What will the impact of falling oil prices be?

So, oil prices are falling again - down to close to $60, compared to over $100 just a few months ago. Good news for economies and motorists around the world? Or a sign of problems to come?

Prices last fell dramatically in 2008, dropping from $145 in July to $30 in December of that year. Of course, this was due to falling demand caused by a global financial crisis - brought on in part by the rising price of oil forcing homeowners to default on their sub-prime mortgages in order to keep buying ever more expensive food and gasoline. Since then, the oil price crept steadily back up again as economies recovered and expensive oil production was mothballed, clearing $100 in 2011 and staying around that level until the recent fall.

So what's happening this time? Well, two key factors are the risk of weakening demand in some parts of the world due to economic issues, and the increase in USA oil production through the fracking of shale oil. Possible falling demand combined with rising supply has reduced the price. Normally, OPEC would act at this point, reducing oil production to support prices. But this time Saudi Arabia has political motivations, as noted by the BBC recently, wanting to punish countries like Russia and Iran, who are being badly hurt by the falling oil price right now. Saudi Arabia is hurt too, but it has a much bigger financial cushion, so can survive for some time yet on lower prices.

So what will the impact be, beyond lower transport costs in the short term? Most of the new oil supply that has come from US fracking needs a high oil price to be profitable - higher than the price is right now (estimates vary from $65 to $80), so fracking companies will be wondering whether they should pause or halt production, and save the oil for a time when prices are higher and they can make a profit selling it. But the problem is they've borrowed money to get started, and that money has to be paid back no matter what the oil price is. Some people even think this might trigger a new financial crisis, as there is over $200 billion in 'junk bonds' in the energy sector. This isn't a USA-specific issue, Barclays is involved in an $850 million loan which may not be paid back in full.

Looking further ahead, when demand for oil picks up again, the shutdown of expensive oil production like fracking, and also tar sands, would mean that prices could jump up significantly, as it would take time to bring this production back online.

Finally, there's another factor affecting future oil production - the risk of falling investment. Anybody who's grasped the climate change issue understands that if we want to keep global temperatures from rising too high we can't burn all the fossil fuel resources we know about, never mind resources we haven't found yet. But companies, and even whole countries, are valued by stock and bond markets according to the quantity of fossil fuel reserves they own or have a right to produce. If some of these reserves have to be left in the ground, then the shares of these companies and the national debt of certain countries could be over-valued right now - a 'carbon bubble'. In fact, The Bank of England is researching the risk of this right now, as reported by The Guardian:

The Bank of England is to conduct an enquiry into the risk of fossil fuel companies causing a major economic crash if future climate change rules render their coal, oil and gas assets worthless.

The concept of a “carbon bubble” has gained rapid recognition since 2013, and is being taken increasingly seriously by some major financial companies including Citi bank, HSBC and Moody’s, but the Bank’s enquiry is the most significant endorsement yet from a regulator.

The concern is that if the world’s government’s meet their agreed target of limiting global warming to 2C by cutting carbon emissions, then about two-thirds of proven coal, oil and gas reserves cannot be burned. With fossil fuel companies being among the largest in the world, sharp losses in their value could prompt a new economic crisis.

The UK Energy Secretary, Ed Davey, has also been talking about this issue with regard to pension funds, as reported by The Telegraph:

"One has got to worry about the investments for pensioners.

If pension funds are investing in companies or banks that have on their balance sheets huge amounts of assets in fossil fuels, and those assets don’t give the return that people expect – because of changes in technology where low-carbon becomes cheaper or because of the world having to take action against carbon emissions – one has got to protect those pensioners and those investments."

 In summary, there are more than simple market forces at play in the oil price right now, and the consequences of any action, or inaction for that matter, will be far-reaching. Governments would do well to give some serious thought to two key problems - how to get off our addiction to oil (and fossil fuels in general), and how how do it without causing another financial crisis as the big fossil fuel companies are wound down.

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UK National Grid asks for help keeping the lights on this winter

After a fire put one of the 370MW generators at E.ON's Ironbridge coal-fired power station out of action in February, another fire knocked out two 500MW coal-fired units at SSE's Northbridge power station too, with one expected to return to service no earlier than November 2014, and the other after March 2015. Then EDF announced the shutdown of the 1190MW Heysham 1 and the 1150MW Hartlepool nuclear power stations in August, due to concerns over a design flaw in the boilers - these are expected to return to service during October.

So it's hardly a surprise that National Grid has asked if anybody can commit to providing extra reserves of electricity generation for this winter...

Of course, we don't know how cold the winter may be yet - if it's mild like 2013/14 then we probably wouldn't have a problem. At least the gas storage is nice and full, after light usage last winter. But if it happens to be cold, or if there are further outages at our ageing power stations, then things might get a bit tight...

UPDATE (4 Sep 2014): EDF has now said the reactors will only come gradually back online between October and December...

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DECC Energy Trends - some good news on renewables!

Just to make a change, the latest Energy Trends publication from DECC is not all bad news! The statistical press release actually starts with this graph, showing how renewable energy supply has grown rapidly in the UK recently:

The biggest chunk of this is electricity, so here's how the overall electricity supply looked in the first quarter of 2014, compared to a year ago:

What's interesting to note here is that while renewable energy supply did increase significantly in absolute terms, from 12.7 TWh a year ago to 18.1 TWh this year (43% increase), the reason its share in the chart above increased so dramatically is because the mild winter reduced demand for electricity by 10.4% compared to a year ago. What's really significant here to me is that the cut in demand was reflected in a big reduction in coal and gas burned to generate electricity - which is of course what is supposed to happen as renewable energy generation increases. But it underlines the fact that cutting demand has a huge impact on the proportion of energy we supply from renewable sources.

