Cheap energy is not always best

It's disappointing that David Cameron has jumped onto the bandwagon and committed the Government to forcing energy utility companies to move customers onto their lowest price tariff. During Prime Minister's Questions on Wednesday, Mr Cameron made a surprise announcement promising to legislate "so that energy companies have to give the lowest tariff to their customers". Although this might sound like a no-brainer at first, by focusing just on price and not on the need to incentivise companies to invest in truly green (renewable) supplies, the Government is sending the wrong signal.

One side effect of a move to force consumers onto a single (lowest price) tariff is that the fledgling green tariffs, whether those offered by the Big 6 under Ofgem's Green Energy Supply Certification Scheme¹ or ones from independent suppliers will become less attractive to consumers. In particular those who have signed up to certified Green tariffs from the Big 6 will find they are moved back onto a brown tariff periodically, and will have to take positive action to reconfirm their greenness - and it's likely that simple inertia will stop many from doing so.

Moreover, I'm not totally convinced that profits in the sector are actually excessive, given the need to de-carbonise the UK's electricity supply (not to mention the Rest of the World...). Cheap electricity may be available today from gas - whether imported from Russia or obtained by environmentally dubious fracking techniques from shale - but this is not low-carbon, unless compared to coal. And if the US fracks all their shale, then global CO2 emissions are most unlikely to start falling in the near future. Of course, the consequences of this are hard to sure about, but as an inherently cautious observer, I would like to see proof that the US droughts this summer were not caused by the jet stream being further South than normal, and that in turn this was not caused by higher than normal melt water from a rapidly warming Arctic Ocean.

But to come back to the UK, politically motivated pressure on prices (from all parties, not just the Conservatives) will lead to short-termism and poor investment decisions about cleaner (and more secure) energy resources. And the Prime Minister's statement was opportunistic as neither the Energy Secretary nor Ofgem, who are about to issue the latest version of their Retail Market Review into how the consumer energy markets work, appear to have known anything about it. The last thing that the UK (and the environment) needs is an energy policy made up on the hoof in order to get a favourable sound-bite and the approval of the Daily Mail.

¹ Disclosure of interest I am professionally connected with this Scheme

Peak Oil and Demand - Again

I have been thinking again about my recent post on high oil prices and the possibility of our having reached “peak oil” (ie. maximum supply levels). In the last post, I noted that there was some evidence that Saudi Arabia and other swing producers were unwilling – or unable – to increase their production so as to take global supplies of oil above around 85 million barrels per day. (Bear in mind, that's still around 35mn tonnes of CO₂ pushed out into the atmosphere every day, too.) Looking at a graph of global production, I now see that we have not yet reached a plateau, although there is still no guarantee that production can exceed this level unless countries such as Russia, Nigeria or Iraq get their act together.


Oil production (and roughly consumption) has been rising steadily at an average of around 1 million barrels per day since the early 1980s, from a level of just under 60mn bbl/day to current levels. Over the past few years the net growth in demand has been a little higher – perhaps 1.5mn bbl/day on average over the past 5 years. Almost all of this extra demand has been in industrialising or developing countries, with China responsible for almost a third of the total.

Now conventional wisdom might say that these poorer countries are likely to be the first to cut back in response to higher prices. However, much of their demand is driven by our insatiable demand for cheap consumer goods in the West, and while China (and other industrialising countries) can continue to pare costs through greater efficiency (not necessarily of oil, but in the overall manufacturing process) then they can swallow the costs. And with a strong renminbi against a weak dollar, coupled with relatively high domestic inflation, even Chinese consumers – with their rapidly escalating personal income – can cope with higher oil prices.

Outside China, many of the same factors apply; and some of the largest increases in demand for oil (and electricity) are coming from the Gulf, where they are cushioned against high prices by high oil prices! Even so, some Gulf Cooperation Council countries are looking seriously at stopping using oil or gas to generate electricity, preferring to sell it on the global market at high prices; instead they are looking at moving to cheaper imported coal or even building nuclear power plants.

This suggests that if we do indeed have a capped oil supply it is more than likely to be Western countries that reduce consumption, not the fast developing economies (who use much less oil per capita in any case). The Western countries are instead likely to invest more in capital initiatives to reduce oil consumption – energy efficiency and investment in alternative supplies. That’s not to say that industrialising countries are uninterested in these technologies – they too can see the need for energy efficiency as part of an efficient manufacturing process (and to a lesser extent in the domestic sectors, although transport efficiency often leaves much to be desired in the shift towards private cars), and are interested in renewables, especially if it comes with support through Kyoto credits.

So will high oil prices give a fillip to energy efficiency in the West? Many commentators seem to think so, especially when backed with strong policies against climate change, including emissions trading systems that include a cap and trade element. I personally am not so sure; high energy prices will certainly improve payback periods or NPV calculations, which may lead to more rational investment decisions in efficiency in the next few years. But most consumers – in the UK at least – seem to be more concerned about grumbling a little, possibly kicking out the politicians in power (whose fault it probably isn’t, except insofar as they should have been encouraging greater energy efficiency over many years), and driving a little less far until such time as they have got used to the new higher prices. This may pressurise Governments into reducing fuel taxes (French and British truck drivers can really frighten a Government) and let demand slip back up. Unless of course the creep back upwards of demand cannot be met by extra supplies, as a result of really having reached peak oil...