G7 (8) summit

The summit has three main themes:

The World economy
Environment and Climate Change
Development and Africa

Reading the Japanese guidance on how to solve these issues leaves me with a sense of despair.

Discussion will include the sustainable growth of world economy, trade and investment, protection of intellectual property rights and energy and natural resources. Japan aims to bring a specific outcome including the measures regarding rising oil prices and toward further liberalization of trade and investment.

It seems thinking is still very much focussed on growth and liberal markets. These objectives may well help Japan continue to secure their share of global resources but they certainly will not reduce energy prices and work towards a more equitable distribution of resources.

Solutions

There are no simple and painless solutions to the greatest crisis ever faced by industrial civilisation. The road to sustainability must start somewhere but I very much doubt that the path will start in Hokkaido. Here are a few pointers as to what I see as the urgent actions required to address the early years of this crisis:

• Recognise and publish the enormous problems associated with the future decline of fossil fuel production so that the population understands the reasons behind actions being taken (immediate)
• Introduce and enforce lower speed limits, uniform throughout the OECD (immediate)
• Introduce regulations on vehicle engine size and efficiency, uniform throughout the OECD (phased introduction from 2009)
• Ban the inefficient production of liquid fuel from food throughout the temperate latitudes of the OECD (effective 2009)
• Introduce regulations on the efficiency of electrical power generating plant (phased introduction from 2009)
• Abandon plans for carbon capture and storage unless this is in context of miscible gas flooding of old oil fields leading to enhanced oil recovery (EOR)
• Abandon all plans for expansion of fossil fuel based transportation and power generation.

This is a list of emergency actions required to reduce demand for oil and energy immediately. The voluntary reduction in demand should lower prices, reduce inflationary pressures and provide a few years breathing space. This must then give way to a structured long term plan for reconstruction of power generation systems and transportation networks built upon sustainable electricity.

In the series

Why oil costs over $120 per barrel

Why oil costs over $130 per barrel: the decline of North Sea Oil

A State of Emergency

And by Jerome a Paris:

Countdown to $200 oil meets Anglo Disease

Countdown to $200 oil: $140 oil and speculation

Countdown to $200 oil: International Energy Agency says current prices justified…

[break]

BERR are inviting comments and suggestions.

emissionsprojections@berr.gsi.gov.uk

Upstreamonline is a good source of oil and natural gas prices.

On 3rd July:
Brent is trading at $144 per barrel
Tapis is trading at $153 per barrel
UK day ahead natural gas is trading at 62p / therm

Business Enterprise Regulatory Reform (BERR) formerly known as the Department of Trade and Industry (DTI) has responsibility for advising HM government on energy matters (amongst other things). Basing policy decisions upon the figures in this report is unlikely to benefit the UK in the long run. The UK economy is founded upon abundant cheap supplies of fossil fuels. This report carries this trend forward into the future while ignoring a reality that is quite different.

Click all charts to enlarge, without call out.

[break]

Methodology

The bar-charts are prepared from the BERR forecast shown below (slide 57 of the presentation). United Kingdom continental shelf (UKCS) production of oil and natural gas are forecast to continue their decline from their respective production peaks in 1999 and 2000. The decline rate is not given, but it appears to be around 8% which seems about right.

Chart modified from slide 57 of the BERR presentation. Click on chart to enlarge.

Historic oil prices shown on this chart are the annual average for Brent Blend taken from the BP statistical review of World Energy 2008. This year to date (YTD) is about $110 and the forecast uses an annual rate of increase of oil and gas prices of 25% per annum. It is of course near impossible to forecast future oil and gas prices, but with international demand for oil and gas continuing to rise against near static supply, the trend of increasing prices seen in recent years seems set to continue.

BERR forecasts consumption of oil and gas to remain relatively flat. This seems a reasonable first order assumption to make. However, in the real world, escalating fuel and domestic energy costs will lead to widespread conservation. The well-off will insulate their homes and buy more fuel efficient cars. The poor will switch off their heating and take the bus. It is near impossible to forecast the scale of energy demand destruction that will take place in the UK.

Oil and gas are assumed to have equivalent price. Millions of tonnes of oil equivalent are converted to millions of barrels by multiplying by 7.33.

From riches to rags

The bar chart up top indicates the cost of importing oil and gas to the UK ballooning to about $200 billion (£100 billion) per annum by 2013 – just 5 years away. This completely dwarfs the riches of North Sea oil and gas production the UK enjoyed up to 2004, which were exported at rock bottom energy prices. The chart is indicative since it is unlikely that this will ever come to pass. It is unlikely that the UK will be able to source or pay for this ever rising energy bill on the international markets.

Left to market forces, the problem will be solved by spreading energy poverty throughout the UK population. The wealthy who can afford the small amount of expensive energy on offer will be fine whilst the poor will just have to go without – personal transport, heat, light and power.

The charts below show the gross cumulative and per capita cumulative surplus / deficit from 1998 which is when the BERR chart begins, which coincides roughly with when the New Labour government (Blair – Brown) came to power. We are currently at the fulcrum of surplus turning to deficit. By 2013, the UK may well run up a cumulative deficit in oil and gas imports in excess of $500 billion – if we can find countries that will sell us oil and gas on credit. This equates to an energy debt over $8000 for every man, woman and child in 5 short years. This is in addition to the already dreadful debts we have run up as a country importing consumer goods on credit (see below).

Mervyn King, Governor of the “independent” Bank of England;-)

Gordon Brown, the most confused man in the world? On his way to Saudi Arabia to beg for more oil to combat global warming whilst promising a green energy revolution at home founded on nuclear power.
Population data from The United Nations.

