Friday, 24 June 2011

IEA oil release from emergency reserves - start of a slippery slope?

Yesterday the IEA announced it was releasing 60m barrels of oil from its 'emergency' reserves, at a rate of 2m barrels per day. The interesting question is: what is the emergency? OK, Libyan oil is not flowing, but that's been the case for months now. Japan is using extra LNG, though it's not clear if oil use there is higher than before the tsunami, but once again, this is not a recent change.

The only reason that can be seen for releasing this 'emergency' oil is that high prices are choking off the economic recovery in developed countries. But if the high prices are due to restricted supply, then this is just the market doing its work - 'rationing by price'. If we don't like it, we should try physical rationing or other ways to get people to use less oil. If the market is signalling a shortage through rising prices, then doesn't trying to reduce those prices without fixing the underlying problem (excessive oil consumption) just push the problem a month or two further down the road?

Worse still, if we're using 'emergency' reserves when there isn't really an emergency, and if this starts happening more often, what will happen when these reserves are gone?

Of course there's always more going on behind the scenes than we know about in public. Take this news story from last week as an example:

The government was warned by its own civil servants two years ago that there could be "significant negative economic consequences" to the UK posed by near-term "peak oil" energy shortages.

Ministers were told it was impossible to know exactly when production might fail to meet supply but when it did there could be global consequences, including "civil unrest".

Yet ministers consistently played down the threat with the contemporaneous Wicks review into energy security effectively dismissing peak oil as alarmist and irrelevant.
full story
Basically, some smart, forward-thinking civil servants in DECC were researching peak oil and its impact on the UK in 2007, and in June 2009 a report was prepared, but ministers ignored it. This has only become public now because of Freedom of Information requests... You can download the slides here, but they are pretty in depth (which is good to see). Slide 16 is interesting, as most of the impacts which were researched in 2007 have now happened to one degree or another. So, coming back to the IEA oil release, maybe it ties in well with this stuff from DECC - they are perhaps trying to mitigate some of the immediate impacts of peak oil. Unfortunately this can't go on for much longer, as our emergency reserves are just as finite as the oil under the ground...


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Wednesday, 8 June 2011

News roundup - prices of food, gas and electricity, and OPEC output

A few interesting news stories in recent days.

The Telegraph reported that food prices are rising at the fastest pace in 23 months in the UK. What's this got to do with oil? Well, here's some quotes from the article:

Disappointing crops and demand from the biofuel industry have helped corn prices rise 112pc in an year and wheat 72pc.
Rising energy prices have also pushed up the costs experienced throughout the supply chain, said the BRC.   full article
So there you go, flat or falling supplies of conventional cheap crude oil are boosting food prices through increased demand for biofuels and also through the energy used in growing, processing, transporting, storing and selling food. Expect more of this to come - it is not a 'blip'.

Moving onto gas and electricity, several weeks ago I was warning on this blog of rising prices, and since then the price of wholesale gas in the UK has been hovering around 2p/kWh, which is getting on for double what it was a year ago. So, it was only a matter of time before this fed through into domestic bills. Scottish and Southern has been the first to move:
Scottish Power is to raise the cost of gas by 19% and the cost of electricity by 10%. The utility firm said the increase, which would affect 2.4 million households in the UK, would come into effect from 1 August.
Scottish Power's latest rise will mean that customers who take gas and electricity from the company but pay quarterly by cash will see their annual bills rise by an average of £180 to £1,391.   full article
So if you needed another incentive to improve your home's energy efficiency and reduce your reliance on fossil fuels, now you have it.

So what next? Well, OPEC have today announced that they are not going to boost levels of crude oil production, so the price of oil has ticked up another dollar or so. Of course, it may all be academic - nobody really knows if Saudi Arabia actually has any spare capacity, and if it does, how long it could be maintained...

And finally, all of this feeds into inflation, which makes it ever harder for the Bank of England to resist raising interest rates. But if they don't and inflation stays high, then they are effectively taxing everyone's savings and delivering real-terms pay cuts to anyone whose pay isn't going up by 5 or 6% a year...


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