A State of Emergency
Posted by Euan Mearns on June 25, 2008 - 9:55am in The Oil Drum: Europe
Tags: alistair darling, balance of trade, bank of england, gordon brown, mervyn king, original, peak gas, peak oil, united kingdom [list all tags]
Click all charts to enlarge, without call out.
|This BERR assessment (960 kb pdf, 58 slides) of oil and gas production on the UK continental shelf arrived in my mail box last week. It is one of the best summaries I've seen and should be read by all with an interest in the future of UK and European energy security. The chart above is based upon the BERR forecast for UK oil and gas production. It is time for Alistair Darling and Mervyn King to explain to the British people why they see current problems with energy prices and associated inflation as a transient blip when the UK seems to be in a terminal dive towards insolvency.|
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 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.
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
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.