Friday, 3 October 2014

Oil Price Falls: and UK Energy Policy, Too

Brent's run below $100 is sustained, and everyone's noticed now.  There are no signs any of the big producers can afford to stop the oil flowing - quite the reverse -  and a number of people's cunning plans are looking a whole lot less clever than when we were in 3 figures.  Russia / Ukraine and Saudi / Syria come quickly to mind: but let's not lose sight of something a whole lot nearer to home, viz DECC's entire energy policy.

This, as you will recall, is predicated on gas prices rising forever, so that the subsidies to nukes and renewables will provide us electricity that is costly, but "cheaper than it would have been otherwise".  This was always the merest sophistry, but they'd rigged their forecasts to make it look possible.  

However.  As we've been reporting here for months, gas prices have also been falling markedly all year, to the extent that even DECC has noticed.  (It is fun to imagine the agonised sessions between Sir Humphrey and Davey.  Must we really change the numbers, Humphrey ?  They are only forecasts, after all ... )  They've felt the need to 'update their forecasts' - downwards, of course - which is to say they never knew what was going on and they still don't.

In principle you'd say the timing of this couldn't be worse for EDF's nuclear power contract which is now even more out-of-the-money than it always has been - but is not yet signed !  However, Brussels is telling everyone that the last act of the outgoing Commission will be to give the thumbs-up to the wretched thing; Cameron has boasted about his new nukes very recently indeed; so there's every sign that sheer political momentum may carry EDF over the line.  (Apparently Austria is trying to veto it, but do they really have the clout ?)

For the UK there is one modicum of comfort: Osborne only signed off on the nuke + renewables subsidy schemes after placing an absolute cap on the cost.  As gas prices fall, this cap will be reached all the more quickly and we will be lumbered with less wind farms etc.  This is actually important because they cause a lot of practical problems for the management of the grid, and raise a lot of other extra costs that (wrongly) aren't counted as subsidies and so do not count against the cap - we just pay them anyway.

There's an equally modest bit of comfort for Putin, too.  Last time gas prices fell (2008-9 and again 2011), the oil price was not falling in parallel.  This meant that the massive oil-indexed wholesale contracts used by continental gas buyers for their Russian (and other) supplies became horribly out of the money: and all the big buyers initiated 'price review' actions against Gazprom.  The sums involved were big, and it got very nasty - most of them couldn't be resolved in the smoke-filled room and went to arbitration, one even to court - and Gazprom lost the lot to nil, coughing up very large rebates as a result.  This time, it looks as though oil and gas prices are falling sufficiently in parallel that another series of bust-ups may just about be avoided.



Gerry Mandering said...

Barker the "green" champion is the guilty one. Handing out endless amount of cash to anyone that fawned over him. His legacy will remain as too will the monstrosity of a "solar research" facility being built in his constituency. A massive black marble thing which stands out like a sore thumb in an Area of Outstanding Natural Beauty. Why worry about things like planning control when you have an MP for a mate.

To think we could have had Nigel F all that time ago

Nick Drew said...

yes, Barker (an old friend of ours) was a piece of work

his obsession was anaerobic digestion, a strange fixation, don't know what that tells you about him

factoid: the workings of a cow's stomach are 20 times more efficient at anaerobic digestion than the best current technology

this maybe deserves an R&D programme, but no public money whatever should be given to installing that, errr, crap technology

rwendland said...

Reuters have been shown the draft decision on Hinkley C, and suggest a further delay might be possible - vote planned for Wednesday.

Nick Drew said...

the whole EC thing is extraordinary, given the caustic response they gave DECC in December

can fear of Putin really lie behind it ? Hinkley can't offer anything this side of 2023 !

what leverage do UK + France have ? what did they (we) concede ? do the EU anti's have the power to block it ?

the politics of Brussels is not my specialist subject ...

Gerry Mandering said...

"Only four people sign up for flagship Green Deal"

From Barkers CV "He served as Head of International Investor Relations for Sibneft, a major Russian oil company, between 1998 and 2000"

One year later.

"served on the House of Commons Environmental Audit select committee between 2001 and 2005"

And he didn't even have to go to Cambridge to get recruited. Or it could all be his own ideas.

Personally with ideas like that, I would claim to be under instructions.