A state of emergency

We should hopefully by now have reached a point where all stake holders in UK, European and Global energy are able to grasp the simple fact that we are now in the early stages of a full blown global energy crisis. The focus is currently on oil but this will soon turn to concerns over natural gas and coal supplies.

This crisis has been turned into a state of emergency by the indifference of political leaders in the UK (and throughout the world), fluttering in the wind of poorly informed public opinion while they have prevaricated about expanding renewable energy resources and building new nuclear power stations. All warnings of this pending energy crisis have been ignored in favor of pursuing popular policies that created the illusion of prosperity whilst the fundamentals of our nations security and well being have been draining away.

The chart below shows the current state of the UK trade balance. This is the position at the end of the good times North Sea oil and gas have provided. The situation now is about to get a whole lot worse as our energy surplus turns into a crippling deficit with no plan on the horizon of returning the books to balance.

Data from National Statistics Online, table 5050646091.csv, column ikbj.

I have not attempted a forecast since some major changes to UK trading status are to be expected. Higher food, fuel, domestic energy and bank interest bills will squeeze the disposable income of many individuals and families. Thus, instead of buying consumer goods and going to Spain on vacation, families will instead spend this money on food and energy. Thus we can expect the deficit in goods and tourism to reduce while the deficit in energy balloons.

The future

The exchange last week between Mervyn King (Governor of the Bank of England) and Alistair Darling (Chancellor of the Exchequer) suggests that they plan to do nothing about this presuming that the upwards tick in energy and food prices (that began in 2002) will drop out of the annual inflation statistics a year from now. True rabbits caught in the headlights. They have created a perilous situation for the UK economy that they seem not to understand let alone know how to fix.

Here are a few pointers to what I think we can expect in the next 18 months:

• Forever rising energy import bills will pressure Sterling which will continue to fall, pushing up the cost of energy, food and consumer goods even more.
• Public sector workers, no longer able to borrow to supplement income will begin to strike once they discover that 3% wage increases do not come close to covering the rise in the cost of living (the great inflation lie will be found out).
• Unemployment will begin a steady rise as financial services, banks, building sector, airlines, airports, leisure and retail come under severe pressure. They will be joined by public service workers as the government struggles to fund public services with falling tax receipts, spiraling debt and a falling pound. (already happening in Aberdeen with deep cuts in education spending across the city and teacher numbers being slashed).
• I won’t go into the spiraling and compounding nature of this on the property market since this is an article about energy.
• The elderly and poor will really struggle this winter to pay their energy and food bills. If the weather is cold, the grid might fail and the vulnerable will begin to die from cold and starvation.

Following that things will begin to get worse as the UK discovers that it is struggling to secure sufficient natural gas at any price, on the liberalised market they helped create. Society becomes more polarised into those who can still afford to drive an SUV, live in comfort and warmth and fill their bellies with prime Aberdeen Angus steak set against a new under class who struggle to feed and heat their families. Welcome to Britain in 2010.

The End

Further reading on UK energy on The Oil Drum

Chris Vernon March 2006
UK Energy Gap

Euan Mearns September 2006
Oil export – import model for the UK

Euan Mearns October 2006
Lies, Damned Lies and Government Oil Production Forecasts?

Euan Mearns November 2006
The architecture of UK offshore oil production in relation to future production models

Chris Vernon February 2007
UK Energy Descent Continues

Jerome a Paris June 2007
The Anglo Disease – an introduction

Euan Mearns July 2007
UK Energy Security

Jerome a Paris October 2007
Energy: the fundamental unseriousness of Gordon Brown

Euan Mearns December 2007
The European Gas Market

Euan Mearns December 2007
Daddy, will the lights be on at Christmas?

Chris Vernon January 2008
Nuclear Britain

Euan Mearns February 2008
Energy Prices, Inflation and Denial

Euan Mearns May 2008
European Gas Security: The Future of Natural Gas

Jerome a Paris June 2008
Countdown to $200 oil meets Anglo Disease

Guest post Bob Everett June 2008
A Little History of the Affordability of Domestic Energy in Great Britain

Guest post Rune Likvern June 2008
Why UK Natural Gas Prices Will Move North of 100p/Therm This Winter

I think it is fair to say that we have been beating this drum pretty hard and loud. While the press and television have begun to help of late they could do an awful lot more. I’d like to see Alistair Darling answer questions about the UK energy trade balance on prime time current affairs. And I believe it is time we had some televised debates about this energy issue that is vital to all of us.

The hydrogen and ethanol powered car

[Editor's note, 14:00 UK: Andris now has 35 excellent comments to contemplate (up from 10 on Friday). If you feel strongly about this then please leave him a message.]
[break]
Riots won’t bring oil prices down. Andris Piebalgs blog entry from 6th June. My emphasis added.

Last Tuesday I was a witness of a very sad episode. Belgian riot police employed force against a group of French and Italian fishermen marching to the European quarter to protest violently against high price of fuel. A car crash occurred as a consequence of the riots. The frustration of the demonstration is easy to understand, but certainly demonstrations and street fights are not the answer to this problem. Oil prices are high and will go higher. No demonstration can change that.

In the past, periods of relatively expensive crude, were followed by periods of cheap oil due to temporary factors like the first Gulf war. Currently, as well, there are temporary factors that are influencing oil prices, like the boom in commodities markets, geopolitical situation in several key producing areas, the weakening of the dollar or the turmoil in global financial markets.

However, the real drivers of oil price escalade have a structural nature. You all know the offer and demand law. If offer decreases, price increases. If there is a growth on demand, there is also a growth on price. If, at the same time offer decreases and demand increases then, price skyrockets. This is precisely what is happening in oil markets.