Although renewable energy capacity had increased over the past year, the other thing that boosted generation was the exceptionally wet and windy weather the UK experienced this winter. Probably not enough of a 'silver lining' to make it worth it for the people who got flooded though... The effect of the weather is shown clearly in the breakdown of renewable energy generation below, with wind and hydro well up on a year ago.


The seasonal trend of more solar power in the summer and more wind/hydro in the winter is clearly shown above as well, which makes a good case for increasing the amount of installed solar PV to even out renewable supply across the year. Though having said that, demand is higher in the winter anyway, so maybe it's not too big a deal.

I'm afraid there's one not so good chart included for electricity though, and that's the one showing our net imports, which are steadily rising:

Clearly this isn't a good thing for energy security, or for the UK balance of payments. Perhaps it's a sign of our steadily ageing generation infrastructure?

Moving on to fossil fuels, there's not a huge amount to report really:

• Coal production was down 27.7% on a year ago.
• Gas production was down 0.2%, but imports were down significantly due to the mild winter
• Oil production was actually up 3.5% for a change!

Of course, we are still a major energy importer - the graph below shows net imports for crude oil (red) and also for petroleum products (blue). We've been a net importer of crude oil for a long time, and the recent rise in production is too small to make a dent in that. But our change to being a net importer of products (diesel, petrol, etc.) is relatively new, and due to reductions in refinery capacity in the UK.

 

So, nice to have some good news to report on the renewables front, even if the overall picture hasn't changed a great deal.

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Catcher - 'major' new North Sea Oil field in context

Numerous news sources are busy celebrating the planned development of the new Catcher oil field in the North Sea. But few of them put it in context, with even the BBC describing it as "a major North Sea field", saying it could ultimately produce 100 million barrels of oil, and other sources mention a peak production of 50,000 barrels per day. These sound like big numbers, but let's compare to the real major oil field of the North Sea - Forties.

Forties is expected to produce over 4 billion barrels during its operational lifetime, and reached a peak output of  520,000 barrels per day in 1978. So that's forty times bigger than the Catcher field, and ten times the peak output. Catcher doesn't look so big now, does it?

Let's also compare it to our current oil production: 925,000 barrels per day, and our oil consumption of 1.5 million barrels per day. So it's basically going to produce 3.3% of our national consumption. Great, that'll make a huge difference... not.

Peak oil is still alive and well, and the IEA's recent report showed that over 80% of investment in energy oil and gas is just to make up for declining production from existing fields. So don't expect to see cheaper petrol or diesel any time soon. Or ever, in fact.


Image: "PlatformHolly" by employee of the U.S. government: public domain - http://www.netl.doe.gov/technologies/oil-gas/Petroleum/projects/EP/ResChar/15127Venoco.htm -- U.S. Department of Energy. Licensed under Public domain via Wikimedia Commons.

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Former BP geologist: peak oil is here and it will 'break economies'

If you thought peak oil had gone away, or at least turned out to be not as bad as you thought it might, perhaps it is time to think again. I expect this story was missed by many, being published as it was the day before Christmas Eve, indeed I only just became aware of it myself. I suggest you go and read the full article in The Guardian, but to show you why, here's a few quotes from the article, which itself is quoting Dr Richard Miller, who worked as a geologist for BP from 1985 to his retirement in 2008.

Dr. Miller critiqued the official industry line that global reserves will last 53 years at current rates of consumption, pointing out that "peaking is the result of declining production rates, not declining reserves." Despite new discoveries and increasing reliance on unconventional oil and gas, 37 countries are already post-peak, and global oil production is declining at about 4.1% per year, or 3.5 million barrels a day (b/d) per year: "We need new production equal to a new Saudi Arabia every 3 to 4 years to maintain and grow supply... New discoveries have not matched consumption since 1986. We are drawing down on our reserves, even though reserves are apparently climbing every year. Reserves are growing due to better technology in old fields, raising the amount we can recover – but production is still falling at 4.1% p.a. [per annum]."

...

"... a sustained decline in global conventional production appears probable before 2030 and there is significant risk of this beginning before 2020... on current evidence the inclusion of tight oil [shale oil] resources appears unlikely to significantly affect this conclusion, partly because the resource base appears relatively modest."

In fact, increasing dependence on shale could worsen decline rates in the long run: "Greater reliance upon tight oil resources produced using hydraulic fracturing will exacerbate any rising trend in global average decline rates, since these wells have no plateau and decline extremely fast - for example, by 90% or more in the first 5 years."

...

"The final peak is going to be decided by the price - how much can we afford to pay?", Dr. Miller told me in an interview about his work. "If we can afford to pay $150 per barrel, we could certainly produce more given a few years of lead time for new developments, but it would break economies again."

And the 'least worst' it gets is:

"We are probably in peak oil today, or at least in the foot-hills. Production could rise a little for a few years yet, but not sufficiently to bring the price down; alternatively, continuous recession in much of the world may keep demand essentially flat for years at the $110/bbl price we have today. But we can't grow the supply at average past rates of about 1.5% per year at today's prices."

Like I said, go and read the full article...

The Royal Society journal it all comes from  is available free online too - I'll read through it when I have time and post some comments, but if you want to take a look now, it's here.

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