Tuesday 20 January 2015

Oil Price: More Whistling In The Dark

Before we get to the frantic whistling, here's an observation from Old Drew's collection of historical anecdotes.

Back in 1994 there was a big overhang of gas supply in the UK, which came about for a variety of reasons I won't bore you with.   The spot market had just started and liquidity was building nicely.  Over the period August '94 to January '95, the price fell from 22 pence per therm to 9 p/th and there it stayed, with seasonal fluctuations, for the next four years:  a fall of 60%.  Why it settled at 9 has no obvious arithmetic rationale - there was plenty of North Sea gas available at lower cost than that - but hey, that's how markets work.  The price of a house has little or nothing to do with the cost of bricks.

Anyhow, one cannot fail to be struck by the similarities between this, and what's been happening to oil.  Maybe January is a good month for bottoming out after a rapid halving of prices.  Then again, for anyone taking cheer at the prospect of finding a bottom there's the unhappy prospect of 50 (or 45?) becoming a new baseline for several years.  As I've pointed out before, only in 2008 did a big oil-price movement ever reverse inside one year.  

I'm not sure how all this sits with the conspiracy theories, but I'd be very surprised if anyone has seriously and consciously engineered $48 oil.  They may have to live with it anyway.

As we all know, among the many parties who'll suffer will be the greenies - amusing bedfellows for Russia and Iran.  The greens of course (and perhaps also the reds), hope in turn that frackers will be hurting to the point of extinction: they'll see the hurt happening alright, but that'll be the limit of their gratification, I suggest.

Here's another source of whistling and bleating - along with some more sensible reflections.  The International Renewable Energy Agency ('IRENA') is one of those annoying and spurious international bodies - 'an intergovernmental organisation', no less - that busies itself at our expense promoting a special interest group.  They've clearly been working for quite a while on a substantial report on the costs of renewables which contains some interesting stuff, albeit spun about with quite disingenuous and misleading puffery.  

Just as they get to publication date, the oil price kicks them in the goolies.  But their jolly Director General, one Adnan Z. Amin, puts on a brave face.
Renewable power generation will keep getting cheaper over time, even in a period of falling oil prices, which history tells us will in all probability be transitory. Renewables development and deployment represents the most secure long-term hedge against fuel price volatility, the best route to reducing greenhouse gas emissions, and a sound financial investment. Their future is bright indeed. 
That would be the long term future, Adnan, because a chilly draft is coming in the short- to medium-term.  'Transitory' won't be measured in months, and there may be a drop-off in demand for energy volatility hedges, ask Ed Miliband.  Ad's right about costs coming down though - they'll have to, it's the only response possible.  Oil costs.  Coal costs.  Wind costs.  Even, dare I suggest, nuclear costs.  Come on you engineers, you know you can do it - you always have done in the past.

And solar PV costs in particular.  Here, technology really is moving forward apace.  Based on some fairly uncontentious projections, it is well within the bounds of plausibility for solar power one day to be economic.  (That's really economic, not 'economic when supported by subsidy'.)  Some even say, we may not need to wait for cheap & efficient electricity storage before solar makes it to economic respectability.

In the meantime, despite the waffle they all still want subsidies.  Which will be in increasingly short supply, with the alternatives at rock-bottom price for a while.  That Paris jamboree will be pandemonium.



Umbongo said...

What should be another nail in the coffin of "renewables" is the Guardiagraph's report about the lack of wind energy available during the current cold snap. Obviously Geoffrey Lean's not around (packing very early for the junketings in Paris?) otherwise Emily's work would have most likely been left on the office floor.

john miller said...

Perhaps I'm missing something, but I can't see any reason in your post for the lack of future increases in subsidies.

Surely the fall in comptetive products will ensure the government reaches into its pockets (i.e. mine) and doshes out some more wonga?

Nick Drew said...

Umbongo - should be ... oh yes, but ...

John - so maybe it's me whistling! clearly you are right, there is a solid track record of govts being willing to thrust amazing costs onto electricity bill-payers, such is the ultra-high utility value of leccy

but even in Germany this game appears to be nearing its end

for the UK, my greatest fear is a mad green bidding war during coalition negotiations (- a better reason for an outright Tory majority I can't think of, sorry you 'kippers)

otherwise I'd say the game is almost up here too, with Hinkley being the really entertaining test case

I suppose if you reckon the fall in oil prices will be so macro-beneficial that we can all (be deemed to) afford higher subs, then you could argue it that way around

there wll be all manner of jesuitical green 'reasoning' on display in Paris

Timbo614 said...

Solar PV: 50% efficiency is on the

Sebastian Weetabix said...

Shame it won't work in the dark, innit?