In year 2000 China had 4 million cars. In 2005 – already 19 million cars. It is expected that in 2010 the Chinese car fleet will be 55 million and 130 million in 2020. India is following a similar trend, and the economies of the United States and Europe continue to devour oil in large quantities. More and more people compete for an increasingly scarce commodity. We all know that oil will run out some day. The exact date is certainly under discussion, but there is a fact that nobody can deny, getting oil out of the earth is now much more difficult and expensive that it used to be.

The easy sources of oil are already in use. Oil companies are currently exploring in deep seas or in frozen and inaccessible regions. Geopolitical uncertainties reign in oil producing areas, while there is a growing tendency among producing countries to nationalise their resources, or make foreign investments more difficult. There is a growing shortage of highly skilled working force and exploration and production of oil is becoming a high tech activity, extremely expensive.

We all know the consequences. The barrel is currently around 130$, 300% more expensive than only 3 years ago. Experts are talking about prices of 200$ per barrel for next year only. At this levels, even non-conventional oil sources, such as heavy crude or tar sands become attractive, despite its awful CO2 foot print and high energy consumption.

So what is the solution? Well, we have to move away from oil. This is what the European Energy Policy is all about.We need to reduce demand with more efficient transport, industry and housing. We need to promote alternative fuels, like biofuels, electricity or hydrogen; we need to change to cleaner and more efficient transport modes like rail, short sea shipping, or public transport. And in the meantime, we need to continue our dialog with oil producers to encourage them to produce more and to supply the markets better. On 24th of June, I will meet ministers of the OPEC countries to discuss with them on this issue.

The era of cheap and easily available oil is over. We need to move away from black gold and put our efforts in a low carbon economy. The sooner we do that, the better.

My reply

Dear Andris,

This entry is the most appalling muddled mess – which is a direct reflection of EU energy policy. There are shafts of sunlight mixed in with utter rubbish.

Each time I have left an entry here I have told you that we are in the early stages of a full blown energy crisis. It is a great pity that you have waited until oil hit $130 per barrel and for French fisherman to riot before realising that this is indeed the case. Of course if you and your team were up to the job, you would be able to study the oil supply and demand data published by the IEA, the EIA and BP and conclude that an energy crisis is on the way in advance and put in place effective strategies to mitigate for this. But no, your approach is reactive, well behind the curve, wrongly focussed and without a substantial re-writing of the EU Energy policy, it is destined to fail. The riots in Belgium and Iberia are partly your fault. You are the EU energy commissioner, pipe dreaming whilst EU energy security drains away.

It is encouraging to see that you finally understand that demand for oil, gas and coal are rising whilst supply for oil at least is static. Rising demand against static supply is controlled by escalating price, encouraging conservation and pricing poor Europeans out of the energy market. You should by now understand that when poor people get priced out of the energy market they riot.

The next thing you need to grasp with some urgency is that oil supply will not stay static for long. IT IS GOING TO GO DOWN ONE DAY VERY SOON. (2012±3 years) And then the problems we are experiencing now will get worse by a factor of 100 or more. WHAT ARE YOU GOING TO DO ABOUT THIS?

The EU and the OECD in general has absolutely no control over raising global oil supplies. You seem to think that OPEC does, BUT YOU DON’T UNDERSTAND THAT OPEC ARE PUMPING FLAT OUT. The IEA data shows that their reserve capacity is near zero. So the only control OPEC has would be to reduce supply in order to conserve their dwindling reserves for future generations.

Thus, the only part of the equation that the EU can control is demand. The EU needs to introduce with some urgency measures to reduce demand for oil and natural gas. And here I believe you make some good points. We need solid, urgent plans to radically transform our transportation systems. To be blunt, cheap air travel for all will not be part of this future. Shipping, canals, and electrified mass transit and electric cars are the future. We need someone with vision to stimulate pilot V2G projects across Europe.

Energy conservation and energy efficiency must be vital cornerstones of the EU energy policy. I believe you understand that but you don’t seem to understand what energy efficiency means. (hence you drive one of the least energy efficient cars ever produced). Producing H uses more energy than can be recovered. It is an energy sink, a waste of energy and a waste of time (apart from in some isolated special cases). Ethanol consumes almost as much energy as it produces and falls into the same category – a waste of time and precious energy. You are converting Gold (nat gas) to Lead (ethanol – anecdote borrowed from Matt Simmons). As a guiding beacon if the eroei of an energy producing system is less than 7 then it must be ignored. It does not produce sufficient net energy to run society – and so pursuing the twin follies of H and ethanol will drag Europe off the net energy cliff.

In essence what you have done in this blog entry is to re-package the wholly misguided EU energy policy that is predicated on climate change and trying now to sell this rubbish as a solution to the emerging energy crisis.

From here there are two ways forward. You either have to admit that the current energy policy is a shambolic mess, tear it up and start over – but this needs to be done urgently, within a matter of months. Or you need to resign and let someone else do this vital job.

Euan Mearns BSc PhD
Editor The Oil Drum Europe

PS I wholly endorse tonyw’s comment up thread – if you want to reduce demand for oil today we need pan-european speed limits and legislation on gas guzzlers. Let these fine German engineers turn their attention to efficiency instead of speed and power.

If you feel strongly about EU energy policy then please leave a comment on Andris Piebalgs blog on the thread – Riots won’t bring oil prices down

The EU Commission contemplating driving Europe and all its citizens off the net energy cliff. The Oil Drum’s geologists, chemists, physicists, economists, bankers and engineers are in pursuit, trying to stop them. Will they get there in time?

Pictures from Thelma and Louise who were having a great time on a girls night out until they made a mistake. And one thing lead to another….

This is a Guest Post by Bob Everett. Bob is Lecturer in Renewable Energy at the Open University in Milton Keynes, UK.

Domestic energy is getting expensive, but what does that mean compared to the situation in our parents’ or grandparents’ days? Should we grumble?

[break]

The chart above shows domestic fuel prices for Great Britain from 1914 to 2007. The data up to 1985 was compiled by Horace Herring and Rodney Evans and been updated with more recent figures from UK government statistics. It is expressed in UK pounds for the year 2000, adjusted by the retail price index (i.e the price of energy related to other ‘real’ goods such as food).

At the beginning of the 20th century, Britain’s fuel situation was dominated by cheap coal. In RPI terms domestic coal was a third of the price that it is today and the domestic sector consumed vast amounts of it. Town gas made from coal was about five times the price of coal. It was locked in a battle with electricity for the lighting market. This gas/coal price ratio decreased and was down to about 3:1 by the middle of the 20th century due to economies of scale and improved production techniques.

Electricity was initially staggeringly expensive. When Brighton Corporation first started producing it in 1885 they sold it at a shilling (5p) a kWh. Translated in RPI terms that is about £900/GJ in today’s money, i.e. way off the top of the chart. Indeed it only gets below £80/GJ in the 1930s, around the time that the National Grid was being created. Yet it was such a desirable commodity that it sold into ordinary working class homes for lighting and appliances.

Oil for heating was not widely available before World War 2 and so doesn’t enter the GB statistics. After the war it became available in larger amounts at progressively lower and lower prices and ate into the town gas heating market. However this fought back with a process to produce town gas from imported naptha rather than coal.

In RPI terms electricity prices bottomed out in the 1960s when it became cheap enough for ‘all electric homes’ to be considered. The bulk of electricity was generated from coal plus some nuclear power.

The oil price rises of 1973 and 1979 put paid to most of the gains of heating oil in the 1960s. North Sea natural gas came to the rescue. The whole country was converted from town gas and it was priced to be competitive with coal. Effectively it wiped out the oil and coal heating markets and much of the rising electric heating market. Britain became a nation of homes with gas-fired central heating. In the 1990s even the power stations started to burn gas rather than coal.

We can also look at this price history through ‘earnings deflated’ prices (above). As per capita GDP and earnings have increased so an ‘average wage’ has been able to purchase more and more energy. This has the effect of ’tilting’ the whole price curve making energy look even cheaper today than it has been in the past. So although the price of electricity in 1960 was not that much different to today’s price in ‘real’ terms (i.e.in the equivalent number of loaves of bread or eggs), the average wage can afford to buy over twice as much electricity.

It is also noticeable that the ‘earnings deflated’ price of coal is amazingly flat over the whole of the 20th century. I suspect that this is because the price was mainly determined by the wages of the miners.

But now things are going awry. In RPI terms all of the fuel prices have risen since 2000. GDP and earnings are still going up, but apparently not fast enough to deflate away the fuel price rises. Domestic energy is now set to consume an increasing proportion of the household budget. In 2000 ‘fuel and power’ made up 3.3% of the UK household expenditure. However, this is a long way short of the peak of over 6% in the mid-1960s. If you go back a really long way a budget study of a 1760s Berkshire family estimated that it took 1% of their income just to buy two candles a day.

I’m not sure where the road forward (to the Olduvai Gorge?) will take us. But surely if we’re all so much richer than we were in the past (through the magic of economic growth) we should be able to afford decent insulated homes and a genuinely sustainable energy system.

Further reading: Olduvai Revisited 2008

Higher energy prices are feeding through to rampant consumer energy price inflation. And yet the authorities and many investment houses still see energy prices falling in the future. This naive view of global energy supplies is starving energy markets of the capital required to expand conventional and alternative energy supplies.

UK National Grid, with responsibility for the distribution of natural gas and electricity in the UK, see flat to falling natural gas prices to 2015 and beyond. Comments welcome!

Global annual average natural gas spot prices from the BP statistical review of world energy 2007. Click all charts to enlarge

[Editor's note: this story was first run on 4th February 2008]

[break]

Global gas spot prices began their sharp up-trend around the year 2000 which just happens to coincide with the year of peak gas production in the UK. Since 2000, UK gas spot prices have increased almost 4 fold and this along with higher coal and oil prices is beginning to have a significant impact upon UK inflation.

The chart is compiled from Table 2.1.1. from the report Quarterly Energy Prices December 2007 (pdf), found in the Energy Statistics section of the BERR web site. From 1990 to 2000 inflation in most primary energy sources was benign in the UK, excluding petrol (gasoline) which was deliberately inflated by progressive tax increases. Since 2003, however, inflation in gas, electricity, coal and heating oil has taken off. RPI data can be found at National Statistics Online.

Prior to 2003, price inflation in UK primary energy sources was running well below the inflation rate as measured by the RPI (the Retail Price Index is a holistic UK inflation indicator). Since 2003, inflation in all primary energy sources has taken off and for example gas prices have increased on average 18% per annum for the last three years. Prior to 2003, low energy costs had a dampening impact upon inflation but now they are running well above the RPI and this may result in inflation spreading through the UK economy since energy use impinges upon numerous goods and services.

Electricity and gas prices have just been raised significantly in the UK leading to howls of anguish from the public and the media.

The meteoric rise in UK gas demand was reversed these last two years as amongst other factors, high price has dampened domestic demand. Data from department of Business Enterprise Regulatory Reform (BERR) table 4.1.1.

Demand for gas has fallen in the UK over the last couple of years. This may be due to a number of factors such as milder winters, efficiency measures, off-shoring energy intensive industries, switching between coal and gas in power generation and demand destruction among industrial and domestic users. Higher prices and scarcity play a role in four of these five factors.

But note, even though demand has fallen UK spot prices for gas are running about double last year.

National Grid

National Grid is a UK company with responsibility for electricity and gas distribution networks. Their web site is a goldmine of data and reports on the UK domestic energy situation. The next three charts come from their Gas Transportation 10 Year Statement 2007.

The National Grid view on UK gas supply and demand is shown below. UK domestic gas supplies are forecast to fall, demand is forecast to rise and imports will rise from zero in 2003 to 80% of total demand by 2017. This complies with my own view, and is in general agreement with the official government view expressed by BERR and is repeated in many industry reports. There seems to be unanimous agreement that UK gas imports are going to explode in the coming years.

National Grid paint a sensible picture of falling UK indigenous supply of gas, rising demand and escalating imports. And yet they forecast gas prices will fall. Source is National Grid Gas Transportation 10 Year Statement 2007

Surprising then that the National Grid has forecast gas prices to fall in 2008 and then stabilise for the next 10 years. I find it truly remarkable that a strategic company such as this can foresee a yawning gap opening between UK gas supply and demand and at the same time forecast falling to stable prices. This in my opinion sends out completely the wrong message to government, consumers and to the investment community.

Beach price is presumed to be the wholesale price. Note that this is significantly lower than the spot price since much gas is sold at contract prices struck many years ago. Industrial consumers paying the lower “Interruptible” tariff will be first to have their gas turned off when supplies fail. Note that domestic users pay by far the highest price and will be last to be disconnected.

Prices are struck in 2006 pence hence discounting future inflation which the Bank of England is mandated to hold at 2% per annum. Source is National Grid Gas Transportation 10 Year Statement 2007

Whilst UK spot prices for gas have near quadrupled since 2000 the wholesale and retail prices have risen by more modest amounts of around 50% since these are cushioned by long term gas sales contracts struck at a much lower price many years ago. These have protected UK consumers from the full glare of the gas spot market but with time this position will unravel. As old contracts and supplies expire new contracts for gas will be struck at considerably higher and rising prices. It’s possible the retail prices we are seeing right now are the tip of an energy price iceberg that is preparing to rip through the system.

And yet the National Grid forecast prices to fall this year whilst UK consumers have just been hit by 15 to 20% rises.

This extraordinary view on future prices from the National Grid is rooted in their forecast for future European gas supplies which shows Russian Gas, Norwegian Gas and LNG imports expanding into the future. As I discussed in my post on The European Gas Market that was updated here, Russian gas supplies may at best maintain current levels – and not double as shown by National Grid (Global Insight report), Norwegian gas production may actually fall from 2010 onwards and LNG supplies may fall well short of the import capacity that has been and is being built.

The National Grid and Global Insight paint a rosy picture of gas supplies to Europe that does not seem to take into account falling production in Russia’s largest gas fields, the reality that associated gas production from Norwegian oil fields will follow their oil production down and that Global LNG supplies will only meet around 50% of import expectations. Ironically the LNG import / export capacity offset is described in a report by Global Insight (large pdf). Source is National Grid Gas Transportation 10 Year Statement 2007

The harsh reality of this situation should be self evident from the fact that UK spot prices for gas have doubled again this year. It’s really time for The National Grid, The Markets and The Government to waken up.

Denial and deprivation of investment

I mention our markets here because, since I started to follow energy markets and companies in 2003 the expectation for the future has always been that prices will fall – even though energy futures prices switched to contango.

This century, energy companies have bought back stock on an unprecedented scale whilst contemplating their corporate navels and avoiding real investment in future energy supplies. No wonder then that energy supplies are waning and prices are going through the roof.

Energy companies like BP find their stock valuations languishing at the same level of Jan 2005 and trading on a lowly PE multiple of 9 times historic earnings despite the meteoric rise in oil and gas prices over the same period. Whilst it is true they are struggling to grow production and reserves they have also done all they can to talk down future energy prices and to avoid investing in our energy future. The market is pricing in a future fall in production and oil price and terminal decline of global energy companies like BP at a time when we need these companies to display creativity, imagination and leadership.

The chart is from Yahoo. Disclaimer – I do not own any BP stock though I do invest in energy companies.

When an energy sector presides over falling production whilst forecasting prices for their product will also fall it is little wonder that their stock values are priced in the bargain basement of Global Stock markets. It is high time that the energy industries, capital markets and governments recognise that falling production and rising demand are not compatible with falling prices and that they come together to invest this profit bounty in our energy future. That future does not lie in low eroei liquid fuels like ethanol and syncrude but in solar energy, wind energy, electricity, batteries, electric transportation and global scale HVDC grids.

It is time to invest and build.

Previously on The Oil Drum

UK Gas and Electricity Prices by Chris Vernon

Natural Gas – A Tale of Two Markets by Nate Hagens

A Closer Look At Oil Futures by Nate Hagens

Rising North Sea oil production was a significant factor in keeping oil prices under control in the 1970s, 80s and 90s. Production peaked at 6.4 million barrels per day in 2000 and since then, declining North Sea Oil production is one significant reason that oil prices are now rising exponentially.

[break]

The UK

Crude oil, condensate and natural gas liquids (C+C+NGL) production. Source BP statistical review of world energy published 2007 with data up to 2006.

• UK oil production has two peaks and it is vitally important to understand that the reason for peak 1 in 1986 and peak 2 in 1999 are quite different, since many observers seem to think that production may begin to rise again as it did in the early 90s..
• Rising North Sea Oil production contributed to the oil price crash of 1986. Deferred investment resulting from this is the principal reason for decline in 1987. This was made worse by the Piper Alpha oil rig explosion of 1988. These are above ground factors.
• The all time high of 2.9 million bpd was reached in 1999. Decline that began in 2000 is caused by resource depletion and exhaustion of reservoir energy. It is no longer possible to bring on new small fields fast enough to compensate for natural decline and the trend that has now existed for 8 years will likely continue down as indicated.

From riches to rags

• The UK was an oil exporting country from 1980 to 2005. This had significant positive impact upon the trade balance. In 2006 production dropped below consumption levels and the UK once again became an oil importing country and will be an oil importer from now on.
• High prices will cause consumption to fall through conservation and pricing poor people out of the energy market. Thus it is difficult to forecast what the future consumption, production and price curves will look like. But by way of example, importing 200,000 bpd at $138 per barrel will add $10 billion per annum to the trade deficit.

Throughout this article referring to the North Sea is a simplification. Whilst most UK oil production does come from the North Sea, there are significant fields off south England, in the Irish Sea and on the Atlantic margin, west of Shetland. Norway also has significant production from the Atlantic margin off mid and north Norway. The data from these regions are all lumped together.

Norway

Crude oil, condensate and natural gas liquids (C+C+NGL) production. Source BP statistical review of world energy published 2007 with data up to 2006.

• Norwegian oil production is shaping up to have a classic Hubbert bell shape curve.
• Production peaked in 2001 at 3.4 million bpd.
• As in the UK, the majority of Norway’s giant world class fields have been developed and are in decline. The oil is gone. Smaller fields being developed now are not large enough to compensate for decline which will likely continue as indicated.
• Norway with a population of only 4.6 million, exports most of its oil. These exports are falling
• With a vast continental shelf that extends along the Atlantic margin and into the Barents Sea, the prospect of new discoveries are much better in Norway than in the UK.

The North Sea

Crude oil, condensate and natural gas liquids (C+C+NGL) production. Source BP statistical review of world energy published 2007 with data up to 2006.

• Adding the small amount of production from Denmark to that for Norway and the UK provides this integrated picture for North Sea Oil production.
• Production peaked at 6.4 million bpd in 2000 and decline will likely continue as indicated.
• With falling North Sea oil production Europe will have to import more oil each year in competition with other regions (the USA and China) from a decreasing number of countries that actually have oil for export. This is one of the main reasons that the oil price is rising exponentially.

A note on reserves figures The remaining reserves figures reported above are for the discovered and developed resource. There may be some incremental growth in these numbers with new discoveries and deployment of Enhanced Oil Recovery (EOR) technologies. These are unlikely to make a huge difference, even if an additional 10 billion barrels are produced between 2030 and 2050. What matters are declining flow rates now that will likely persist for the foreseeable future.

Technology

Horizontal drilling, 3D seismic and dynamically positioned production ships have been deployed for over a decade. The incremental oil these technologies produce are embedded in the production data. Simply continuing to do what you are already doing will not change the decline trends.

The one technology that is not widely deployed that would add some incremental oil is CO2 miscible gas flooding of reservoirs. This would not change the picture very much but would reduce the decline rate and extend field life. The North Sea desperately needs this technology deployed. The UK government failed to support the flagship BP Boddam – Miller scheme and the Miller Field is now shut down. Indifference and ignorance on the part of the British and other OECD governments is another reason the oil price is rising exponentially.

Economists

Steadily rising oil price since 1999 has had little discernible impact upon declining UK oil production. Where economists want to see a positive correlation between production and price the reality in a post peak oil world is the exact opposite – a negative correlation. Annual oil price and production data from the BP statistical review of world energy

There are many economists involved in running UK and European government agencies. Classical economics thinking is that high price will stimulate production and reduce consumption providing an amiable equilibrium between supply and demand.

In natural resource exploitation this rule works during the exploration and production build up where high price may stimulate fruitful exploration effort and new field development projects. However, once past peak, these rules break down and do not apply. It seems there are no economists around that understand this simple point. Once a resource is gone, used up, no amount of money in the world will bring it back. Economists who advise that production will somehow do a U-turn as prices rise are doing untold harm. This false hope, optimistic message grasped by politicians, is blocking the action required to mitigate for peak oil. This is another reason oil now costs over $130 per barrel. Vigorous expansion of all viable alternative energy sources may reduce demand for oil and that will bring down the oil price.

High price may slow the decline of the North Sea a bit but it cannot invent fields to be discovered or alter the rules of reservoir physics that dictate decline. Since high price will not stimulate much new production in mature provinces like the North Sea the only route available is demand destruction. The oil price will stop rising when gasoline gets too expensive and we stop using it.

31 Billion barrels per year

With production running at 86 million barrels per day, that means we are consuming 31 billion barrels of oil every year. It is a sobering thought that by the time the Sun sets upon the whole of the North Sea, it will have produced enough oil to fuel planet Earth for just 2 years. To keep the oil party going we need to discover a “new North Sea” every two years and the last time we managed that rate of discovery was in the late 1980s, 20 years ago. We have been living off savings since then, and the bank balance is running down. It is not possible to get an oil overdraft or to create an energy instrument to magic oil and energy out of nothing. There is no choice other than to reduce our oil consumption and it is much better that we do this in a controlled way than to let high energy prices and inflation rip through our economies – which is exactly what is happening now.

The Brent Field. One of the UK’s largest producers of oil and gas. Field operator Shell are in discussion with the UK government about decommissioning this icon of the North Sea. Image from Oil Rig Photos

More detailed analysis can be found in the following articles:

EU oil imports set to grow by 29% by 2012

The architecture of UK offshore oil production in relation to future production models

UK Energy Security

Global Total Liquids production and oil price, January 2002 to present. Production data from the IEA, data files supplied by Rembrandt Koppelaar. Monthly average WTI oil prices from Economagic.

With oil reaching $135 / barrel, Oil Drum readership exceeding 30,000 unique visitors per day and many wild stories circulating in the MSM as to why oil prices are so high this post strives to explain why oil prices are rising exponentially.

[break]

Production and demand

The most significant feature of the chart up top is the dog leg in production growth in 2004. Prior to then the flow of new oil field projects combined with increasing utilisation of spare capacity allowed global oil production to grow and to meet much of the growth in demand.

In 2004, OPEC spare capacity fell close to zero (see below) and the world struggled for a number of reasons to bring on new supply to compensate for decline (see below). The slowing of production growth has meant new supplies are insufficient to meet growing demand and the price has gone up to balance the books. Higher prices stimulate conservation that may take the form of fuel efficiency (driving a smaller car) or abstinence (poor people being priced out of the energy market).

Every year a large number of new oil fields are brought on line. However, this does not directly translate to growth in supplies since amongst other things the production decline in existing fields needs to be replaced first:

new annual production capacity = consumption growth + annual decline + spare capacity growth

Decline

All oil wells, oil fields and oil provinces are exposed to a phenomenon called decline. Producing oil depressurises the sub-surface reservoirs and uses up the reserves. With time the proportion of water to oil that is produced in any well increases (increasing water cut) and this combined with depressurisation leads to declining oil flow rates.

Combined, these processes result in naturally declining production. It has been estimated that the global average decline rate is 4.5% per annum. (personal communication, Peter Jackson, CERA). What this means is that every year the global oil industry must bring on stream 3.8 million barrels per day new production just to compensate for decline (4.5% of 85 mmbpd). If less than 3.8 million bpd are commissioned then global oil production will fall and vice versa.

The higher global oil production rises, so rises the amount of new annual capacity required to compensate for decline.

As global oil production has risen, the annual new capacity required to offset decline has gone up too. Bearing in mind that all the best fields have already been produced, annual decline must be offset using second and third class oil fields. This task eventually becomes impossible and a production plateau is attained. That is where we are right now.

Net energy and energy density

The world has already used up a large proportion of its best oil reserves. These are the light sweet crude oil reserves produced on shore from first class reservoirs.

The proportion of low ERoEI liquids and low energy density liquids is growing exponentially. Source EIA and Oil Watch Monthly.

This chart shows that a growing proportion of world total liquid fuels production comprises second generation liquids – e.g. natural gas liquids, syncrude from tar sands and biofuels.. These are essentially synthetic liquids that need to be created and the process of creation uses energy. The term used to describe this concept is Energy Return on Energy Invested (ERoEI) and while historic oil production may have had large ERoEI numbers greater than 100, these synthetic liquids have low ERoEI. Around 1.2 in the case of temperate latitude ethanol and 5.0 in the case of syncrude produced from tar sand. The main point is that a steadily growing proportion of the global total liquids production is being used to produce these liquids leaving less for society to use than the bare figures may suggest.

ERoEI = (energy contained in fuel) / (energy used to produce fuel)

When the energy used to produce a fuel is larger than the fuel itself contains the ERoEI will be less than 1 and the whole exercise is rather pointless apart from in exceptional circumstances where energy quality is very important, e.g. in food production.

A second and equally serious issue lies in the energy density of the new liquids being produced. In energy terms, 1 barrel of ethanol or a barrel of liquefied natural gas is not the same as a barrel of crude oil. The latter contains significantly more energy. Hence measuring energy production by the volumes produced (barrels) is misleading and presents an over-optimistic picture.

As a rough approximation, the energy equivalence by volume of ethanol and LNG are as follows:

1 barrel of ethanol = 0.61 barrels of crude oil
1 barrel of LNG = 0.73 barrels of crude oil

In summary, the picture of rising liquids volume production up top is deceptive. With the passage of time the energy content of those liquids is falling steadily and the amount of energy used to produce them is rising. This means less energy for society to use at a higher cost.

31.8 billion barrels per year

The world now consumes 31.8 billion barrels of oil per year. 1978 was the last year that this volume of oil was discovered and more recently discovery has been running at less than 10 billion barrels per year. It is an utterly forlorn hope that exploration and new discoveries may alleviate the current supply crisis.

Mega projects

The inventory of past discoveries has not yet been used up and a list of new oil mega-projects first complied by Chris Skrebowski has been expanded and maintained by The OIl Drum in Wiki format.

Global crude + condensate + NGL + syncrude scenario based on TOD mega-projects database as of 27 May 2008. This is not a definitive forecast since there is uncertainty over decline rate, project slippage and there is no allowance made for small projects. Beyond 2012 there is a planning horizon for projects and so beyond that date is pure speculation based on 10% per annum decline in new production capacity – and this may contribute to the apparent peak at that time. The 4.5% per annum decline rate is based on a personal communication with Peter Jackson (CERA) who conducted a comprehensive study of oil field decline last year. This decline is applied also to new production.

At face value, these mega-projects should be sufficient to ensure some production growth in the coming years.

However, the pattern of recent years has been project slippage owing to global shortages of materials, manpower and rampant oil service sector inflation. The pattern of slippage may continue and the promise of an increase in new supplies may remain just that – a promise.

Spare production capacity and OPEC

It is a feature of natural resource depletion that there is either a glut or a shortage. Managing this during the early years of resource exploitation causes all sorts of problems. On planet Earth we need to be thankful to OPEC for trying to manage this problem via their production-sharing cartel. For much of the period since OPEC formed in 1960, the world had excess productive capacity, i.e. production potential was higher than was utilised. Withholding this reserve capacity helped bolster prices and reduce demand. But with erratic additions of non-OPEC supply and a tendency for certain OPEC members to cheat on their quota, oil prices tended to swing in an unpredictable manner through the period 1960 to 2000.

Since 2000 this situation has changed. Global demand for oil has continued to increase and to meet this demand much of the OPEC spare capacity has been switched on so that all but Saudi Arabia are now producing flat out.

Global spare production capacity from this presentation by Lawrence Eagles of the IEA (link lost). Note how 8mmbpd spare capacity in 2002 had all but disappeared by 2004. It has since then grown slightly but is once again in decline.

This more detailed and up-to-date picture from Rembrandt Koppelaar’s excellent May edition of oil watch monthly shows spare capacity in sharp decline. Despite a healthy inventory of mega-projects, the world is quite simply not managing to bring on new supply fast enough to compensate for decline.

In order to grow spare capacity, the world each year must commission new capacity to compensate for decline and to accommodate increased demand:

spare capacity growth = new annual production capacity – (annual decline + consumption growth)

As demand continues to rise against static supply, the only solution is for prices to rise and to price poor people out of the oil consuming economy.

Much of the spare capacity held in Saudi Arabia is heavy sour crude oil and the world currently lacks capacity in specialised refineries to handle this crude.

Peak exports

Another important concept is to consider is oil exports as described here by Westexas and Khebab. Oil exporting countries have increasing wealth and are attracting massive inward investment and migration resulting in steadily rising oil consumption. Indonesia provides a classic example of a former export land whose rising consumption has totally consumed their oil exports. Indonesia, once part of the oil supply solution has become part of the oil demand problem and has just left OPEC.

Rising demand and falling production has totally consumed Indonesia’s oil exports in the space of 40 years. Indonesia’s passion for bio-fuels is explained by this chart.

In 2006 Luis de Sousa produced this analysis of global oil exports. Those seeking an explanation for why oil now costs over $120 per barrel need look no further than this chart.

Luis de Sousa’s analysis of net oil exports shows a peak in global oil exports in 2004/5 followed by a period of gradual decline until 2010. Net export decline then accelerates. If this analysis is correct then the current oil price / oil supply crisis will shortly get much worse. However, note that 4 important exporting countries – Iraq, Nigeria, Azebaijan and Kazakhstan – are not yet included in this analysis.

Oil is still cheap

At $2 per liter bottled spring water costs $318 per barrel.

Oil is still very cheap. Bottled spring water at $2 per litre works out at $318 per barrel. Oil is fundamental to our lives for transportation and a myriad products ranging from plastic to pesticides. Unlike spring water, oil is finite and costs significantly more to find and produce. The price of oil will continue to rise until the world as a whole decides it can do with less or until meaningful volumes of energy substitution take root.

Subsidies and taxation distort the market

Many of the world’s oil consumers do not pay the market price paid by the OECD. In Russia, the Middle East and China and many other countries oil and gasoline prices are subsidised. So the thirst of those consumers is not abated by current high spot price. Taxation in Europe and Japan also de-gears the impact of high oil price in those regions where high tax means that gasoline is already expensive. The impact of rising prices is felt less in these countries – though it is now beginning to bite.

Secondary factors and excuses

There are a range of secondary factors impacting the day to day fluctuations in oil price such as:

• Speculation
• Political unrest in producing countries
• The depreciation of the $US
• Prime exploration acreage that is off limits to OECD corporations

Speculation

Financial speculation in oil futures is being offered increasingly as the reason for high oil prices. True, speculation is rife. However, the futures market is a zero sum game. For every long position there is a short position and the price is ultimately struck by the individual who takes delivery of the oil – which is then refined and purchased by a consumer. For so long as consumers keep demanding oil at ever higher prices, the price will continue to rise.

The only way speculation could impact the oil price is under accumulation. Inventories of crude oil and refined products have been falling for a year (see figures 14 to 17).

Political unrest

True, political unrest in exporting countries such as Iraq and Nigeria means that less oil is being produced. But this situation has prevailed for many years now and is likely to get worse as energy poverty begins to bite.

The depreciation of the $US

True, the depreciation of the US$ has contributed to the rise in oil prices. But the oil price has risen in € too.

From Countdown to €100 oil by Jerome a Paris.

Off limits exploration

True, there are vast tracts of the USA that are under-explored in the ANWR and off the east and west coasts where the US has placed a high price on protecting their own environment. But it is not true that the Middle East and Russia are under-explored and that greater access to these areas by OECD companies would transform the current situation.

In summary these secondary factors touted by the MSM, politicians and oil companies are nothing more than an excuse and a distraction from the core problem which is demand growth running ahead of supply growth for over three years now. If the USA, Russia or Saudi Arabia could turn on the taps and produce an additional 3 mmbpd, the oil price would fall tomorrow. But they can’t and the only way the oil price will come down is by reduced demand brought about by pricing poor people out of the energy market and by deepening recession.

Conclusion

We are now in the early stages of a full blown energy crisis that was predictable if not wholly avoidable. Politicians are awaking to the crisis now that escalating energy costs make its existence plain to see. It is highly unlikely that politicians will now grasp the gravity of the situation that the OECD and rest of the world faces and the responses will likely be ineffectual and too little too late.

The principal reason for current high oil price is the proximity of a peak in global oil production. Politicians must understand this and then grasp that natural gas and coal supplies will follow oil down by mid century. Reducing taxes on energy consumption right now is the wrong thing to do. Taxation structure needs to be adjusted to oblige energy producing companies to re-invest wind fall profits in alternative energy sources on a truly massive scale.

Energy efficiency should be the guiding beacon of all policy decisions and this must apply equally to energy production and energy consumption.